U.S. Taxation - Short FAQ's and Notes for Expatriate Australians
Exfin can provide access to US tax advice for both Australians resident in the US (or contemplating an assignment in the US) and for American expatriates in Australia who are seeking advice or simply the completion of US tax returns. It is often beneficial if the same advisor can complete both US and Australian tax returns - apart from the efficiencies involved it can allow for a better optimisation of your tax situation. Contact us using the Inquiry Form below for details of the services available and fees applicable.
The sections below provide a very brief introduction to US tax issues for Australian leaving for the US, and returning to Australia.
US Inbound Issues
Q : What taxes do I pay in the US?
A: There are potentially four levels of taxation on income in the United States;
- Federal Income Tax (payable by all)
- Social Security Tax (payable by everyone earning salary type income)
- State Income Tax (depends on state of residence and work)
- Local Income Tax (depends on locality of residence and work)
Q: What are the rates of tax in the US?
Federal Income Tax rates
From 10% to 39.6%. Top rate applies, generally, from $418,400 (Single Taxable Income 2017).
Social Security Tax
6.2% on first $127,200 (in 2017) plus 1.45% Medicare Tax on all earnings.
Various rates. Some states have no income tax whilst some are as high as 12%. The average is around 5%.
Generally not higher than 1 or 2 percent. The main exception is New York City and rates are often indexed each year for inflation.
Q: What is the US tax year?
A: The income tax year in the US is the calendar year.
Q: What income is taxable in the US?
A. The US taxes its Citizens and individuals, who are resident for income tax purposes, on their world-wide income. Where the income is sourced in a foreign country, the US will allow a credit for the tax paid on that income.
A query which often arises in respect of Australians in the US is how to treat Australian dividend income for US tax purposes. The answer is that they should report the unfranked amount and the franked amounts as qualified dividends in the US. The imputation credit is not income and is not a credit in the US return.
Q: What Tax returns do I have to file?
- Federal Income Tax Return
- State Income Tax Return (if paying State Income Tax)
- Local Income Tax Return (if paying Local Income Tax)
All returns are due for filing and the tax due for payment by 15 April following year end. Extensions can be obtained but interest will be charged on any tax paid after 15 April. Note that US citizens filing income tax returns whilst resident outside the US, for example in Australia, are entitled to submit their returns up to two months later - June 15 - although if they have taxes owing they may be charged interest for this period.
U.S. Outbound Issues (for individuals who are not Citizens or Green Card Holders)
There is a requirement for an individual who is leaving the US permanently and is not a Citizen or Green Card holder to file a departing alien income tax return. This must be filed before leaving the country and, if it shows a balance owing, this tax must be paid at that time. If this return shows a refund, the refund is not issued until the final return is prepared and filed after the end of the year.
Individuals who have a Green Card should seek advice before surrendering the Card as there can be ongoing tax consequences arising.
If an individual has money in a 401(k) plan in the US, there may be adverse tax consequences in Australia if this money is rolled over into an Individual Retirement Account (IRA) in the US. Prior to withdrawing funds from a 401(k) plan or an IRA, professional advice should be sought on the tax consequences in both Australia and the United States.
Any remuneration for US services paid after arriving in Australia will affect the Australian income tax liability on other income, which is taxable here, so planning payments of remuneration can be beneficial.
If the individual is resident in a state that imposes income tax, advice should be sought on the effect of leaving on their status in that state.
For those with the necessary time, experience and interest we've also included for download below a copy of the US Australia Double Tax Agreement and Technical Explanations (1983 and 2001):