How does moving to Australia affect my US tax obligations?
Published on December 04, 2023
by Jonathan Rose, EA
Jonathan Rose, an IRS Enrolled Agent with 12 years of expat tax experience, specializes in U.S. tax preparation, tax planning, and tax advice for U.S. citizens and Green Card holders living and working in Australia.
Jonathan also talked about family tax benefits in Australia.
Relocating to Australia doesn’t automatically relieve you of your U.S. tax responsibilities. U.S. citizens and green card holders are subject to tax on their global income, regardless of where they live. However, your time abroad may affect your residency status for tax purposes. The moment you establish a home in Australia, you may trigger a shift in your tax obligations.
How does dual tax residency affect me?
Dual tax residency may place you in the position of being taxed by both the U.S. and Australia on the same income, so you’ll need to do some work to plan around that.
If you’re a tax resident of the U.S. and Australia, both countries may claim the right to tax your global income. However, this doesn’t necessarily mean you’ll pay twice; thanks to the tax treaty between the U.S. and Australia, you can often avoid double taxation. But how does this treaty work in practice? It allows you to claim a credit on your U.S. tax return for taxes you’ve paid in Australia, potentially reducing what you owe to the IRS.
Considering the implications of possibly being twice on the same income, it’s crucial to seek professional advice for support. While the tax treaty is there for help, differences in tax laws might still lead to varying outcomes. A tax professional can help you understand the treaty, claim the Foreign Tax Credit, and ensure you’re not paying more than necessary.
What if I’m way behind on my U.S. tax returns?
There is a special IRS program to help you catch up on your U.S. taxes safely, without fines and penalties
It’s for American citizens that didn’t know they had to file U.S. tax returns each year, and have therefore fallen behind. Some more than 30 years! With the IRS Streamlined Procedure, say goodbye to overdue tax returns, late fees, and penalties. If you have children, we can backdate your Child Tax Credit Refund for 3 years.
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Do I still file US taxes after moving?
Yes, even after moving abroad, U.S. citizens are required to file U.S. taxes. The United States taxes its citizens and resident aliens on their worldwide income, regardless of where they live. As a U.S. expat, you must report all income, deductions, and credits to the IRS, just as you would if you were residing in the States.
For U.S. citizens living abroad, the standard deadline for filing taxes is the same as for residents, typically April 15. However, expatriates receive an automatic two-month extension to file their returns; for the tax year 2023, the deadline is June 17. If more time is needed, one can file Form 4868 for an extension until October 15. It’s important to remember that while the filing deadline may be extended, any taxes owed are still due by April 15 to avoid interest and penalties.
Can I reduce US taxes with FEIE or FTC?
Yes, you can reduce your U.S. taxes by utilizing the Foreign Earned Income Exclusion (FEIE) or the Foreign Tax Credit (FTC). For the tax year 2023, the FEIE allows you to exclude up to $120,000 of your foreign earnings from U.S. taxation. To qualify, you must have a tax home in a foreign country and meet either the bona fide residence test or the physical presence test.
Claiming the FTC is another way to lower your U.S. tax bill. This credit is for income taxes paid to a foreign government, reducing your U.S. tax liability on a dollar-for-dollar basis. The FTC is particularly beneficial if you pay taxes to a country with a higher tax rate than the U.S.
Are Australian taxes creditable in the US?
Australian taxes are indeed creditable against your U.S. tax liability. The U.S. has various provisions that allow you to claim credits for Australian taxes paid, which can reduce your U.S. taxes.
It’s important to remember that each individual’s circumstances can significantly affect how these reductions work. Therefore, it is necessary to seek the guidance of a tax professional who can provide personalized advice and ensure that you maximize your benefits.
What’s required for FBAR and FATCA reporting?
The requirements for FBAR and FATCA reporting, as outlined on the IRS website, are as follows:
FBAR (Foreign Bank and Financial Accounts Reporting) Requirements:
- U.S. persons, which include citizens, residents, corporations, partnerships, limited liability companies, trusts, and estates, must file an FBAR if they have:
- A financial interest in or signature authority over at least one financial account located outside the United States and
- The aggregate value of those foreign financial accounts exceeded $10,000 at any time during the calendar year reported.
FATCA (Foreign Account Tax Compliance Act) Requirements:
- U.S. taxpayers holding financial assets outside the United States must report those assets to the IRS on Form 8938, Statement of Specified Foreign Financial Assets, if the total value exceeds the appropriate reporting threshold.
- Form 8938 is filed with the annual income tax return.
You might wonder, “What happens if I don’t comply?” The penalties for failing to file are as follows:
- Non-Willful Violation: If you fail to file an FBAR or maintain records of your accounts, and the IRS determines that this was not due to willful neglect, you may be subject to a penalty of up to $12,921 for each violation.
- Willful Violation: If the failure to file is found to be willful, the penalty may be the greater of $129,210, or 50% of the amount in the account at the time of the violation, for each violation.
Criminal penalties may also apply for willful actions, including fines of up to $250,000, imprisonment for up to five years, or both.
It’s important to note that these penalties are adjusted annually for inflation, so the amounts may vary. Additionally, the IRS may impose penalties for each year you fail to file an FBAR.
How should I handle retirement savings?
As a U.S. expat, you must continue to handle your retirement savings with care, considering both U.S. retirement accounts and Australian superannuation funds are subject to U.S. tax laws. Contributions to U.S. retirement plans like IRAs and 401(k)s can still benefit your U.S. taxes, even if you reside overseas, but special rules apply to be able to contribute.
Investment taxation in both countries can affect your retirement savings. Hence, this is why understanding the implications of the tax treaty and how it applies to your specific situation is essential. It is advisable to consult with a tax professional who can guide you through reporting your retirement savings and help you understand the tax obligations in both the U.S. and Australia.
Will my estate be taxed in the US or Australia?
Your estate will be subject to taxation in the U.S. if you are a U.S. citizen or resident alien, as the U.S. taxes the worldwide estates of its citizens and residents. Additionally, you might like to know that Australia does not impose an inheritance tax, so your estate would not be taxed by the Australian government solely based on inheritance. However, if your estate generates income in Australia, that income may be subject to Australian taxes. It is important to consult with a tax professional to understand the specific implications for your estate and any potential benefits from tax treaties between the U.S. and Australia.
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