If you’re a U.S. citizen or Green Card holder residing in Australia, tax-time can be less straightforward than filing a simple tax return. Many expats aren’t even aware that they are required to continue to file their U.S. tax returns once they have settled in a new country. It can be a little confusing, and oftentimes, stressful. The rules and seasons are quite different, and it’s not always the simplest thing to figure out for yourself.
With the United States being one of the few countries that requires their citizens to declare foreign income and file a tax return even while residing overseas – it’s usually the safest option to assume you must file in both the U.S. and Australia.
You will need all of your tax related documents from the country you are residing in, such as income statements, dividends or interest earnings, and receipts from certain expenses to file your U.S. taxes. And there are also a few differences to note about filing/lodging in the different countries.
The Australian tax season operates from July – June, with lodgement of taxes being due by the end of October, while the U.S. follows the calendar year. But being an expat currently residing overseas, you are automatically awarded a two-month extension, with the option to apply for another extension into October.
Important things to know about Australian taxes as an expat:
- The requirement to lodge taxes in Australia will depend on your residency and domicile status. (Domicile being your permanent home, and residency being where you spend the majority of your time.)
- You are an Australian resident for tax purposes if you’ve resided there for more than half a year without a permanent residence somewhere else.
- Australian residents pay tax on all and any income over $18,200.
- Non-residents pay tax on all income that has been earned from an Australian source (some exceptions apply).
- Non-residents are also taxed at a higher rate, but are only required to report on income earned within Australia – not worldwide.
- Holding an Australian superannuation fund can provide certain tax benefits.
- You may also be required to pay the Medicare levy surcharge, which will be applied to your tax return.
I want to know more about US taxes abroad
Things to know about U.S. taxes as an expat:
- If you are required to pay income tax in Australia, there are certain IRS programs that help you avoid double taxation, and prevent you from having to pay tax on the same income in the U.S. as well. Two of them being the ‘Foreign Earned Income Exclusion’ which allows you to exclude a certain amount of your income from U.S. taxation, and the ‘Foreign Tax Credit’, which applies U.S. tax credits to offset the tax you’ve already paid in Australia.
- The ‘Foreign Tax Credit’ program allows you to carry excess credits forward to use on future tax returns.
- You still have to file even if you don’t owe any tax in the U.S.
- If you own foreign assets worth over US$200,000 (excluding your home), you must declare them.
- If you had combined bank balances totaling over US$10,000 across your non-US bank accounts (including superannuation) at any time during the tax year, you are also required to file a Foreign Bank Account Report (FBAR).
- The U.S. – Australia Tax Treaty enables the two countries to share tax information. The two government tax agencies freely communicate, and you should be aware that both countries will be aware of your tax obligations and/or debts.
- Australian pension/superannuation contributions are NOT tax free regarding your U.S. taxes.
- You must calculate your earnings from January – December.
- You must report your income in U.S. dollars, and you must convert your AUD earnings as accurately as possible into USD, using the rates set by the IRS.
- If you have earned over US$12,550, or over $400 of income from self-employment, you will be required to file form 1040.
While many U.S. citizens do not end up owing any American taxes, due to the offsets applied from the foreign tax paid, filing is still a requirement and there are two types of penalties that you may face if you fail to file your taxes: failure-to-file penalties, and failure-to-pay penalties.
There is also the more serious case of the passport revocation law, which came into effect in 2015, which allows the U.S. government to revoke the passport of any citizen who owes more than $50,000 to the IRS. While this kind of tax debt seems large, it is easy enough to build up, especially taking into account applied interest and penalties.
Fortunately, in 2014 the IRS revamped an amnesty program for expats which is called “Streamlined Foreign Offshore Program.” This program allows citizens currently residing outside the U.S. an opportunity to become fully US tax compliant, without facing any penalties.
To utilize this amnesty program, you must first show that any undeclared financial assets were due to non-wilful conduct, or of a well-intentioned misunderstanding. You will also be required to file the last three years of your federal tax returns, and six years of FBARs. If you can prove that your past failure to lodge was non-wilful, and you are willing to pay any outstanding due tax, then there will be no penalties applied.
To be eligible for the ‘Streamlined Foreign Offshore Program’, you must meet the following criteria:
- Have spent at least 330 days outside of the United States in one of the past three tax years.
- Be currently non-compliant, and have failed to file/lodge past tax return/s.
- Your failure to comply was due to non-wilful conduct.
While tax time can be confusing and stressful (especially for expats), there are certified professionals out there that can help you get through it with ease. And while the threat of penalties can be scary, there are programs in place that can help you as a citizen to catch up and make things right in the eyes of the IRS.
We hope that this information has helped you, and that you have a clearer understanding of your tax obligations as a US citizen (or Green Card holder) residing in Australia.