U.S. Expats outside USA Taxes
U.S. Expats outside USA Taxes
Whether you’re a U.S. citizen or a green card holder living outside USA, you need to be aware of your tax obligations as a U.S. expatriate outside USA, which can be a complex issue without guidance.
As a general rule of thumb, a U.S. expat working or living outside USA should assume they have a tax obligation in the U.S.
How U.S. Taxes Work for American Expats outside USA
Working as a U.S. expatriate outside USA can impact your U.S. tax obligations even if your stay outside USA was short-term.
For instance, if you earn income while on a short-term assignment outside USA, you are required to report that and any other income earned outside USA on your U.S. taxes.
The longer you reside outside USA and establish closer economic ties you’ll have even more consideration towards your American tax filing.
You may also need to report any foreign financial accounts and assets acquired during your stay. Generally, U.S. taxpayers outside USA with more than $10,000 in a foreign bank or financial accounts (for example, superannuation accounts) are bound by FBAR filing and reporting requirements. You can also be subject to FATCA reporting requirements if you have assets that are valued at $200,000 or higher.
There Are an Estimated 105,000 Americans Living outside USA
All citizens and green card holders from the U.S. whose worldwide income exceeds the IRS’ current minimum thresholds will be required to file a U.S. federal tax return and to pay any taxes to the IRS, no matter where they live or whose income is generated.
Australia’s Taxes at a Glance
You should know a few things about Australia’s taxation process. The essential need-to-know is:
TAX RATES FOR AUSTRALIA
Like the U.S., Australia uses a marginal tax rate that is based on a progressive tax system; for example, tax rates for an individual increase as one’s income rises. The present highest marginal tax rate for residents is set at 45%, but that is not without an additional 2% Medicare levy. Differently from the U.S., income taxes in Australia are most often imposed at the federal level but not at levels relating to state or local.
Also, similar to the U.S., all Australian taxpayers are required by tax law to file an income tax return annually with the Australian Tax Office (or ATO). The Australian tax year ends on June 30, unlike the U.S.’s on December 31. Also, Australia’s individual income tax return is required to be “lodged” (i.e., filed) by October 31; in the case of emergencies and such, extensions are available.
Australia has a progressive tax system; the more your income is, the more you will have to pay.
You can also earn up to $18,200 in a financial year and not have to pay taxes. This is known as the tax-free threshold, after which the tax rates kick in.
The lowest rate is 19%, and the highest rate is 45%, which is only charged on income over $180,000. Most Australians sit in the middle bracket.
For the 2022/2023 tax year, all Australian residents shall expect to be taxed on all income over $18,200, no matter where it’s earned.
Non-residents are taxed on all Australian-sourced income, with some exceptions.
What Types of Taxation Does Australia Have?
With everything mentioned above, let’s get into the various kinds of taxes to expect or keep in mind.
AUSTRALIAN RESIDENT INCOME TAX RATES
The income tax rates for residents are different from that of a non-resident.
Similar to US taxes, the percentage of tax you pay increases as your income increases. However, the rate ranges are steeper for non-residents, as shown below.
Resident Tax Rates 2022-2023
|A$5,092 with an additional 32.5%
|A$29,467 with an additional 37%
|A$51,667 with an additional 45%
|A$180,001 and up
FOREIGN RESIDENT TAX RATES
Tax rates for foreign residents for the 2021/22 and the 2022/23 year are:
Taxable income $
|Tax payable $
|0 – 120,000
|120,001 – 180,000
|39,000 + 37% of excess over 120,000
|61,200 + 45% of excess over $180,000
CAPITAL GAINS TAX
Capital gains are taxed in Australia but are considered part of the standard income tax instead of a separate category. Because of that, capital gains are therefore taxed at the same rates as one’s income.
However, Australia’s capital gains tax does not apply to assets received through an estate transference, and capital gains can only be incurred if you sell the asset you acquired later on.
GOODS AND SERVICES TAX
The Goods and Services Tax (also known as GST) is a value-added tax that can be applied to most goods and services transactions, even if relating to goods and services and can be applied at a flat rate of 10%.
