Managing expat tax in Australia involves balancing both U.S. and Australian tax obligations. U.S. citizens living in Australia must file U.S. taxes, including reporting worldwide income and addressing issues like the Foreign Tax Credit (FTC) and superannuation. This article breaks down key tax filing requirements, deadlines, and strategies to help avoid double taxation. At 1040 Abroad, we specialize in U.S. expat taxes and offer free tax advice—reach out to our Enrolled Agents today for assistance.
Do U.S. Citizens Living in Australia Have to Pay U.S. Taxes?
Yes, U.S. citizens living in Australia are generally required to file U.S. taxes, but whether they actually owe any taxes depends on their income and various exclusions or credits available. All U.S. citizens and green card holders must report their global income to the IRS by filing a Form 1040, regardless of where they live or where the income is earned. This applies to both income from the U.S. and Australian sources.
If your income exceeds certain thresholds (e.g., $13,850 for single filers in 2023), you’ll need to file a tax return, although many expats end up owing little to no U.S. tax due to credits like the Foreign Tax Credit (FTC) or the Foreign Earned Income Exclusion. For those who are self-employed, U.S. self-employment taxes still apply and cannot be offset by Australian taxes. The Totalization Agreement between the U.S. and Australia helps to avoid double taxation in social security contributions. Additionally, U.S. citizens with foreign bank accounts must file a Foreign Bank Account Report (FBAR) if their total account balances exceed $10,000 at any point during the year.
How Can the Foreign Income Tax Offset Help U.S. Expats in Australia?
The Foreign Income Tax Offset (FITO) can be a valuable benefit for U.S. citizens living in Australia who pay taxes on foreign income. It helps reduce their Australian tax liability by the amount of foreign tax already paid on that income, preventing double taxation.
If you’re a U.S. citizen residing in Australia and earning foreign income, you may be eligible for the FITO. The amount you can claim is the lesser of the foreign tax paid or the Australian tax due on the same income. For instance, if the foreign tax is lower than the Australian tax, you can only offset up to the amount of the foreign tax you paid. To claim the FITO, expats need to report their foreign income and taxes paid on their Australian tax return, ensuring they have proper records of the foreign taxes paid.
The FITO can significantly reduce your tax burden in Australia, especially given that Australian tax rates can be higher than U.S. rates. By using both the FITO and the U.S. FTC, expats can ensure they are not taxed twice on the same income. However, it’s important to note that the FITO cannot be carried forward to future tax years and only applies to specific foreign income taxes as defined by Australian law.
What Are the U.S. Expat Tax Filing Deadlines for Citizens Living in Australia?
U.S. citizens living in Australia still need to adhere to U.S. tax filing deadlines, though they receive some automatic extensions.
Standard U.S. Tax Filing Deadline
The regular deadline to file a U.S. tax return is April 15 each year. However, if you’re living abroad, you are granted an automatic two-month extension, making the filing deadline June 15. You don’t need to request this extension—it’s automatic for U.S. citizens and residents living outside the U.S.
Extended Filing Deadline
If you need more time beyond June 15, you can request an extension until October 15 by filing Form 4868. However, keep in mind that while the filing deadline can be extended, any taxes owed are still due by the original April 15 deadline to avoid interest and penalties.
FBAR and FATCA Reporting Deadlines
For those required to file an FBAR (Foreign Bank Account Report), the filing deadline is April 15, with an automatic extension until October 15. Additionally, if you are required to report foreign financial assets under FATCA (Form 8938), this must be filed along with your Form 1040 by the same deadline.
Do U.S. Expats in Australia Have to Pay Capital Gains Tax?
Yes, U.S. expatriates living in Australia are subject to capital gains tax (CGT) on their investments, including real estate and stocks. As U.S. citizens are taxed on their worldwide income, they must report any capital gains from the sale of assets, no matter where those assets are located. This means that if you sell property or stocks in Australia and make a profit, you are required to report those gains on your U.S. tax return.
Taxation of Australian Assets on U.S. Tax Returns
Real Estate: If you sell real estate in Australia, any capital gains are subject to U.S. capital gains tax. The gain is calculated by subtracting the property’s adjusted basis (purchase price plus any improvements) from the selling price. Even if the property is your primary residence in Australia, the primary residence exclusion of up to $250,000 (or $500,000 for married couples) allowed under U.S. tax law may not fully apply. This can result in a substantial U.S. tax liability if the property has appreciated significantly.
Stocks and Investments: Similar rules apply to stocks. If you sell stocks that you purchased before moving to Australia, the capital gains are calculated based on the stock’s value when you arrived in Australia, not the original purchase price. This can result in unexpected tax liabilities if the stocks have appreciated since your arrival.
Australian Capital Gains Tax (CGT) for U.S. Expats
Real Estate in Australia: Australian CGT applies to property sales, and gains are considered part of your overall income, taxed at your marginal rate. However, non-residents, including U.S. expats, are not eligible for Australia’s 50% CGT discount on assets held for more than 12 months, meaning they may face higher Australian tax rates on capital gains from real estate.
Stocks and Other Assets: U.S. expats are generally subject to Australian CGT only on “taxable Australian property,” which includes real estate and certain business assets. Other types of assets, like foreign company stocks, may not be subject to Australian CGT.
Managing Capital Gains Tax Obligations
Foreign Tax Credit: To avoid double taxation, U.S. expats can claim a FTC for any Australian taxes paid on capital gains. This credit can help offset U.S. tax liabilities on the same gains, easing the burden of being taxed by both countries.
How Is Foreign Tax Paid in Australia Reported on U.S. Taxes?
