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us expat tax guide – australia

How can you avoid dual taxation in the US and Australia?

If you earn income subject to tax in the US and Australia, you generally won’t pay tax twice on the same income. Instead, you pay the higher tax rate of the two countries. This typically means you end up paying Australian taxes because they are higher. This is managed through the Foreign Tax Credit, designed to prevent double taxation.

What exactly is the Foreign Tax Credit?

The Foreign Tax Credit (FTC) allows US citizens and green card holders to offset taxes paid in a foreign country against their US tax liability. The credit applies to the income earned in the foreign country, in this case, Australia, and helps ensure you are not taxed twice on the same income.

Is the Foreign Tax Credit available to temporary residents in Australia?

The situation gets complex for US expatriates in Australia on temporary visas. Australia offers tax exemptions for certain types of foreign income for temporary residents, which means they might not pay Australian taxes on foreign investment income. 

Consequently, without paying these taxes in Australia, there’s no tax paid to credit against US taxes, potentially leading to a US tax liability.

What are the implications of not including your non-US spouse on your US tax return?

Not including your non-US spouse in your US tax filing can be beneficial. It allows you to manage your assets more efficiently from a tax perspective. Any assets held by your non-US spouse are considered outside the scope of US taxation, which can significantly reduce your overall tax liability.

What are the advantages of including your non-US spouse in your US tax return?

Including your non-US spouse in your US tax return can provide several financial benefits. For instance, you can access higher tax credits and exemptions. One notable benefit is the increased exclusion amount from $250,000 to $500,000 for the sale of your main residence if filing jointly.

However, this filing status can complicate your tax matters and should be considered carefully.

What should you consider before including a non-US spouse in your tax return?

When you decide to include your non-US spouse in your tax filings, it’s crucial to understand that:

  • Once included, you must continue to include them in future filings.
  • You can only change this status through a formal IRS procedure.
  • Even if you divorce, your non-US spouse may continue to be treated as a US tax resident for certain purposes.

Should you include your non-US spouse in your tax filings?

Often, it’s more beneficial to file separately from your non-US spouse. The complexities and potential disadvantages of filing jointly generally outweigh the benefits. 

However, it’s important to evaluate each tax situation individually and consider alternative filing statuses like Married Filing Separately or Head of Household, which might offer a more favorable tax outcome without unnecessarily involving your non-US spouse.

What’s the best approach?

The decision to include or exclude a non-US spouse from US tax returns should not be taken lightly. It involves careful analysis of the tax implications and potential benefits. Consulting with tax professionals who understand US and Australian tax laws is important to making these decisions effectively and optimizing your tax outcomes.

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