Expat Income Tax in the US: What You Need to Know

As an Australian expat residing in the United States, you might find yourself faced with a complex taxation scenario that can be quite overwhelming to navigate. With the United States following a citizenship-based taxation model, unlike the residency-based taxation model followed by Australia, it becomes crucial for Aussie expats to have a comprehensive understanding of their tax obligations in the US.

As Aussie expats, you need to plan your taxes effectively to maximise their savings and comply with tax regulations in both countries.

This article will provide an elaborate and comprehensive guide to the tax considerations that Australian expats should keep in mind while living in the United States. 

Understanding the Basics of US Taxation

The United States employs a citizenship-based taxation policy. This means all US citizens and residents, including those holding green cards, are required to file an income tax return with the Internal Revenue Service (IRS), regardless of where they live, where their income comes from, or whether they are also paying taxes in another country.

Interestingly, the United States does have tax treaties in place with various nations to help avoid issues of double taxation. One such agreement is in effect between the US and Australia.

As an Australian expat residing in the US, this treaty between the two countries becomes critical for your tax obligations. This agreement governs how your “worldwide income” is taxed. “Worldwide income” is a comprehensive term that includes income from any source anywhere in the world – be it wages, interest, dividends, rent, or income from the sale of assets.

Under the terms of the tax treaty between the US and Australia, certain types of income may be taxed in one country, both, or potentially neither, depending on the specific terms of the agreement. To fully understand the implications of this treaty on your personal taxation situation, it is advisable to seek guidance from a tax advisor.

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The Australian Tax System

On the other hand, Australia employs a residency-based taxation system. This means if you’re classified as a tax resident of Australia, you’re obligated to pay tax on your income from all over the world. However, as a non-resident, your tax obligation is limited to income originating in Australia.

Typically, when an Australian citizen relocates overseas and establishes permanent residence in another country (such as the United States), they may be deemed a non-resident for Australian tax purposes. 

Yet, the Australian Taxation Office (ATO) evaluates several factors before finalising your residency status. These include your intentions related to your stay, your connections to Australia, and the enduring and continuous nature of your residence overseas.

Decoding the Expat Income Tax: US Tax Responsibilities of Aussie Expats

Upon moving to the United States, you generally become a US tax resident under the Substantial Presence Test if you meet a specific criterion related to your duration of stay. This includes spending at least 31 days in the current year and 183 days during the current and two preceding years in the United States. 

The count for the 183 days takes all days in the current year, 1/3 of the days in the first preceding year, and 1/6 of the days in the second preceding year into account.

As a tax resident, you are obligated to report all your income to the IRS, irrespective of whether it was earned within the US or abroad. This encompasses wages, dividends, interest, rental income, and income generated from the sale of assets. 

The documentation process requires filing the IRS Form 1040, the U.S. Individual Income Tax Return, annually. This needs to be completed before April 15th of the subsequent year.

Even if your income is not liable for US tax, or if it has been taxed in Australia, you must still declare it in your US tax return. Nonetheless, the US tax code offers several provisions to prevent double taxation. 

These include the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC), which could potentially be utilised to decrease your tax obligations.

Double Taxation and How to Avoid It

As mentioned before, there is a tax deal between the US and Australia to help avoid double taxing and tax dodging. This deal covers many types of taxes and helps sort out tax disagreements. It also helps the US and Australia share tax info and figure out which country should tax certain types of income.

But even with this deal, double taxing can sometimes happen because tax rules in the US and Australia aren’t exactly the same. For example, the same type of income might be taxed differently in each country. That’s why Aussie expats in the US can use things like the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC). These can help avoid being taxed twice on the same income.

Foreign Earned Income Exclusion (FEIE)

If you meet the physical presence test or bona fide residence test, you can exclude up to $120,000 of your foreign earned income from US tax.

Foreign Tax Credit (FTC)

If you pay or accrue tax to a foreign country on income that is also subject to US tax, you may be able to take a credit for the foreign taxes paid. This is typically more beneficial than the FEIE if the taxes paid in the foreign country are high since the FTC reduces your US tax on a dollar-for-dollar basis.

What about the Australian Superannuation Funds?

A complex area of US taxation for Australian expats involves Australian Superannuation funds. The IRS has not provided clear guidelines on how these are treated for US tax purposes. Generally, the conservative approach is to treat superannuation as a foreign grantor trust, with contributions, earnings, and distributions reportable on your US tax return. 

It’s recommended to seek advice from a professional familiar with both US and Australian tax law to navigate this area. Contact Odin Tax to learn more about it. 

Expat Income Tax: The Importance of Tax Planning

Tax planning is critical for Australian expats in the US. The US tax code is complex and can be a minefield for the uninitiated. With proper planning, you can leverage tax treaties, exclusions, and credits to minimise your tax liability.

When planning your taxes, keep in mind the tax year difference – the US tax year is the calendar year (January to December), whereas the Australian tax year runs from July 1 to June 30.

Being an Aussie expat in the US comes with its unique set of tax challenges. While the dual tax obligations can seem daunting initially, understanding the basics of taxation in both countries and knowing your rights and responsibilities can make a huge difference. 

Navigating the Complexities of Expat Income Tax with Professional Assistance

The US taxation system can be complex, particularly for expats. While it’s possible to do your taxes yourself, it may be worth consulting with a professional tax advisor experienced in international tax law. They can provide personalised advice and ensure that you comply with all tax regulations, while also maximising your savings.

If you’re preparing to file your tax returns in Australia, don’t hesitate to reach out to our sister company, Odin Tax. Specialising in expat tax lodgment in Australia, our team of expert tax advisors is ready to provide you with the guidance you need to navigate the complexities of taxation. 

Let Odin Tax help you maximise your return and minimise your tax liability. Contact us today to get started!

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Frequently asked questions

The US offers several provisions to prevent double taxation, such as the Foreign Earned Income Exclusion (FEIE) and Foreign Tax Credit (FTC). These provisions can help you exclude a certain amount of foreign earned income from US tax or claim a credit for taxes paid in a foreign country.

The tax treatment of Australian superannuation funds is a complex area in US taxation for Aussie expats. The IRS has not provided explicit guidelines, but a conservative approach is to treat superannuation as a foreign grantor trust, where contributions, earnings, and distributions are reported on your US tax return. It’s advisable to seek professional advice on this matter.

Failing to report foreign income can lead to penalties, including fines and interest charges. In severe cases, it can also lead to criminal charges. It’s important to declare all your income to the IRS, even if it’s not subject to US tax or has been taxed in Australia.

The US tax year is the calendar year, running from January to December. In contrast, the Australian tax year runs from July 1 to June 30 of the following year.

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