US Homeownership for Australian Expats

Learn the benefits and drawbacks of owning a home in the US as an Australian expat

Mortgage Interest Deduction

You can deduct mortgage interest from your taxable income, a benefit you don’t get in Australia. This deduction is limited to $750,000 of mortgage debt. or $1 million for older mortgages at the Federal level and can be different at State levels). For instance, if you had a $1,000,000 mortgage and paid $40,000 in interest, you could claim $30,000 as a mortgage interest deduction. This alone could be higher than the standard deduction, reducing your tax burden each year.

Property Tax Deduction

Homeowners can deduct state and local property taxes paid on their primary residence and additional properties they own when itemizing deductions. At the federal level, this deduction is capped at $10,000 per year. By itemizing and having substantial deductions to exceed the standard deduction, you can further lower your tax burden.

Mortgage Tax Deduction

Homeowners who paid points (prepaid interest) to obtain a mortgage may be eligible to deduct these points over the life of the loan. Typically, specific criteria must be met, and the points should be within the range commonly charged in the area.

Capital Gains Exclusion

Selling a primary residence may qualify homeowners for a capital gains exclusion. If the homeowner lived in the home for at least two of the past five years before the sale, they can exclude up to $250,000 of capital gains (or $500,000 for married couples filing jointly) from their taxable income. While advantageous in the US, this is a drawback compared to the Australian tax rules of having no capital gains tax at all when selling your primary home.

Energy Efficiency Tax Credits

Homeowners may be eligible for tax credits for installing energy-efficient improvements in their homes. These credits vary depending on the type of improvement and are subject to specific limits.

Concluding Thoughts

As an Australian expat in the US, being aware of the potential deductions and benefits of homeownership is crucial when considering your living circumstances. It’s essential to stay informed about current tax laws and regulations, as they can change over time. If you plan to move back to Australia, the timing of selling your home can impact your tax reporting obligations, making it advisable to consult an international tax professional well-versed in both tax systems. By understanding the tax benefits and drawbacks, you can make well-informed decisions to optimize your financial situation as an Australian expat in the US.

Leveraging Child Tax Credits

Learn the different types of child tax credits you can claim on your tax return

Why it matters: Child-related tax deductions and credits can significantly lower your tax bill.

Child Tax Credit (CTC)

Eligible parents or guardians can claim $2,000 for each qualifying child under 17 years old with a social security number (SSN). The credit is lower for higher-income taxpayers.

Additional Child Tax Credit (ACTC)

If the Child Tax Credit exceeds your tax liability, you may instead qualify for the Additional Child Tax Credit, which can get refunded to you.

Credit for Other Dependents

You can claim a nonrefundable credit of up to $500 for each qualifying relative dependent, such as a child with an Individual Taxpayer Identification Number (ITIN).

Child and Dependent Care Credit (CDCC)

This credit helps cover childcare expenses while parents work or seek employment. It's based on a percentage of qualifying expenses and phases out with income level.

Earned Income Tax Credit (EITC)

This credit provides financial assistance to low- to moderate-income families with qualifying children.

Adoption Tax Credit

If you've adopted a child, you may be eligible for a tax credit to offset adoption expenses.

Education Credits

These credits indirectly benefit families with children attending higher education institutions.

Medical Expenses

You can deduct medical expenses for your qualifying child or relative if you itemize deductions and they exceed 7.5% of your adjusted gross income.

Concluding Thoughts

Child or dependent tax deductions and credits can help Australian expats in the US reduce their tax burden and support their families financially. However, tax laws can change, so it's important to consult with a tax professional or refer to the latest IRS guidelines to ensure eligibility and compliance with the US tax system.

Impact of Australian Investments on US Taxes

Learn how investment opportunities and structures that are tax efficient in Australia can impact your US taxes.

Why it matters: The IRS requires all US tax residents to report their worldwide assets and income. If you hold certain investments and trusts in Australia, you will need to report them to the IRS and may be taxed on them. If you are a US tax resident and hold these, it’s important to consider whether the benefits outweigh the consequence.

