Lauren | Dec 28, 2017 | 0
Understanding US Expatriate Taxes
As a US expat, your taxes just got more complicated.
I’m not qualified to advise you on your taxes but Taxes for Expats is, and yes, they are a partner of Sydney Moving Guide. Taxes for Expats has agreed to give SMG readers a $75USD credit (promo code “downunder”) towards any of their services.
You can schedule a 30-minute phone consultation with them, but they will ask you for a $50USD retainer towards your tax preparation fees.
Since I am not a tax consultant and not qualified to give you advice on taxes, I’m just going to define some new terms you might not be familiar with as well as some dates that you need to know as filing deadlines are different for US expat taxpayers.
I will link to either the Taxes for Expats website or the resource where I found the information.
Please note that US tax laws change, almost every year, and can result in changes to due dates for specific forms and requirements necessary for filing.
Before we get started, I need first to clear up some misconceptions US expats have.
Clearing Up US Expat Tax Misconceptions
Misconception #1: Not filing a US tax return when living and working in Australia.
As a US citizen or green card holder, you still need to file your taxes every year, even if you do not owe any tax.
Many US expats hear about the tax treaty between Australia and the United States and assume this means that since they now live and work in Australia, and file yearly tax in Australia, they no longer have to file US taxes. This is not true. You must still file your yearly tax return in the US.
Misconception #2: Not reporting Australian-based income or other financial holdings.
Many US expats assume that they only need to report their US-based income and financial holdings on their US tax return. This is not true.
You can take certain deductions and exclusions that will reduce or eliminate your tax liability in the US. More on that below.
Misconception #3: Treating Australian Superannuation contributions the same as 401K contributions.
Your Australian Superannuation does not count as a qualifying fund the way a 401K does. You are not able to deduct your superannuation contributions when determining your taxable income.
In fact, contributions to your superannuation fund should be reported as income on your US tax return even though contributions are taxed in Australia. Certain individuals, may also have to pay tax on the accumulate non-distributed growth of their super. Australian Superannuations and filing US taxes is incredibly confusing. I do try and tackle it later when I discuss US expat taxes.
Misconception #4: US expats living in Australia are double taxed.
You will have to file taxes in both the US and Australia, but you can offset this with specific credits, deductions and exclusions if they apply to you.
Misconception #5: US expats do not have to file a state tax return.
This is only true of states that do not collect state income tax. Taxes for Expats has a post on state income tax for US expats here that you need to read if you live in a state that does collect income tax.
Federal Tax Filing Deadlines for US Expats
As an expat, your tax filing deadline is June 15th, but you must pay any tax due by April 15th. If you do not pay your taxes by April 15th and instead pay by June 15th, the IRS will not assess a Failure to Pay Penalty but will charge you interest on the unpaid amount.
Tax Filing Extension for US Expats
The deadline for a tax filing extension request is October 15th.
Australia follows a non-calendar tax year, starting July 1st and ending June 30th. The Australian tax filing deadline is October 31st.
You can request an automatic six-month extension (from the April 15th due date) since you live in a country with a non-calendar tax year. A six-month extension will give you time to sort out your Australian taxes, due October 31st, and determine if that has any effect on your US taxes. However, you must request this extension by filing a form with the IRS by the original due date of your return.
You still must pay any tax owed by April 15th, or accrue interest on the unpaid amount. To do this, you will need to make an accurate estimate of the tax you owe and send in the payment. This is where Taxes for Expat can be a big help.
If any due dates fall on a Saturday, Sunday, or legal holiday in the US, the due date is the next business day.
There is one more due date you need to know about, and it’s something that is probably new to you unless you have lived overseas before.
Form FinCEN 114, or a Foreign Bank Accounts Report (FBAR), is due by April 15th. I have a separate post all about FBAR here. Since you will have an Australian bank account and an Australian Superannuation, you will need to know the requirements for filing an FBAR and also the threshold values for filing a Form 8938 for your superannuation. I have a post all about Form 8938 and another post on how your Australian Superannuation will affect your taxes. Please be sure you read all of those posts because you will most likely be filing those additional forms along with your usual 1040.
Foreign Earned Income Exclusion (FEIE) Form 2555
Foreign Earned Income Exclusion (FEIE) is a favorite deduction with US expats. The FEIE allows you to deduct up to $102,100 per taxpayer for 2017 ($104,100 for 2018) of your foreign earned income. This exclusion significantly reduces or even eliminates your US tax obligation. Yay!
However, you must qualify as an expat to be eligible for the FEIE via one of the residency tests we covered earlier: the Physical Presence Test or the Bona Fide Residence Test. Most US expats pass the Physical Presence Test. (What is the Physical Presence Test? Click here. What is the Bona Fide Residence Test? Click here.)
Are you unsure that you will pass the Physical Presence Test? Remember you have an automatic June 15th extension for filing your tax. Does that help you pass? No? Then file an October 15th extension. That usually does it.
Foreign Tax Credit Form 1116
The Foreign Tax Credit will reduce the amount of US tax you owe on the income you receive in Australia. Unfortunately, you cannot take a foreign tax credit for taxes on income you can exclude with FEIE.
Foreign Tax Credit can be taken as a deduction on Schedule A (Form 1040) or as a credit. Taken as a credit usually works out to your advantage but look at both options.
Qualifying Tests for the Foreign Tax Credit
The tax must meet four tests to qualify for the credit:
- The tax must be a legal and actual foreign tax liability
- The tax must be imposed on you
- You must have paid or accrued the tax, and
- The tax must be an income tax (or a tax in lieu of an income tax)
There are foreign taxes that do not qualify for the credit, one of them being refundable taxes such as the Medicare Levy which is refundable for those who do not qualify for Medicare in Australia. Be sure to keep that in mind.
Future Reading on US Expat Taxes:
- Link to Tax Treaty between US and Australia
- IRS Tax Guide for U.S. Citizens and Resident Aliens Abroad