In Australia, domestic companies don’t always have to be incorporated, so they can be considered as a corporation to reach specific tax purposes. All that is necessary from the company is that it carries out business in Australia, along with Australian ownership or control.
All companies in Australia are also subject to a federal tax rate of 30% upon their taxable income. The exception would be for ‘small or medium business’ companies, usually subjected to a reduced tax rate of 25%.
Let’s examine the following key points surrounding the basics of Australian Social Security:
Do I Need to Pay Social Security in Australia?
- If a U.S. company has assigned you to work in Australia for less than five years, you will pay into U.S. Social Security;
- If the assignment timeline goes over five years, you will need to pay towards the Australian social security; and
- If you are working for an Australian employer located in Australia, you will pay towards the Australian social security (contact your local AOT) for information).
Australia’s Social Security Agreement with the United States
Like the U.S., Australia has a social security system so that it can best provide for its citizens and residents. Even a secured system can still confuse expatriates over which system they should contribute to while residing in Australia. Fortunately, the U.S.-Australia totalization agreement establishes rules for social security contributions.
Self-employed Americans living abroad in Australia may choose to contribute to either social security system.
Defined as a payment by an employee towards a fund that can evolve in the future as a pension, superannuation can serve Australian taxation for the purposes listed below.
Superannuation Reporting is Important
Superannuation funds can make filing expatriate taxes extra complicated. Anyone who has control over these funds will encounter additional IRS reporting requirements.
How to treat Australian superannuation contributions for your expat tax return?
The IRS treats these funds as grantor or employee benefit trusts, so they are not recognized qualified retirement plans, though they operate very similarly to a 401(k).
Living as an Expat in Australia
Moving to Australia but still having tax residency/citizenship status in another country (including the United States) can lead to questions about filing for both. Let’s look at the overall question below:
Do I Need to File 2 Income Tax Returns – Both US and Australia?
If you’re an American working or residing in Australia for some time (short or permanent), you should assume you have an income tax return obligation in both the U.S. and Australia.
If you’re an American working in Australia, you may also have to file Australian taxes based on your residency and domicile status. Where Australian taxes are concerned, your domicile is generally where you have your permanent home, and your tax residency is where you spend most of your time. You can be a resident in more than one country, but you can only have one domicile.
How do U.S. Expat Taxes Work While You Live and Work in Australia?
Here is what American expatriates can expect from both U.S. and Australian tax laws about living and working in Australia:
AMERICANS WHO ARE SELF-EMPLOYED IN AUSTRALIA
It is required by Australia’s tax law to file a U.S. income tax return in the case that you have net earnings worth $400 or more from self-employment, regardless of age. You are required to pay self-employment tax onto your self-employment income, no matter if it can be excludable as foreign earned income in figuring your income tax.
DOES AUSTRALIA TAX FOREIGN INCOME?
The Australian income tax system taxes its residents based on their worldwide income (i.e., whether the income is earned within or outside Australia).
Generally, non-resident individuals are only required to pay tax to the ATO on an Australian-sourced income. However, unlike the U.S., individuals that have become residents in Australia for a short time may be eligible for a temporary resident tax exemption on their foreign income and capital gains.
WHAT IS THE INCOME TAX RATE IN AUSTRALIA COMPARED TO THE U.S.?
Current Australian income tax rates are relatively high compared to the U.S., which is 37%. Australian tax rates vary depending on your taxable income and between 0% – 45%,
WHEN IS MY AUSTRALIAN INCOME TAX RETURN DUE?
Australia’s tax year starts on July 1 each year and ends the following year on June 30. The deadline to lodge (file) your taxes is October 31.
U.S. Taxes – What You Need to Know
If you earned over U.S. $12,550 (per individual) in 2021 (or $12,400 in 2020), have $400 of self-employment income, or only have a minimum of $5 of any income if you are married to (but happen to be filing separately) from a foreigner, it is a requirement to file Form 1040. While taxes owed are due on April 15, expats are able to get an automatic filing extension until the deadline of June 15, which can be extended further online on request until October 15.