US Tax residents who hold a PFIC, SMSF, Trust, or Proprietary Limited in Australia may be subject to additional:

1) Forms to file with the US tax return

2) Expenses ie. hiring a specialized accountant to prepare these forms

3) Taxes

Failing to report these investment vehicles and structures to the IRS can result in significant penalties.

Passive Foreign Investment Companies (PFIC)

A PFIC is a foreign domiciled (i.e. not based in the US) corporation or trust that meets one of two criteria:

1. At least 75% of the corporation’s gross income is passive (e.g. dividends, interest, capital gains)

2. At least 50% of the company’s assets produce passive income (e.g. dividends, interest, capital gains)

Examples: Australian mutual funds, index funds, exchange traded funds and listed investment companies.

US tax residents must report PFIC holdings annually if their total exceeds $25,000USD (for single filers) or $50,000USD (for married filers) or have excess distributions. Failure to report can result in fines starting at $10,000USD per unreported form.

Self-Managed Super Funds (SMSF)

SMSFs are viewed as foreign grantor trusts by the IRS, leading to annual taxation on fund growth. Reporting requirements include Form 3520 and possibly Form 3520-A, with penalties for late submission.

Trusts

Trusts held in Australia may trigger additional reporting requirements for US tax residents. Annual filing of Form 3520 and Form 3520-A may be necessary, with potential taxation on trust income by the IRS.Trust income may be taxed.

Proprietary Limited Company (Pty Ltd)

Australian expats owning 10% of a Pty Ltd must file Form 5471 due to their ownership in a foreign corporation. Profits from these businesses could be subject to US taxation, with additional taxes like GILTI potentially applying. Form 5471 is complex and non-compliance incurs a minimum $10,000USD penalty.

Failed to report any of the above?
Depending on your situation, you may need to amend your US tax return to include missing forms or you may be eligible for a tax amnesty program.

Contact us to explore your options.

Navigating Quarterly Taxes as an Australian Expat in the US

Learn the purpose of the quarterly tax system, how it works, and its relevance to Australian Expats in the US.

Quarterly Tax System

A method used by the United States government to collect income taxes from individuals and businesses on a more frequent basis throughout the year.

It ensures that taxpayers who do not have taxes withheld from their income still meet their tax obligations on time.

Estimated Tax Payments

Taxpayers who expect to owe a certain amount of tax for the year are generally required to make estimated tax payments quarterly, rather than in a single lump sum at the end of the tax year.

This includes self-employed individuals, freelancers, independent contractors, and others who receive income not subject to withholding (i.e., not from an employer).

Australian expats who receive cash bonuses, stock grants (RSUs), exercise stock options (ISO, NSO), or have other passive income streams, are affected by this requirement as their employers often do not withhold enough. See our guide on Bonus & RSU shortfalls for more details.

Frequency of Payments

Estimated tax payments are made on a quarterly basis, meaning four times a year. The due dates for these payments are typically April 15, June 15, September 15, and January 15 of the following year. If any of these dates fall on a weekend or holiday, the due date is shifted to the next business day.

Calculating Estimated Tax

To calculate the amount for each quarterly payment, taxpayers typically estimate their total tax liability for the year and divide that amount by four to determine the amount due for each quarter. For joint filers, this would mean combining both spouses’ incomes and calculating the tax on the total sum. A helpful tool like Smartasset can assist with this calculation, although it’s essential to factor in additional self-employment taxes.

Various methods can be used to estimate taxes, but common approaches include using the previous year's tax return as a starting point or projecting current-year income and deductions.

Payment Methods

Taxpayers can make estimated tax payments in several ways:

• Electronically through the IRS's Electronic Federal Tax Payment System (EFTPS)

• Credit or Debit Card

• By mail using payment vouchers provided by the IRS

The same approach applies at the State level for those residing in a state with state income taxes. Keeping track of these payments is crucial for seamless tax return preparation.

