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Help with common US tax issues for US-Australian persons

An Australian-US tax treaty exists but offers scant benefits. It is routinely mocked as one of the worst tax treaties ever. Efforts are underway to amend the tax treaty, but until then our firm of tax lawyers, CPAs, and tax preparers do the best with the law as it is now: Taking advantage of every benefit and doing our best to avoid the tax treaty pitfalls.

 

Superannuation tax issues

The biggest, thorniest issue we encounter is the US taxation of Australian Superannuation funds.

  • The IRS does not consider things like Australian superannuation funds to be tax-deferred. They also may consider them to be “Grantor” trusts, requiring additional compliance forms.
  •  When the funds within these plans are distributed, they will be taxed like an annuity under IRC section 72. This basically means that you will use your contributions (which have already been included in your income and taxed) as a basis for determining how much of a distribution is income. This will be whether you take a lump sum payment, yearly distributions, or distributions structured in any other way.

 

Are you a US person living in Australia?

The US taxes its persons on a worldwide basis. So what you earn in Australia, even if it is taxed by the Australian taxing authority, is subject to additional taxes by the IRS. This is true even if you have a "tax-free" account in Australia. However, you are entitled to a credit for taxes paid. In the alternative, there is a foreign income exclusion which will exempt a portion of your income from income taxes.

 

Are you an Australian person living in the United States? (Visa/Substantial Presence Test)

If you are a Green Card holder you are subject to universal taxing jurisdiction on all your income, anywhere in the world. If you are a visa holder the rules are a bit more complicated about when universal taxing jurisdiction is triggered.

 

Foreign Earned Income Exclusion

Citizens and residents living and working in Australia may be entitled to a foreign earned income exclusion that reduces taxable income. In addition, you may exclude housing expenses, but with limits. There are limits and special rules about who qualifies for the exclusion.

 

Foreign Tax Credits

This is a non-refundable tax credit for income taxes paid. The foreign tax credit is available to anyone who either worked in a foreign country or has investment income from a foreign source. There are qualifying factors, and we can help you understand if you are eligible to tax advantage of this credit. 
 

If you need assistance with any of these issues, contact us to schedule a consultation at 888-727-8796 or email info@irsmedic.com.

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IRS Medic: Parent & Parent, LLP
144 South Main Street Wallingford, CT 06492
Phone: (203) 269-6699