If you have foreign assets valued at over U.S. $200,000 (per person, excluding your home if it is owned under your name), you must also file a Form 8938 to declare them.
If you had over U.S. $10,000 in one or multiple foreign bank accounts during the tax year at any time, it would be necessary for you to file FinCEN form 114, also known as an FBAR (Foreign Bank Account Report).
If you are paying any income tax in Australia, several IRS provisions allow you to avoid paying double tax onto the same income in the U.S.
The two primary provisions are the Foreign Earned Income Exclusion, as it lets you exclude the first US$110,000 income earned from U.S. tax, and the Foreign Tax Credit. This gives you a U.S. tax credit to offset the tax you already have paid in Australia.
The Foreign Tax Credit is a more beneficial option for American expats who find themselves paying more tax in Australia than they would in the U.S. They can carry any excess U.S. tax credits forward for any future use. No matter if you don’t owe any tax in the U.S., you will still have to file if your income exceeds the IRS minimum thresholds.
Does the U.S. Have a Tax Treaty with Australia?
Yes, the U.S.-Australia Income Tax Treaty was signed in late 1982 and later entered into force a year later in 1983
THE U.S. – AUSTRALIA TAX TREATY
However, the U.S. – Australia Tax Treaty doesn’t prevent U.S. expats living in Australia from having to file U.S. expat taxes. It contains provisions that can benefit some U.S. expats in Australia, such as students and individuals who will be given retirement income.
Most kinds of income are set out in the Treaty for U.S. expats so that they can avoid double taxation of their income arising in Australia. One way is to claim U.S. tax credits towards the same value as Australian taxes that have already been paid on their income by claiming the IRS Foreign Tax Credit.
If they have income arising in the U.S., U.S. expats in Australia can claim Australian tax credits against any U.S. income tax paid to the IRS when they file their Australian tax return.
The Treaty also covers any corporation taxation, stating that a company shall only be taxed in the country which it is registered under. An exception would be a ‘permanent establishment’ (an office, branch, factory, etc.) in another country. In that case, the permanent establishment’s profits shall be taxed within the country where it is located.
It’s also worth mentioning that the Treaty contains a clause that allows the two countries to share tax information; in other words, the IRS can see the Australian taxes U.S. expats currently residing in Australia are paying and vice versa.
Australian banks also share their U.S. account holders’ contact and balance info with the U.S. Treasury.
To claim a provision in the Tax Treaty (besides claiming U.S. tax credits), expats should use IRS form 8833.
For the 2022/2023 tax year, all Australian residents are expected to be taxed on all income over $18,200, regardless of where it’s earned. Also, non-residents are taxed on all Australian-sourced income, with some exceptions.
Australian Pension Plans
Superannuation is considered to be Australia’s version of a pension system, as superannuation is partly mandatory and voluntary. Excluding salary and wages, the government has minimums employers and employees must meet to fulfill superannuation requirements. The current rate is 9.5%, which will increase to 12% by 2025.
Employee investments are both funded and vested.
Superannuation funds can make filing U.S. expat taxes extra complicated. The IRS treats these funds as grantor or employee benefit trusts, so they are not considered to be qualified retirement plans; they also operate similarly to a 401(k). Anyone who has authority over these funds will encounter additional IRS reporting requirements.
The U.S.-Australia Totalization Agreement
This agreement influences most tax payments and benefits under their respective social security systems due to it being designed to eliminate dual social security taxation. This situation occurs when a worker from one country relocates (digitally or in-person) to another country to work and is required to pay social security taxes to both countries (IRS and ATO) on the same earnings. It’s also good to fill gaps in benefit protection for all workers who have divided their careers between the United States and Australia.
What Tax Forms do Americans Living in Australia Have to File?
The most common forms to file as a U.S. expat include the following:
- Foreign Bank and Financial Account Report (FBAR): it should not be considered a tax form and is not filed with the IRS. Instead, it is an informational form submitted to the U.S. Treasury Department. Any U.S. account holder (either person or entity) with a financial interest in or has signature power over one or more foreign financial accounts with more than $10,000 in aggregate value in a calendar year must file the FBAR annually with the Treasury Department.
