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us expat tax guide – australia

What is the Foreign Tax Credit (FTC)?

The Foreign Tax Credit (FTC) is a mechanism for US citizens or Green Card holders who pay taxes in a foreign country and are also liable for US taxes on the same income. It allows for a credit that can reduce their US tax liability. This credit is often claimed using IRS forms 1116 for individuals or 1118 for corporations.

What about the Foreign Earned Income Exclusion (FEIE)?

The Foreign Earned Income Exclusion (FEIE) enables US citizens or Green Card holders living and earning income abroad to exclude a set amount of their foreign earnings from US taxation. 

This exclusion amount is adjusted annually for inflation (for example, $126,500 for 202). To claim the FEIE, one must file Form 2555 with their US tax return. However, it’s crucial to remember that claiming this exclusion doesn’t exempt you from the obligation to file a US tax return.

Which is more advantageous: FTC or FEIE?

Choosing between the Foreign Tax Credit and the Foreign Earned Income Exclusion depends on various factors specific to an individual’s tax situation. 

FEIE might seem appealing due to its significant impact on reducing US tax liability, but it also has several constraints:

  • It disallows claiming other refundable tax credits.
  • Once chosen, it’s binding for future returns unless formally revoked.
  • Revoking FEIE bars you from using it again for five years without IRS permission.

FEIE is particularly useful in countries with lower tax rates than the US, but it may not be the best choice in countries like Australia, where the tax rates are higher.

What are the primary benefits of using FEIE?

While FEIE was more beneficial in the past, changes over time have reduced its advantages, especially in countries with high tax rates like Australia. In certain scenarios, like for US expats previously residing in countries with lower taxes, transitioning to FTC upon moving to Australia might be more beneficial.

Key points about FTC:

  • FTC can be carried forward for ten years, enhancing its future utility.
  • Users of FTC may be eligible for additional child tax credits.
  • It’s particularly useful for US expats who may relocate to other countries, allowing for flexibility in managing global tax liabilities.

FTC often results in unused foreign tax credits that can be applied to future US tax returns, providing a buffer against taxes owed when moving between countries with varying tax rates.

In Australia, the Foreign Tax Credit is generally more advantageous due to the higher local tax rates. It allows for greater flexibility and can effectively reduce US tax obligations to minimal or zero amounts. 

However, since every individual’s situation is unique, and it’s crucial to consult with a tax professional to ensure that the chosen tax strategy aligns with personal circumstances and provides the optimal tax outcome.

Does the choice between FTC and FEIE influence eligibility for the Stimulus payment?

Whether you qualify for the Stimulus payment, which could be up to US$1,200, hinges on your adjusted gross income (AGI). For a single filer, the AGI must be below US$75,000 to qualify for the full payment, with the amount reducing for income above this threshold and phasing out entirely at US$99,000.

For a US citizen in Australia earning AU$140,000 (approximately US$100,000), their eligibility for the Stimulus payment could vary based on whether they claim the Foreign Tax Credit (FTC) or the Foreign Earned Income Exclusion (FEIE). 

Claiming the FTC might push their AGI above the eligibility threshold, potentially disqualifying them from the Stimulus payment. On the other hand, using the FEIE could lower their AGI, possibly keeping it within the range that qualifies for the Stimulus payment.

Are US expats in Australia entitled to receive the Stimulus payment?

Yes, US citizens and Green Card holders residing in Australia are eligible for the Stimulus payment as long as they meet the income requirements. It’s important to clarify that the term “resident” in this context refers to tax residency, not physical presence. Thus, US tax residents, including those living abroad, are eligible.

What if you didn’t receive your Stimulus payment?

Many US expats have encountered issues with receiving their Stimulus payment despite being eligible. The Stimulus payment is technically an advance on a refundable credit for the 2020 tax year. 

If you didn’t receive your payment, you could claim it when you file your 2020 US tax return. By providing your US bank details on your tax return, you can receive the credit directly in your bank account, avoiding delays associated with mailing a check.

Please note that the deadline for the stimulus check is May 17, 2024.

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