Watch Seth & Khandra explain the most commonly asked questions for American expats in Australia.
U.S. Tax Help When
You’re Living In Australia
Is it true that every US citizen or Green Card Holder in Australia has to file a tax return in the US?
No, it’s not true. However, the vast majority of people do.
Who is required to do so?
First you need to look at your filing status in the US. Your filing status determines your income threshold, which in turn will show whether you need to file a tax return in the US.
What is my filing status?
Your filing status is used to determine your filing requirements, standard deduction, eligibility for certain credits, and your correct tax. If more than one filing status applies to you, you will want to choose the one that will result in the lowest amount of tax payable.
What are the main filing thresholds for Americans to be aware of?
Joint Return: Two spouses who are filing together as a joint return would have a filing threshold of $25,900 of gross income (the amount of money a person earns in one year before taxes and includes income from all sources) in the US Tax Year 2022. This doesn’t necessarily mean that you have to pay any tax in the US, most Americans and Green Card holders don’t, but that you are required to file a return.
Head of Household: The filing status for Head of Household is $25,900 of gross income in the 2022 US tax year.
Single Filer: The filing status for a single filer is $12,950 of gross income in the 2022 US tax year.
Married Filing Separate: Those who are married filing separately only need to earn more than $5 in the 2022 US tax year. An example here would be if you are married to a non-American and your worldwide income exceeds $5 you need to file a US tax return. Just because you are not working, does not mean that you will not earn $5 and need to file. For example, you would be required to file if you made $5 through interest. This threshold took a major change in 2018 following the Trump tax reforms of 2017.
It’s important to reiterate the point made earlier that just because you have to file your tax returns, it doesn’t necessarily mean you will have to pay anything.
Who does have to pay US tax in Australia then?
A couple of common examples of people who might have to pay US tax would be:
People who may still have income streams from the US. This could include if you have a rental property in the US, if you have investment income or dividends or capital gains from US sources (e.g. property, car, shares etc).
Someone who does not pay a lot of Australian tax: this could be down to salary sacrificing or a termination payment that is subject to a low rate of tax in Australia.
However, in most cases, US citizens living in Australia should not have to pay US tax.
Is double taxation possible (i.e. being taxed both in the US and Australia?)
It is uncommon but it can happen.
If the level of income that a US citizen has goes above particular thresholds, then the investment income that they earn has a surtax (called the Net Investment Income Tax). This is where you will pay Australian tax on all of your worldwide income that offsets the normal US tax completely but then there’s this surtax of 3.8% on the US side and this cannot be offset.
Is it better to file as Head of Household rather than Married Filing Separate?
There are certainly benefits to Head of Household filing status compared to Married Filing Separate, particularly as it comes with better tax benefits. There are however criteria that you must meet to qualify such as:
- You must be providing more than 50% of the costs of expenses in the household.
- You are unmarried (single, divorced or legally separated) or considered unmarried (for instance if you are married to a non-American or non-Green Card Holder) by December 31 of the year. Unfortunately, if you are married to an American, the status generally does not apply to you.
- You also need a qualifying dependent – for example a child or an elderly relative.
So, if you are single or married to a non-American and living with a dependent child, you can file as Head of Household and claim higher standard deductions as well as child tax credit.
What counts as a qualifying dependent when filing US tax returns as a Head of Household?
The criteria for having a qualifying dependent is as follows:
- You lived in a household for which you paid over half of the costs to keep with a dependent as listed on the IRS website, for more than half of the year.
- In the case of a dependent parent, they do not have to live with you in order for you to file as Head of Household. You just need to have paid more than half of the costs for keeping their principal home.
What counts as household expenses in order to file as a Head of Household?
The following are some of the expenses that if you pay over 50% of, will qualify you to file as a Head of Household:
- Property taxes
- Mortgage interest
- Utility bills
- Repairs and household maintenance
Tax treaties between countries often present a complicated and time-consuming consideration when preparing to file a US tax return. We take a look at the Australian-US Tax Treaty, to help you understand the important considerations.
Is there an Australian/US Tax Treaty?
Yes, there is. The Treaty is used by us almost every day: it has a lot within it to help us prevent double taxation and also to assign taxing rights of certain incomes between Australia and the US. However, it isn’t a silver bullet, making your liability the lowest possible or preventing you from paying tax at all in the US. The Treaty has a savings clause, by which the US Government reserves the right to tax a US citizen or Green Card Holder as they see fit under domestic tax laws.
What is the main benefit of the Australian/US Tax Treaty?
The Treaty’s main benefit to those US citizens or Green Card Holders living in Australia is that it eliminates double taxation. It allows us to use mechanisms within the Treaty to optimize the way that income is taxed between Australia and the US, so that we can minimize tax and optimize the outcomes for our clients.
Key points to know about the Australian/US Tax Treaty
- Its purpose is to ensure fairness, but that doesn’t guarantee that you will achieve the lowest outcome by using it.
- There’s more than one type of Tax Treaty between the US and Australia. For example, there is a Totalization Agreement between Australia and the US, focusing on the term ‘social security’. From a US perspective, it focuses on the tax withholding that comes out of the US payroll at 6.2%. Although the systems don’t exactly match up, the rough equivalent in Australia is superannuation, so the Treaty ensures that you do not have to pay both social security in the US and superannuation in Australia.
- The Totalization Agreement is less of an issue for an employee, but something that we see more often with those who have their own businesses or are self-employed in other ways.
What if you do own a business or are self-employed?
In the US, you would be liable to pay self-employment tax as a self-employed person or owner of a business. Self-employment tax is one of those taxes that cannot be offset by taxes paid in a foreign country. However, the Totalization Agreement can work in your favour. As a US citizen or Green Card Holder living in Australia, you are eligible to use the social security Totalization Agreement; this exempts you from paying any US self-employment tax.