- Form 8938, Statement of Specified Foreign Financial Assets (FATCA Reporting): If you reside outside the U.S. and have a bank account or investment income account with a foreign financial institution, you will be required to include FATCA Form 8938 along with your U.S. federal income tax return if you meet certain monetary thresholds.
U.S. TAX FORMS FOR EXPATS IN AUSTRALIA
- FinCEN Form 114: Report of Foreign Bank and Financial Accounts (FBAR)
- Form 1040: Individual Income Tax Return
- IRS Form 8938: Statement of Specified Foreign Financial Assets (FATCA)
U.S. TAX REPORTING CONSIDERATIONS
U.S. expats who possess accounts or other overseas assets can be subject to several specific filing requirements in the structure of informational forms. Some forms need to be submitted to the IRS as attachments onto the personal income tax return (Form 1040), while others can be submitted to other governmental departments. Failing to file any of the proceeding forms will result in severe civil penalties, such as a $10,000 per form per year. Additionally, criminal penalties, including fines and incarceration, may apply in certain extreme cases if the reporting delinquency is shown to be willful.
Australia Expat Income Taxes
There are a few standard expectations when paying taxes for Australian-sourced income, such as:
WHO IS LIABLE FOR INCOME TAXES IN AUSTRALIA?
For the 2022/2023 tax year, all Australian residents are expected to be taxed on all income over $18,200, no matter where it’s earned. Non-residents are taxed on all Australian-sourced income, with some exceptions.
Who is an Australian Tax Resident
You can qualify as an Australian resident if you’re domiciled in Australia or spent more than half of the tax year without a permanent home residing elsewhere. Additionally, you also may be a resident if you happen to be an “eligible employee” of a superannuation fund.
TAX YEAR IN AUSTRALIA AND TAX FILING AND PAYMENT RULES
Unlike in the U.S., the Australian tax year starts on July 1 and ends on June 30 of the following calendar year. The official deadline for filing an Australian income tax return is October 31, after the end of the country’s tax year.
Extensions are available for taxpayers in certain situations for exceptional and unforeseen circumstances, such as those affected by natural disasters or even those who volunteered to aid victims of natural disasters.
If you hire a registered tax agent before October 31, the filing deadline is automatically extended to June 5 of the following year.
EXPAT TAX WITHHOLDING IN AUSTRALIA
When U.S. Expats start working as an employee in Australia, they pay income tax on payments received from their employers. The U.S. Expats’ employers deduct tax from your pay and send those amounts to us.
As an expat your employer withholds tax on your behalf from your salary or wages. Your employer will use your TFN declaration to work out how much taxes will be withheld from your pay.
Who Qualifies for a Resident of Australia?
If you’re domiciled in Australia, you qualify as a permanent resident of Australia or spent more than half of the tax year without a permanent home elsewhere. Additionally, permanent residents may be “eligible employees” of a superannuation fund.
What is the Implication of Being a Self-Employed American in Australia?
All U.S. expats are required to file a U.S. income tax return if your net earnings are $400 or more from self-employment, regardless of age. You must also pay self-employment tax onto your self-employment income, no matter if it is excludable as a foreign-earned income when calculating your income tax. Any net earnings from self-employment include the income earned in Australia and the United States.
What You Need to Know about Living and Working in Australia for Your U.S. Expat Tax Return
Along with standard expectations, some common dos and don’ts come with being an Australia-residing expatriate are:
Of particular importance is that U.S. expats, more often than not, mistakenly assume that once they have moved abroad, any U.S. tax obligations will cease to exist.
So much so that, as a basic rule, all U.S. citizens, even those residing outside the United States, will be recognized as U.S. residents for tax purposes. Therefore, they are subject to U.S. tax reporting on their worldwide income and can be held towards tax liability if unable to report all current tax information.
AUSTRALIA FOREIGN BANK ACCOUNT
Suppose you reside outside the U.S. and possess a bank account or investment account in a foreign financial institution. In that case, it is necessary to have FATCA Form 8938 included with your U.S. federal income tax return so you can meet certain monetary thresholds.
