Common US/Australia Tax Matters for Dual-Status Taxpayers

An Australia/American Expat Tax Guide for U.S. Income Taxes

Australia/US Tax Expat Tax Guide 

It is very common for US taxpayers who are citizens of Australia to relocate to the United States temporarily or permanently for work — only to get (understandably) overwhelmed by the U.S. tax system. Unlike most other countries across the globe, the United States follows a worldwide income tax model. It is based on citizenship, although that is a bit of a misnomer because it is not just limited to US Citizens –– it includes US Citizens, Lawful Permanent Residents, and Foreign Nationals who meet the Substantial Presence Test. Taxpayers who fall into any one of these categories, are considered to be US persons for tax purposes and are subject to US tax on their worldwide income, as well as global reporting and international information reporting forms such as the FBAR and Form 8938. Let’s look at some important tax aspects for expats who are originally from Australia and/or US persons now residing in Australia.

US Taxes Until Formal Expatriation

One of the most common misconceptions that US Expats have is that if they relocate overseas, they are no longer required to pay U.S. tax on foreign earnings — but that is incorrect. Unless a person formally expatriates and relinquishes their green card — or renounces their US citizenship — they are still considered a US Person and are still required to pay U.S. tax on their worldwide income.

Treaty Benefits May Apply to Australian/US Residents

If a person is considered a US person, they may be able to make a treaty election using form 8833 and elect to be treated as a foreign person for U.S. tax purposes (generally excludes U.S. citizens). In this scenario, the Taxpayer may qualify to file a Form 1040NR as a nonresident instead of a Form 1040 — and they only have to pay U.S. tax on their US-sourced income (FDAP and ECI).

Foreign Earned Income & Housing Exclusion (FEIE)

US persons who reside overseas and qualify for either the Physical Presence Test or Bona-Fide Residence Test can qualify to exclude up to about $108,000 of their US income from their U.S. tax return — as well as claim a housing credit for a portion of the rent and other costs associated with foreign housing. If a person qualifies for the Foreign Earned Income Exclusion they must still file the tax return and include a Form 2555 — couples filing joint tax returns can each claim the earned income exclusion but cannot double-dip on the housing exclusion.

Foreign Tax Credits (FTC)

When a person pays tax overseas on income they earned abroad, they may be able to claim a foreign tax credit against any taxes that would otherwise be due on the same income on a US tax return. It is not always a dollar-for-dollar credit — and if a person claims the foreign earned income exclusion for earned income they cannot double-up on the same dollar using both the credit and the exclusion — but they may still have some remaining credit available depending on how much income they earned after applying the earned income exclusion. In other words, if a person earns significant income from employment — above the foreign earned income exclusion amount — they may be able to still claim a foreign tax credit on the additional income for the portion not exempted by the FEIE.

Australia Pension Plan & US Tax

The Australia Pension Plan (aka Superannuation) typically grows tax-free (distinct from Provident Funds in non-treaty countries in which there may be more immediate tax consequences). Since it is a foreign pension, it may qualify as not taxable during the growth phase from a U.S. tax perspective — but some IRS agents may take the position that the growth is still taxable since it is not a qualified plan. You should speak with a Board-Certified Tax Law Specialist before taking a position on your tax return.

Australia Pension & US Reporting

Even if the Australia Pension Plan is not taxable during the growth phase, it is still a reportable foreign financial account that must be disclosed on various international information reporting forms such as the FBAR and FATCA Form 8938.

FATCA and Form 8938

FATCA is the Foreign Account Tax Compliance Act. US taxpayers generally comply with FATCA by filing Form 8938 (above). The Foreign Financial Institutions (FFI) may send expats and other US persons a FATCA letter or KYC Letter to ascertain whether the individual is a US person even if they are residing outside of the United States as an expat. This may lead the FFI to report the Taxpayer to the IRS.

Foreign Account Reporting & FBAR (FinCEN Form 114)

When a US person has foreign bank accounts and other financial accounts with an annual aggregate total that exceeds $10,000 on any given day in any year, they have to report the accounts on the FBAR (aka FinCEN Form 114). The form is filed electronically directly on the FinCEN website.

Foreign Gifts from Australia & Form 3520 

Here is a common scenario: A US citizen has moved back to their home country. They may possibly have dual citizenship but their immediate family resides overseas. They receive a large gift or bequest from a family member who is a nonresident alien, such as when a grandparent or parent passes away and leaves a gift to multiple siblings — and the US Expat may be the only US person sibling. The expat is still required to report the gift on Form 3520 and the failure to do so can lead to some steep penalties.

Expat Tax Amnesty for Australian Residents

The US government has developed various voluntary disclosure and amnesty programs designed to assist expats and other taxpayers with getting into compliance for unreported income, accounts, investments, or assets. There are various different programs and although some of the programs have been recently closed, other programs have been updated and for expats who can meet the foreign residence test and prove they are non-willful, they may still qualify for the Streamlined Foreign Offshore Procedures  — and a complete penalty waiver.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.