U.S. Taxation - FAQ's and Notes for Expatriates
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.
The sections below provide a very brief introduction to US tax issues for Australians moving to the US and for individuals returning or moving to Australia.
Moving to the U.S - Tax FAQ's
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)
Federal Income Tax rates - Marginal Tax Rates for 2024
Marginal Tax Rate | Single Taxable Income | Married Filing Jointly | Heads of Household |
|---|---|---|---|
10% | Up to $11,600 | Up to $22,000 | Up to $16,550 |
12% | $11,600 to $47,150 | $22,000 to $94,300 | $16,550 to $63,100 |
22% | $47,150 to $100,525 | $94,300 to $201,050 | $63,100 to $100,500 |
24% | $100,525 to $191,950 | $201,050 to $383,900 | $100,500 to $191,950 |
32% | $191,950 to $243,725 | $383,900 to $487,450 | $191,950 to $243,700 |
35% | $243,725 to $609,350 | $487,450 to $731,200 | $243,700 to $609,350 |
37% | $609,350+ | $731,200+ | $609,350+ |
These rates need to be read in conjunction with the individual standard deductions available - a dollar amount that "non-itemizers" can subtract from their income before income tax is applied, but note that tax payers can alternatively choose to claim itemized deductions.
Alternative Minimum Tax (AMT)
The Alternative Minimum Tax (AMT) system was created to prevent very high-income taxpayers from circumventing the payment of income tax. It is a parallel tax income system which requires high-income taxpayers to calculate their income tax bill twice: under both the ordinary income tax system and again under the AMT. The taxpayer pays the higher of the two calculated tax amounts.
The AMT uses a different definition of taxable income called Alternative Minimum Taxable Income (AMTI) and AMT is levied at two rates: 26 percent and 28 percent. The AMT exemption amount for 2024 is $85,700 for singles and $133,300 for married couples filing jointly.
Social Security Taxes
In addition to income tax, an employee also has to pay Federal Insurance Contributions Act tax (FICA), with an equal amount of FICA tax payable by the employer. It comprises a 6.2% Social Security tax on the first $168,600 of income (in 2024) plus a Medicare Tax - this varies depending on whether an individual is employed or self-employed and their income.
Not all working visas in the US require the payment of social security contributions, but if you do make them you will earn an entitlement to US social security payments on retirement if resident in Australia - without the need to meet the minimum normal requirement of 10 years of contributions.
The FICA tax is not imposed on investment income such as rental income, interest or dividends.
State Taxes
Various rates apply; some States have no income tax whilst some are as high as 12%. The average is around 5%.
Local Taxes
Generally not higher than 1 or 2 percent. The main exception is New York City and rates are often indexed each year for inflation.
The income tax year in the US is the calendar year.
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 typically 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.
Importantly, we advise that all expats seek professional advice before selling real estate in Australia, particularly given that expats are now unable to access the main residence CGT exemption. Additionally, expats resident in the US may be subject to US capital gains tax on the sale of their Australian property although an offset may be available in relation to Australian CGT paid.
- 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 in the following year. 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.
Leaving the U.S. - Outbound Issues
Neither US Citizens or Permanent Residents (Green Card Holders)
Any individual who is leaving the US permanently and who is not a citizen or green card holder (permanent resident) is required 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.
Note that whether you can rely on the expiry of your green card, or your absence from the US for a prolonged period, to constitute a cessation of your green card is (surprisingly) the subject of quite a legal debate. The IRS takes the view that a green card remains valid until formally surrendered with the submission of Form I-407. Whether that position is legally correct is probably debatable but if it is your intention to abandon your green card then the safest and best approach is to seek tax advice - to ensure you understand any implications attaching to abandonment and that the formalities are properly completed.
Interestingly, back in December, 2018 Congressman Holding (R) of North Carolina introduced a tax Bill which would have initiated a move away from the US's current citizenship-based taxation system - which is strikingly anomalous - to a system that would provide for residence-based taxation for US citizens and permanent residents abroad. This piece of legislation, entitled the Tax Fairness for Americans Abroad Act (H.R. 7358), did not proceed. Note that the Bill provided that any election to be taxed on a residence basis would require that an individual be in "full compliance with U.S. income tax laws for the previous 3 years".
If an individual has money in a US pension plan, such as a 401(k), 401(a), 403(b), IRA or occupational scheme , they should seek tax advice regarding their options in the US prior to leaving the US and becoming resident in Australia - particularly if they are not US citizens or green card holders. Note also that a number of major pension plan administrators in the US are now actively divesting themselves of non-residents clients and any rollover into an IRA may have adverse tax consequences if you are resident in Australia at the time of the rollover.
Any remuneration for US services paid after arriving in Australia may affect the Australian income tax liability on other income, which is taxable here, so planning the payment of remuneration can be beneficial.
If an individual is resident in a state that imposes income tax, advice should also be sought on the effect of leaving on their status in that state.
US Citizens and Permanent Residents (Green Card Holders)
Individuals who have US citizenship or a Green Card and are moving to Australia or elsewhere permanently, and are seeking to relinquish their citizenship or long term residency, must seek prior tax advice regarding the consequences, as they can be both complex and significant depending on your circumstances - with an "exit tax" applicable in certain situations.
For US tax purposes, an "expatriate" includes not just US citizens relinquishing citizenship, but any long-term US resident who ceases to be a lawful permanent resident. A long-term resident of the United States for these purposes is any person who has been a US green card holder for at least 8 of the last 15 years and has not been treated as a non-resident of the US under an applicable income tax treaty. Further, an expatriate is considered a "covered expatriate" if any of the following apply:
- The have an average annual net income tax liability for the 5 preceding tax years ending before the expatriation date exceeding US$201,000 (in 2024).
- They have a net worth of USD2million or more as of the expatriation date (aggregate net value of worldwide assets).
- Fail to certify (Form 8854) that all US federal tax obligations have been complied with for the five tax years preceding the tax year that includes the expatriation date.
If they are subject to the exit tax then, in general, all property (worldwide) will be taxed as if it had been sold for fair market value on the day before the expatriation date. Special rules apply in relation to the treatment of deferred compensation (e.g. pension plans such as 401(k) plans), tax deferred accounts (e.g. Roth IRA's) and non-grantor trust interests.
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):
- US - Australian Double Taxation Convention - 1982
- US - Australian DTA - Technical Explanation - 1983
- US - Australian DTA - Technical Explanation - 2001
US citizens and green card holders resident in Australia will typically need to continue submitting annual US tax returns and meeting other compliance requirements, and we address their situation more fully on a separate page, dealing with US tax advice and services in Australia.
If you would like to arrange professional advice please complete the Inquiry form below providing details and you will be contacted promptly.