To avoid double taxation on income earned in Australia, U.S. expats can use the FTC or the FEIE when filing their U.S. tax returns.
Using the Foreign Tax Credit (FTC)
The FTC allows U.S. expats to offset U.S. taxes by claiming a credit for the taxes paid to the Australian government on income that is also taxable in the U.S., such as wages, business income, or capital gains from selling taxable Australian property.
Steps for claiming the FTC:
- Calculate the foreign tax paid on Australian income.
- Complete Form 1116, which determines the credit amount, capped by the U.S. tax owed on the same income.
- Apply the credit on Form 1040 to reduce U.S. tax liability.
This method is most beneficial when Australian taxes are higher than the U.S. tax on the same income.
Claiming the Foreign Earned Income Exclusion (FEIE)
Expats who meet the requirements of the Physical Presence Test or Bona Fide Residence Test can exclude up to $120,000 of foreign earned income for the 2023 year using Form 2555. While this exclusion reduces U.S. taxable income, any Australian tax paid on excluded income cannot be claimed as a credit or deduction. However, the FTC can still be applied to taxes on income exceeding the exclusion.
How Does Australia’s Tax Year Differ from the U.S. Tax Year?
The tax year in Australia operates quite differently from the U.S. tax year, which can have important implications for U.S. expats living in Australia. Here’s how they differ:
Tax Year Dates
Australia’s tax year begins on July 1 and ends on June 30 of the following year. In contrast, the U.S. tax year aligns with the calendar year, starting on January 1 and ending on December 31. This difference requires U.S. expats in Australia to adjust their calculations when preparing their U.S. tax returns.
Filing Deadlines
For Australian residents, individual tax returns are due by October 31 after the end of the Australian tax year. In the U.S., the standard tax filing deadline is April 15, but U.S. expats are granted an automatic extension until June 15. Many U.S. expats living in Australia choose to file for an additional extension to October 15 to reconcile both tax systems.
Implications for U.S. Expats in Australia
Due to the differences in tax year dates and filing deadlines, U.S. expats in Australia must calculate their income for U.S. tax purposes based on the U.S. calendar year and convert their Australian income into U.S. dollars. This also applies to foreign source investment income, and income earned from superannuation funds.
Filing for an extension on U.S. taxes can give expats more time to file their Australian tax returns first, helping ensure they meet the deadlines in both countries and potentially claim a FTC for taxes paid in Australia. Managing these tax year differences effectively helps avoid complications and ensures you comply with both U.S. tax rules and Australian tax obligations.
What U.S. Tax Forms Do Expats in Australia Need to File?
U.S. expats living in Australia must file several key tax forms to meet U.S. tax obligations. These forms report income, claim exclusions or credits, and ensure compliance with U.S. tax laws:
- Form 1040: All U.S. citizens and green card holders must file Form 1040 to report worldwide income, including income earned in Australia.
- Form 2555: This form allows expats to claim the Foreign Earned Income Exclusion (FEIE), excluding up to $120,000 (2023) of foreign earned income from U.S. taxation.
- Form 1116: Expats can use this form to claim the Foreign Tax Credit (FTC) to offset U.S. tax liability with Australian taxes paid, avoiding double taxation.
- FBAR/FATCA: Expats with foreign financial accounts must file FBAR if account balances exceed $10,000 and may need to file Form 8938 for FATCA if they hold higher balances in foreign assets.
These filings help U.S. expats reduce their overall tax liability and meet U.S. tax requirements.
Related: Navigating the US-Australia Tax Treaty as an American Expat
What Are the Tax Obligations for Superannuation in the U.S.?
Superannuation funds are an essential part of the retirement savings system in Australia, but for U.S. expats living in Australia, these funds come with unique U.S. tax obligations. Here’s a straightforward breakdown of how superannuation contributions, distributions, and reporting requirements are handled under U.S. tax law.
Overview of Superannuation and U.S. Tax Treatment
Superannuation is Australia’s mandatory retirement savings scheme where employers contribute a percentage of an employee’s salary to a superannuation fund. For U.S. tax purposes, these funds are generally treated as foreign pension plans. However, the tax treatment of these funds is different from how Australian tax residents handle them.
Contributions
- Employer Contributions: The mandatory contributions made by your employer to your super fund (also known as the Superannuation Guarantee) are not included in your taxable income on your U.S. tax return. Similar to how Social Security contributions are treated, these contributions are not subject to U.S. income tax at the time they are made.
- Voluntary Contributions: If you voluntarily contribute extra money to your super fund, these voluntary contributions are included in your gross income for U.S. tax purposes. This includes salary sacrifice arrangements where you direct part of your pre-tax salary into your superannuation. For U.S. expats, these contributions increase your taxable income in the U.S.
Distributions
When you begin withdrawing from your superannuation fund, the distributions may be partially taxable in the U.S. The taxable portion of the withdrawal depends on the contributions made by both the employer and the employee. In general, withdrawals from your superannuation fund will be subject to U.S. income tax, though the exact tax treatment can vary depending on how the fund is structured.
Get Expert Tax Advice for U.S. Expats in Australia – Contact 1040 Abroad Today!
Understanding your tax obligations as a U.S. citizen living in Australia can be complex, especially when balancing the requirements of two different tax systems. Whether it’s filing Form 1040, claiming the Foreign Tax Credit, or dealing with superannuation, careful planning is essential to avoid double taxation and minimize your overall tax burden. 1040 Abroad is here to help. We offer free tax advice for U.S. expats to ensure you stay compliant and maximize your tax benefits. Contact our Enrolled Agents today for expert guidance!