Exceptions

Certain individuals and businesses may be exempt from making estimated tax payments or may have different rules for payment frequency. For example, employees who receive wages subject to withholding typically do not need to make estimated tax payments because their taxes are withheld by their employer.

Underpayment Penalties

Taxpayers who fail to make sufficient estimated tax payments throughout the year may be subject to an underpayment penalty. To avoid this penalty, taxpayers generally must pay at least 90% of their current year's tax liability or 100% (110% for high-income taxpayers) of their previous year's tax liability, whichever is lower, through a combination of withholding and estimated tax payments.

Conclusion

Understanding the quarterly tax system is essential for Australian expats in the US to ensure timely and accurate tax compliance. With income streams from both Australia and the US, it becomes even more crucial for Australian expats to engage an international tax accountant who can provide expert guidance in calculating their quarterly taxes. Proper estimation and timely payment of quarterly taxes not only fulfills tax obligations, but allows for more efficient cash flow management. By staying well-informed and proactive, Australian expats can confidently navigate the intricacies of the US tax landscape, ensuring financial ease and peace of mind.

Avoid Surprise Tax Bills from Bonuses and RSUs

Bonuses and Restricted Stock Units (RSUs) are common forms of compensation for employees in the US. In this guide, we'll explore how regular bonuses and RSUs are taxed in the US.

Why it matters: Australians in the US receiving bonuses or RSUs may be surprised by year-end tax bills because the way they are withheld for in the US differs significantly from Australia. Planning ahead can help manage tax liabilities effectively.

Bonuses

As an employee, you can earn a bonus as additional supplemental income. Bonuses are often based on work performance metrics.

How they’re taxed in the US:

• Withholding: Bonuses are typically subject to a flat tax rate for federal withholding, which may differ from your regular income tax rate. There are also additional flat tax rates applied based on the state in which you reside.

• Social Security and Medicare Taxes: Similar to regular wages, bonuses are subject to Social Security and Medicare taxes (FICA taxes).

Restricted Stock Units (RSUs)

RSUs are stock awards granted as part of employee compensation.

How they’re taxed in the US:

• Vesting: RSUs usually have a vesting period during which they become eligible for distribution. When RSUs vest, their fair market value (FMV) at the time of vesting is considered taxable income, similar to cash bonuses. The value of the vested RSUs is reported on your W-2 form.

• Withholding: When it comes to taxes on vested RSUs, employers often sell a part of them to cover the income tax. This involves a fixed amount being withheld for taxes at both the federal and state levels, similar to what happens with regular bonuses.

Taxes on Bonuses and RSUs in the US

Unlike Australia, in the US, taxes aren't automatically deducted from your paycheck based on your earnings. Some Australians in the US may not know this, leading to insufficient tax withholding. In the US, bonuses and RSUs are taxed at fixed rates, irrespective of your regular salary. This can result in a higher overall tax rate because employers don't consider the impact of extra earnings on your regular salary tax rate. Many Australian expats in the US receiving bonuses or RSUs are surprised by year-end tax bills.

Avoid Surprise Tax Bills with these Strategies

To manage the impact of bonuses and RSUs on your overall tax liability you can:

• Adjust W-4 Withholding Allowances: Review your W-4 form with your employer and adjust your withholding allowances to account for additional income from bonuses and RSUs.

• Pay Quarterly Taxes: Estimate your total tax liability for the year, considering all income sources and deductions and remit quarterly estimated taxes based on how much you will owe. This can help you avoid a large bill at tax time and manage your cash flow.

• Contribute to Retirement Accounts: Contributing to retirement accounts, such as a 401(k) or IRA, can reduce your taxable income, potentially lowering your overall tax liability.

• Elect a higher sell-to-cover on RSUs: If your employer allows it, you can elect a higher sell-to-cover percentage to cover the possible tax liability, however it means receiving less of the company stock.

