Taxes For US Citizens Living Australia

World’s smallest continent and the biggest island, Australia. It is the land of dreams coral reefs, rainforests, and scorched red deserts. Austalia rates at the top as one of the best expat destinations. This English speaking country has high-quality living conditions, good schools, and excellent pay and health care system which attracts a lot of Americans to reside in Australia. 

US and Australia have an income tax treaty as well as a Totalization agreement which makes reporting their taxes in the US fairly simple. 

Filing US tax returns while living in Australia. Both countries have to report worldwide income and they both follow graduated and progressive tax rates, meaning higher the income higher the tax. So whether you are living in Seattle or Sydney you are required to report your worldwide income.

Apart from filing US tax returns while living in Australia, Americans need to submit an FBAR if qualified and it is reported on FinCEN form 114. The regular due date is April 15th and it is automatically extended to October 15th. There is no separate extension filed for FBAR’s. 

Being required to file annual US tax return do not mean that you have to pay it and in fact, many Americans abroad do not even owe any taxes, thanks to provisions and concessions that prevent double taxation as well as help the US expats to save money on their tax bills.

There are the foreign earned income exclusion, foreign tax credits, and foreign housing exclusion or foreign housing deduction. Neither of these; exempt the individual from filing if your gross income is above the filing threshold but can it helps in reducing your US tax by a substantial amount.

Foreign Earned Income Exclusion (FEIE)

The Foreign Earned Income Exclusion allows you to exclude a certain amount ($1005,800 for 2019) of your earned income from US tax. The emphasis is on earned as in income from employment, trade or business income. The FEIE does not apply to passive incomes like pensions, interest, dividends or capital gains.

Foreign Housing Exclusion or Deduction

In addition to the FEIE, you can claim a foreign housing exclusion or deduction – using Form 2555 – for your housing expenses minus the base housing amount. The exclusion applies to housing paid for with employer-provided amounts like a salary, while the deduction applies to housing paid for through self-employment.

Your housing expenses are your reasonable expenses incurred, limited to 30% of your maximum FEIE. High-cost localities like Melbourne, Perth or Sydney have a higher limit listed in the Instructions for Form 2555. Housing expenses do not include the cost of buying a property, making improvements or incurring other expenses to increase its value. And your housing expenses can also not exceed your total foreign earned income.

Foreign Tax Credit: You can claim a foreign tax credit – using IRS Form 1116 – for the tax already paid in Australia. Unused foreign tax credits can be rolled over for 10 years. 

Contribution to Superannuation Funds

Superannuation is similar to a 401(k) plan. Employee contributions are voluntary, but employers must make a compulsory contribution of 9.5% of employees’ base wages. Employer’s contributions are tax-deductible for Australian taxes but not for US expat taxes. Similar to a 401(k), access to superannuation funds are restricted to those who have reached retirement age or one of some special circumstances