Additional Child Tax Credit for American Families in Australia
American expatriate families living in Australia should know the benefits they can receive from the Additional Child Tax Credit.
Australia is a country that has a higher income tax rate than the U.S., so Americans residing abroad in Australia can use the Foreign Tax Credit way instead of the Foreign Earned Income Exclusion. They can also then receive up to $1,400 per qualified child per year.
A qualifying child must be dependent on you, is under 17 years old, and has a valid Social Security Number.
We have met families who made up for lost years of tax filing through our Streamlined Procedure and were surprised to receive up to $3,000 of refunds every year when they claim the child tax credit.
What Tax Deductions are Available for Expats Living in Australia?
Because of the Treaty, most Americans residing in Australia already have an exemption from double taxation. However, the IRS can also provide several other beneficial tax credits and deductions for expats, such as:
- Foreign Housing Exclusion (or Deduction);
- Foreign Earned Income Exclusion; and
- Foreign Tax Credit.
Most expats who apply these tax credits are able to erase their U.S. tax debt entirely.
How to Deal with the Different Tax Year in Australia in Your U.S. taxes?
Filing your U.S. tax return is due on June 15 – the automatic, 2-month filing extension for expats. However, you may need to file for the October 15 deadline because Australia has a different tax year.
When you report income as a U.S. citizen in Australia, you cannot use the same tax year in Australia as in the U.S. Both countries have different tax years. Therefore, for filing a U.S. tax return as an expat, you’ll need to calculate your worldwide income according to the U.S. tax year. This tax year is January 1 – December 31.
Due to this, it is recommended to use monthly payslips so you know how much income you receive every month. That way, you can translate what you earned from the Australian tax year to the U.S. tax year.
You `must report your worldwide income and file a U.S. tax return by June 15 every year as an American living abroad in Australia. However, if you are waiting for your second Australia income statement, that may come after the U.S. expatriate filing deadline.
SHOULD I TAKE THE FTC OVER THE FEIE IF I LIVE AND WORK IN AUSTRALIA?
While Australia’s top marginal rate is at 45%, the U.S. instead charges 37%. And the Australian maximum marginal tax rate starts much earlier. That way, you will be better off ignoring the FEIE but still claiming a full foreign tax credit.
But exercise caution, as you can only claim a new FEIE if six full years have passed since you had last rejected an FEIE. The sole exception for this scenario is if you receive permission from the Internal Revenue Service in order to change back earlier.
You may carry any qualifying unclaimed foreign tax credits for one year and then carry them forward for ten years. However, you can only claim these against other foreign income, so if you return to the States and still have excess foreign tax credits, you can’t use these against U.S.-sourced income.
USE THE FOREIGN TAX CREDIT TO PREVENT DOUBLE TAXATION
If you’d like to avoid double taxation, American expatriates in Australia can apply and use the Foreign Tax Credit. That way, whatever amount of taxes that is owed will be paid in Australia by you and can be applied to your U.S. tax return. That way, you will only have to pay taxes once.
Filing Requirements and U.S. Tax Deadlines
Suppose you are a U.S. citizen or resident, and your tax home and your abode are outside either the United States and/or Puerto Rico upon the regular due date of your return. In that case, you will be automatically granted an extension for June 15 to file your return and pay any tax due. You do not have to file a particular form to receive this extension, and you must attach a statement to your tax return when you file it, showing that you are eligible for this automatic extension.
Qualified Dividends in Australia for your Foreign Corporation or Investment
Resident shareholders in foreign companies can receive credits on distributions. If you happen to own shares within an Australian company and receive a grossed-up dividend report of profits, the company has already paid any and all taxes on a portion of those dividends (as of this posting, the rate is 30%). Australian residents can also receive a rebate (also known as franking or imputation credit) on the tax that has been paid and distributed by that company. Depending on your Australian tax bracket, receiving the entire credit or a portion of the credit is possible.
Selling Your Home in Australia
You need to be aware of some tax implications if you are planning on selling your home in the U.S. or Australia as a U.S. citizen abroad.