• Seek Professional Assistance: Given the complexities of international tax matters, seeking guidance from an international tax professional is essential. They can help you understand your tax situation and plan effectively.

Concluding Thoughts

As an Australian expat in the US, understanding how bonuses and RSUs are treated is vital for managing your overall tax liabilities effectively. By being aware of the differences in withholding methods and implementing tax planning strategies, you can navigate the US tax system with confidence and avoid unexpected tax bills at year-end.

Decoding Your Stock Options: The Benefits of ISOs vs NSOs

Working in the US for a large corporation presents an exciting opportunity for Australian expats, especially due to the allure of employee stock options. These options are used to attract and retain top talent and offer substantial financial opportunities beyond regular employment income.

For Australian expats, it’s essential to understand the advantages and disadvantages of each type of employee stock option to make informed decisions about careers and financial futures. In this guide, we explore the various types of stock options, shedding light on their pros and cons to empower Australian expats with valuable insights.

Incentive Stock Options (ISOs)

ISOs grant employees the right to purchase company stock, but with a key advantage - they are usually priced lower than the current market value of the stock. This lower price, combined with favorable capital gains tax treatment, makes ISOs more appealing than NSOs.

Pros:

• Tax Benefits: If certain holding period requirements are met, the difference between the exercise price and the fair market value of the stock at the time of exercise, is taxed as a long-term capital gain. This results in a potentially lower tax rate compared to ordinary income tax rates.

• Tax Deferral Opportunity: Employees may defer taxes until they sell the stock, providing potential tax savings and cash flow benefits.

• No Withholding at Exercise: Employers are not required to withhold taxes at the time of ISO exercise, giving employees more control over their tax planning.

Cons:

• Strict Qualifications: ISOs must meet specific statutory requirements, including limitations on the exercise price, maximum vesting period, and aggregate value of options exercisable in any calendar year.

• Alternative Minimum Tax (AMT): Exercising ISOs may trigger the AMT, resulting in additional tax liability. AMT calculations can be complex and lead to unexpected tax bills.

• Transfer Limitations: ISOs are generally not transferable, meaning employees cannot sell, gift, or transfer them to others.

• Expiration Period: ISOs have a limited exercise window, typically ten years from the grant date. If not exercised within that period, the options become worthless.

Non-qualified Stock Options (NSOs)

NSOs grant employees the right to purchase a specific number of shares of their company's stock at a predetermined price (exercise or strike price). NSOs do have expiration dates, making it crucial for Australian expats to be aware of these dates to avoid forfeiting the options.

Pros:

• Broad Eligibility: NSOs can be granted to employees, consultants, contractors, and non-employee directors, providing more flexibility in compensation strategies.

• No Qualification Restrictions: Unlike incentive stock options (ISOs), NSOs do not have to comply with strict statutory requirements, allowing companies greater flexibility in designing option plans.

• No AMT Concerns: NSO exercises do not trigger the alternative minimum tax (AMT), simplifying tax implications for employees.

• Potentially Lower Risk: Since NSOs are subject to ordinary income tax rates at exercise, there is no risk of AMT liability or disqualifying dispositions.

Cons:

• Higher Tax Rates: NSOs are subject to ordinary income tax rates at exercise, potentially resulting in higher tax liability compared to ISOs if the stock has appreciated significantly.

• No Tax Deferral: Taxes on the stock option gain are due at exercise, leading to immediate cash flow implications for employees.

• Ordinary Income Treatment: Regardless of the holding period, the gain from NSO exercise is treated as ordinary income and not eligible for long-term capital gain tax rates.

• Withholding at Exercise: Employers are generally required to withhold taxes at the time of NSO exercise, reducing the employee's control over tax planning and possibly causing a tax shortfall at tax time.

Restricted Stock Units (RSUs)

In addition to stock options, another form of stock compensation for employees is Restricted Stock Units (RSUs). RSUs are grants of stock shares given as employee compensation, subject to a vesting period and its own tax implications.

