Guest Article by Craig Joslin, Founder of The Australian Expat Investor – A website with a treasure trove of informative articles to help Australian Expats Build Their Wealth While Living Abroad. Get Craig’s free ebook at http://www.austexpatinvestor.com.
As an expat myself, I understand the number of things people need to worry about when moving overseas from Australia. Whether it is immigration and work visas in your new country of residence, finding a house to live in, researching suitable schools for the kids, or even just tidying up loose ends in Australia – it can get overwhelming.
Often, the last thing on your mind is the tax implications of moving abroad, both in Australia and in your new country of residence (USA). If you don’t get on top of it early, you may find you have made some costly mistakes down the road.
In this article, I will give you a taste of some of the issues to be aware of. This discussion is necessarily simplified. Taxation law is complex, and so you should consult a registered tax advisor both in Australia and the USA to understand how the various laws and tax treaties apply to your specific situation.
So, what are 3 things every new Australian Expat should know about taxation in the USA?
1. Determining Which Country You Are A Tax Resident Of
The most important question you need to ask yourself when moving to any new country is which country you are a tax resident of. Your tax residency has enormous implications on how much tax you pay and how you should optimise your investments to be most tax effective.
Generally speaking, if you are considered a tax resident of a country then you will be liable to pay tax in that country on your global income (from all sources).
Australian Tax Residence
Simply moving overseas is generally not, in itself, sufficient to claim you are no longer a tax resident of Australia.
The Australian Tax Office has a number of tests to determine whether or not they consider you to be a tax resident. Among other factors, you are expected to have established a permanent home overseas and to live overseas for at least two years.
If you are deemed to be a non-resident of Australia for taxation purposes, there are number of tax consequences for any investments you have in Australia, which you should discuss with your Australian tax advisor.
Ioutline more details on determining your tax residency and the tax implications of moving overseas in my Tax Report For Australians Living Abroad.
United States Tax Residence
The United States also has its own rules for determining whether you are a tax resident of the United States. Subject to some exceptions, foreign nationals who hold US permanent residence immigrant visas (commonly referred to as ‘green cards’) are automatically classified as a “resident alien”, as well as those who are physically present in the USA for more than 183 days.
It is also possible you can be deemed to be a US resident for tax purposes for being in the country for as little as 31 days in other years. The International Revenue Service (the US equivalent of the Australian Tax Office) outlines these rules in more detail.
If you are deemed to be a “resident alien” by the US government , you will generally be taxed in the same manner that US citizens are taxed. This means, that you will usually be liable to pay income tax in the US on your global income (from all sources, and from wherever in the world).
If you are deemed to be a “non-resident alien” by the US government, then you will generally only be taxed on your income sourced in the United States.
2. Australia – USA Tax Treaty
Australia and the USA have entered into a tax treaty to prevent the double taxation of income between the two countries
.
Of interest for Australians in the USA is that:
(1) In the event you are considered to be an Australian resident for Australian tax purposes (under Australian law) and a US resident for US tax purposes (under USA law), the tax treaty provides rules to ensure you are only a tax resident of one country
(2) It allocates taxing rights over certain categories of income between Australia and the United States (in the event you are earning income from both countries)
3. Multiple Income Taxes (and Multiple Tax Returns)
Here are some of the income taxes you need to be aware of when moving to the United States.
Federal Income Tax
The US government imposes a Federal Income tax. This is the primary form of taxation on your income. The federal income tax rates vary between 10% and 39.6% depending on your income.
As a resident alien, your taxable income will be based on your global income minus any allowable deductions.
State Income Tax
In addition to federal income tax, most states in the USA impose personal income tax. These state taxes are generally much lower than the federal income tax and are generally deductible for federal income tax purposes. State income taxes vary from state to state, but are generally less than 10%.
Federal Social Security & Medicare (FICA)
The social security tax rate for 2016 was 6.2% and assessed on the first US$118,000 of income, while the Medicare tax rate of 1.45% is assessed against all salary, and increases a further 0.9% on higher salaries.
When moving to a new country, managing your tax affairs can become increasingly complicated (particularly if you have accumulated a house or other investments in your home country). Tax laws in your new country can be quite different to how the tax laws behave in your own country. Avoid the heartache (and the tax penalties later), by ensuring you get good advice from a tax advisor in both countries as early as possible after moving abroad.
Sources:
IRS
USA – Australia Tax Treaty 1982
Global Mobility Services : Taxation of mobile employees working in the United States (inbound), PWC
Disclaimer : This information is for educational purposes only and does not constitute financial or taxation advice. As this information is not advice and has been prepared without taking into account your objectives, financial situation or needs you should, before acting on this information, consider its appropriateness for your circ*mstances. Independent advice should be obtained from a licensed financial or tax advisor for the relevant country.
**Disclosure: This post may contain affiliate links. If you purchase something through one of these links you don’t pay a cent more, but I receive a small commission, that is put towards the running of this blog.
Ben Smithon May 5, 2017 at 12:51 am
Hi,
Do you know any decent CPA that are across USA/Aussie tax issues?
Thanks,
Ben
Reply
Katherineon May 5, 2017 at 4:23 pm
Hey Ben,
I haven’t had much luck either but I’m looking into this at the moment. I’ll let you know if I have any luck.
Cheers,
KatReply
John Boweson February 19, 2020 at 12:48 am
I’m an dual US/AUS citizen who has just moved back to the US after 20 years in Perth. I’m getting ready to do my 2019 US taxes, and the US IRS doesn’t seem to have a clue as to how to handle my Australian Superannuation.
There are a couple of main ‘lawyer/CPA’ websites that advertise that they can help. But truth be known, they cannot answer with any certainty how (or if) the Superannuation is to be treated in the US tax law. One will ‘Attach a written opinion letter’ to my US tax return stating that they take the ‘Treaty’ position and feel no tax is due at all, for the meager sum of $6500 USD.
I’ve read the treaty, and the wording in Article 18 (3) “Annuities paid to an individual who is a resident of one of the Contracting States shall be taxable only in that State.”
Followed by Article 18 (5) “The term ‘annuities’, as used in this Article, means stated sums paid periodically at stated times during life, or during a specified or ascertainable number of years, under an obligation to make the payments in return for adequate and full consideration (other than services rendered or to be rendered).
These seem to be the closest I can get to a description/definition of a Superannuation account.
Another website ‘IRS Medic’ makes mention of an ’employees trust’ as the answer.
What do you think?Reply
Katherineon February 19, 2020 at 8:05 pm
This is a definite grey area in taxation between the two countries.
Some CPA’s go the route of the one you mentioned, and do not declare Superannuation in an FBAR.
However, a majority do advise that superannuation is declared on your FBAR in the US, as a safety measure.We spoke to a few different accountants/firms/tax preparers in this article, and asked about superannuation: https://brightlightsofamerica.com/2019/01/us-australian-expat-tax/
Reply
Lindaon July 24, 2020 at 10:02 pm
I am dual citizen (Aus/USA) selling house and moving back to Perth. Will I be taxed on the sale of house when i transfer funds into Australian bank? Lived in house for 16 years.
Reply
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