As an expat in Australia, you have the ability to claim Section 121 Exclusion and exclude up to $250,000 of profit from U.S. taxation if you file taxes separately (e.g., if your spouse is a non-U.S. citizen). But if filing jointly with another U.S. citizen, you individually can exclude a U.S. $500,000 maximum.
As long as you are qualified under Section 121 Exclusion and its protocols and have lived in your primary house for either two out of five years or owned it for two out of five years, you have the ability to exclude up to $250,000 on your U.S. tax return.
If not, and if the profit when selling the house comes to an estimated $300,000, then $50,000 will be taxable by the IRS. You need to make sure all your tax documents are on a cost basis. The house purchase price includes the cost of renovations, home improvements, etc., so your profit number goes down. Unless you make a significant profit on your home, it is unlikely you will owe U.S. tax for selling your home.
U.S. Tax Benefits are Available to You
Now that we’ve covered the financial and legal aspects that come with being an Australian-residing expatriate, here are some benefits for you to consider:
FOREIGN EARNED INCOME EXCLUSION
The Foreign Earned Income Exclusion permits you the ability to exclude your wages from your U.S. taxes. However, this option is only available to those who meet specific time-based residency requirements.
FOREIGN HOUSING EXCLUSION/DEDUCTION
Along with the FEIE, you can also claim a foreign housing deduction or exclusion (applied through Form 2555) for any housing expenses, with the exception of the base housing amount. This exclusion applies to housing paid for with employer-provided amounts similar to a salary, while the deduction can apply to housing that is paid for through self-employment.
Your housing expenses are your reasonable expenses incurred, limited to 30% of your maximum FEIE. High-cost localities like Melbourne, Perth, or Sydney have a higher limit listed in the Instructions for Form 2555. Housing expenses do not include the cost of buying a property, making improvements, or incurring other expenses to increase its value. And your housing expenses can also be within your total foreign-earned income.
The base housing amount is usually 16% of your FEIE.
FOREIGN TAX CREDITS
The Foreign Tax Credit permits you to claim a credit for any income taxes that have been paid to a non-domestic government.
There are two bilateral agreements to be aware of for future research and consideration. They are:
- Double Tax Treaty – U.S./Aus
- Social Security Totalization Agreements
Reach of U.S. Government
Because of FATCA and its Supporting International Agreements have made the U.S. Income Tax Reach more comprehensive than ever before.
FATCA, also recognized as the “Foreign Account Tax Compliance Act,” FATCA is a relatively new tax law enacted in 2010 as an addition to the HIRE Act. The objective behind FATCA since then has been to combat all offshore tax evasion by requiring U.S. citizens to report their holdings residing in foreign financial accounts and any foreign assets to the IRS annually. As part of FATCA’s implementation since the 2011 tax season, it is an IRS requirement that certain U.S. citizens must report (on Form 8938) the total value of any of their “foreign financial assets.”
Starting January 1, 2014, to further enforce FATCA reporting, foreign financial institutions (also known as “FFIs,” which include just about every investment house, foreign bank, and even some foreign insurance companies) must report all account balances held by U.S. citizen customers. To date, several large foreign banks have required that all U.S. citizens who have maintained accounts with them (the large foreign banks) to provide a Form W-9 (a form to declare their status as U.S. citizens) and to sign a confidentiality waiver agreement where they grant permission to the bank to provide the IRS all information about their account. There are cases where foreign banks have closed the accounts of U.S. expats who refuse to cooperate with the requirements.
This renewed effort by the U.S. government to combat offshore tax evasion through FATCA has led to a recent surge in tax compliance efforts by U.S. expats.
Recently, the IRS announced that the United States had signed a so-called competent authority arrangement (“CAA”) with Australia in furtherance of a previously signed intergovernmental agreement (“IGA”) with Australia. This agreement is designed to promote the implementation of the FATCA tax law requiring financial institutions (mainly banks and investment houses) outside the U.S. to report information on financial accounts held by their U.S. customers to the IRS.
Suppose you are a U.S. expatriate living in Australia. In that case, you must remain compliant with your continuing U.S. tax obligations and contact your local ATO for tax services and questions.