Vesting Period

The vesting period, or schedule, plays a significant role in determining when employees gain ownership and control over their company stock options/units. It outlines the milestones or duration that employees must fulfill to receive the benefits offered, acting as a strong retention tool.

Concluding Thoughts

For Australian expats in the US, employee stock options present a valuable financial opportunity beyond regular employment income. Understanding the various options and their tax implications is crucial when presented with these options as part of their employment package. Seeking professional assistance from tax accountants and financial advisors will help navigate the complexities involved and enable them to make well-informed decisions. By understanding the pros and cons of each stock option, Australian expats can optimize their tax planning and secure a brighter financial future.

Maximize Tax Savings: Choose the Right Filing Status

Navigating the U.S. tax system as an Australian expat can be a complex task, especially when it comes to choosing the right filing status. Unlike Australia, the U.S. offers several filing statuses, each with its own rules and advantages. The tax filing status you select drives the tax rates, deductions and credits that can be applied to your tax return. In this guide, we'll break down the five main tax filing statuses, helping you understand which one aligns best with your unique circumstances and how it can impact your tax obligations.

There are 5 main filing statuses, each with their own set of rules and advantages.

1. Single

• Definition: Individuals who are not married or are separated/divorced according to their marital status on the last day of the tax year.

• Advantages:

  • Simplicity: This is the most basic filing status as it involves only reporting your own income, deductions and foreign disclosure requirements

2. Married Filing Jointly (MFJ)

• Definition: Legally married couples who choose to file their tax returns together as US tax residents, combining their income, deductions, credits and foreign disclosure requirements.

• Advantages:

  • Potentially lower tax liability: Filing jointly may result in a lower overall tax bill compared to filing separately as the tax brackets are better and allow for more beneficial deductions

  • Additional tax benefits: Access to some tax credits and deductions only available to couples filing jointly

3. Married Filing Separately (MFS)

• Definition: Legally married couples who choose to file separate returns.

• Advantages:

  • Liability separation: By filing separately, each spouse is only responsible for their income and tax liability, protecting one spouse from the other's tax issues.

  • Itemizing deductions: If one spouse has significant itemized deductions, such as medical expenses, that exceed the standard deduction, filing separately may be advantageous.

4. Head of Household (HOH)

• Definition: Unmarried individuals who provide a home for a qualifying dependent, such as a child or certain other relatives. 

• Advantages:

  • Lower tax rates: Head of Household filers generally benefit from lower tax rates compared to single filers.

  • Larger standard deduction: The standard deduction for HOH is higher than that of single filers, potentially reducing taxable income.

5. Qualifying Widow(er) with Dependent Child

• Definition: Qualifying widows or widowers for the two years following the death of their spouse if they have a dependent child. 

• Advantages:

  • Potentially higher standard deduction: Qualifying widows or widowers may use the same standard deduction as those filing jointly, which can reduce taxable income.

  • Lower tax rates: Similar to married filing jointly, this status often enjoys lower tax rates compared to single filers.

Concluding thoughts for Australian expats

The U.S. tax system presents a unique challenge for Australian expats. With its diverse array of filing statuses, making the right choice is paramount as it significantly influences tax liability or potential refund. It's essential for Australian expats to have a solid grasp of their filing status eligibility. Seeking guidance from an international tax professional is a prudent step to ensure you choose the most fitting status for your specific circumstances, make the most of your financial situation, and meet your tax obligations in the United States.

The ATO vs. IRS: 4 Key Differences Australian Expats Should Know

Most Australians are well-acquainted with the operations of the Australian Taxation Office (ATO). However, Australian expats who either move to or are already residing in the United States, often find that the US’ tax body equivalent, the Internal Revenue Service (IRS), is distinctively complex and difficult to navigate. In this article, we delve into the differences between these two tax authorities and shed light on how they impact expatriates.

Why it matters: As an Australian expat, understanding the difference between the ATO and IRS helps ensure you are in compliance, submit accurate and timely US tax returns, pay the correct amount of US tax, and avoid significant penalties. 

