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us expat tax guide – australia

Does everyone face double taxation, or do some pay taxes partially?

Generally, individuals are subject to higher tax rates than the two countries, which, in practice, should prevent double taxation.

For instance, in Australia, the tax rate can go up to 45% for incomes over AU$180,000, plus an additional 2% for the Medicare levy. This higher rate ensures that Australian taxes typically offset any US tax liabilities due to the foreign tax credit, thereby avoiding double taxation.


What common mistakes do Americans make when relocating to Australia for work?

A common misconception among Americans moving abroad is the belief that they no longer need to file a US tax return if they’re paying taxes in another country, such as Australia. 

Under this assumption, it’s common for expats to fall behind on their US tax filings. While high Australian taxes often mean that additional US taxes are minimal or nonexistent, US citizens and Green Card holders must file returns with the IRS annually.

Why are most US expats in Australia not paying additional taxes?

The foreign tax credit, which offsets taxes paid in Australia, significantly reduces any additional US tax liabilities for most expatriates. In some instances, the foreign-earned income exclusion might also apply, potentially excluding a portion of foreign earnings from US taxes altogether.

What should you know about the child tax credit for US expats in Australia?

The child tax credit refunds $1,600 per qualifying child for US citizens. Children of mixed-nationality couples (where one parent is Australian) often qualify. 

Parents must obtain a US Social Security number for each qualifying child to claim this credit. Expats have an extended deadline to file their tax returns and can amend returns if necessary to claim credits after obtaining social security numbers. Refunds can be directly deposited into US bank accounts, which simplifies the process for expats.

Why are superannuation accounts problematic in the context of US taxes?

The US tax code does not automatically recognize foreign retirement plans such as Australian superannuations as equivalent to US-based plans like the 401(k). Therefore, these accounts do not receive the same favorable tax treatment and must be reported in detail on US tax returns.

How should superannuation accounts be reported to the IRS?

Due to their status as foreign financial accounts, superannuation accounts must be declared on the FBAR (Foreign Bank and Financial Accounts Report). Their highest balance during the year needs to be reported annually. 

Additionally, if the total value of the foreign financial assets exceeds the reporting threshold, they may need to be reported on Form 8938. This detailed reporting is necessary to ensure compliance with US tax laws and avoid potential nondisclosure penalties.

How are employer contributions to superannuation funds viewed by the IRS?

Unlike the 401(k) plans familiar in the US, employer contributions to Australian superannuation funds are treated as taxable income by the IRS. Moreover, the IRS considers the growth within these funds each year, which can complicate your tax situation.

What triggers grantor trust reporting for superannuation funds?

Grantor trust reporting requirements are activated when an employee makes contributions to their superannuation fund that exceed those made by their employer. This also applies to Self-Managed Super Funds (SMSFs) established by business owners or partners. The complexities of grantor trusts, including the need to file Forms 3520 and 3520-A, make accurate and timely reporting crucial to avoid severe penalties.

When is superannuation taxed in the US?

While distributions from superannuation are tax-free in Australia, the US treats them differently. The IRS taxes the growth in the funds upon distribution unless it has already been taxed in the US Properly applied foreign tax credits may reduce the tax burden, but this depends on the individual’s tax situation and history of contributions.

What should you know about family trusts in the US?

In the US, family trusts are typically treated as grantor trusts, meaning all income and gains are taxed to the trust’s founder, regardless of who benefits from the trust in Australia. This classification necessitates careful investment choices to avoid adverse tax consequences and potential double taxation.

What is the first step in managing US tax obligations from Australia?

The best initial step in managing US tax obligations is consulting with a tax expert. This provides a clear understanding of your standing with the IRS and helps strategize ways to reduce your overall tax liability, potentially enhancing your financial position in both the US and Australia.

What advice is there for Americans considering moving to Australia?

For Americans planning to move to Australia, it’s crucial to seek tax advice before investing, particularly in managed funds. Understanding the tax implications can prevent unexpected tax liabilities and ensure compliance with US and Australian tax laws.

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