1. Tax Jurisdictions

The ATO: In Australia, the ATO exercises jurisdiction over a single-layer of taxation.

The IRS: The United States’ tax system can have multiple layers of taxation. The IRS exercises jurisdiction at the Federal level while those residing in states with State income tax have an additional tier of taxation imposed by their respective State tax authorities e.g. California Franchise Tax Board. Some States such as Florida, Nevada, Washington, and Texas do not levy a State income tax so residents there only pay Federal taxes.

2. Expat Tax Obligations

The ATO: While expatriates residing in Australia are subject to higher tax rates than Australian citizens, their tax filing requirements are much simpler relative to the US tax filing requirements for expatriates.

The IRS: The US tax system is much more complex than the Australian tax system, especially when it comes to expat tax. Our Ultimate Tax Guide for Australians in the US covers key tax filing obligations for expats.

3. Filing Tax Returns

The ATO: Many Australian citizens can self-file their tax returns through the ATO portal, particularly if their financial circumstances are relatively straightforward. Individuals with more intricate situations involving Trusts, Proprietary Limited Companies, Self-Managed Super Funds, Rentals, and similar complexities often enlist the assistance of an Australian Tax Agent to manage their tax submissions.

A distinguishing feature of the ATO process is the availability of a dedicated portal for Tax Agents. This portal allows Tax Agents to monitor the progress of tax return submissions without needing power of attorney or additional authorization. Subsequent to an electronic submission, the ATO issues a Notice of Assessment to the taxpayer after a few weeks. This notice provides a comprehensive breakdown of the tax assessment, including details such as taxable income tax owed, existing tax credits, refund amounts, and relevant health-related adjustments.

The IRS: The IRS accommodates both electronic and paper tax return submissions. Electronic filings generally enjoy expedited processing times (approximately 3-4 weeks), unlike paper submissions which typically take considerably longer (at least 6 months). Thus, opting for electronic submission is often recommended for efficiency.

While the IRS offers the Free File program for taxpayers with straightforward situations, this avenue does not adequately cater to the unique tax circumstances of Australian expatriates. While third-party software such as TurboTax or SprintTax can be used, they are not advised for expatriates unless the filer has a sound understanding of expat tax obligations. US tax obligations for expatriates are typically much more complex and involved. Engaging an International Tax Accountant is strongly advised to effectively navigate potential pitfalls and avoid severe penalties.

Unlike the ATO, the IRS does not issue a formal Notice of Assessment. In the US, the submitted tax return serves as the de facto tax bill or refund determination.

4. Correspondence

The ATO: In the event of any discrepancies or concerns regarding tax returns, individuals can conveniently contact the ATO via phone, ATO account messaging, or even delegate the responsibility to their Tax Agent for prompt resolution.

The IRS: Correspondence from the IRS typically takes the form of physical mailed letters. Thus, handling IRS correspondence or pending refunds requires careful monitoring. The IRS’ phone-based communication is notoriously challenging, with physical mail remaining the primary mode of contact. Taxpayers can access their Online IRS Account to review balances and notices, although certain notifications may not be accessible through this channel.

Noteworthy developments are underway in the IRS landscape. The Inflation Reduction Act has allocated substantial funding—$80 billion over a decade—to enhance customer experience, efficiency, and digitization within the agency. This endeavor holds the promise of potentially mirroring the streamlined processing model employed by the ATO.

Conclusion

For Australians contemplating a move to the US or those already residing here, understanding the disparities between the ATO and IRS is important. The differences in tax return submission, tax tiers, communication avenues, and available resources, underscores the critical need for Australian Expats to be well-informed and prepared to successfully manage their tax obligations.

Disclaimer: Uptrend Advisory blogs and all other multimedia content is intended to provide general information and should not be construed as tax, accounting, financial, legal, consulting or any other type of advice regarding any specific facts and circumstances, nor should they be construed as advertisements for services.