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Sydney Americans Message Board › Filing US Taxes on Australian Income

Filing US Taxes on Australian Income

Benjamin
BenGuapo
Group Organizer
Sydney, AU
The April 15th US tax deadline is coming soon. Here is some helpful information about filing your US taxes from Australia.

First, if you’re overseas, you get an automatic extension until June 15th.

Disclaimer: I am not a tax professional and this information is not to be considered tax advice.

If you are a U.S. citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. There are two important deductions/credits to exclude this income for filing US taxes while earning foregin income.

Foreign Earned Income Exclusion
If you make less than $95,100 (2012) you can exclude this amount from your gross income.
http://www.irs.gov/In...­

Foreign Tax Credit
For most countries (including Australia) you get to deduct the amount of foreign tax your paid to the AU government from the amount for which you’re liable to the US government for your foreign income. In all countries where the foreign tax rate (i.e. Australia) is higher than the US rate, you’ll owe nothing.
http://www.irs.gov/ta...­

If you’re a US citizen you’re required to file US taxes regardless of whether or not you live abroad and only earn foreign income. You also must claim your entire global income regardless of where it was earned. That sounds bad,

Example: if AU rate is 30% and US rate is 25% and you earn $100,000 in Australia then you’re tax liability to the US is $25k, but you get to deduct $30k from that (can’t go below zero) so you owe $0.

If you were in Singapore and the tax rate were (for example) 10%, then you would’ve paid $10,000 in Singapore taxes and would still owe the US government $25k-$10k=$15,000.

However, your AU income is included in your gross income (foreign tax credit but not foreign income exclusion), which pushes any US investment income into a higher bracket. You also can’t deduct foreign tax paid from US tax owed on US income. It can only be deducted from foreign income.

Example: AU income $100,000. US investment income: $1,000. Since the US has tiered tax brackets, normally if your gross income was $1,000 you’d be in a low tax bracket (i.e. 5%), but your AU income puts you in a $101,000 bracket which would be at a higher rate (i.e. 25%).

So instead of owing $50 (5%) on that $1000 US investment income, you’d owe $250 (25%).

Going back to the previous example where you owe the US $25k (25%) for your foreign income but can deduct the $30k you paid in AU taxes, you also can’t deduct foreign tax paid from US tax owed on US income. It can only be deducted from foreign income. So $25k-$30k=-$5k…capped at $0. Then add the $250 (25%) you owe for your US investment income.

You may not take either a credit for taxes paid on income you exclude under the foreign earned income exclusion although this is irrelevant for Australian income as the rate is higher anyway.

Easiest way to file:
-If you make less than $95k file the exclusion or the credit but no need to file both.
-If you make more than $95k but don’t have US income, file the credit but not the exclusion.
-If you make more than $95k in AU and also have some US income, file the exclusion to put you in a lower tax bracket and then file the credit on the remaining AU income (but this can’t be more than your AU portion so you’ll still owe some for your US income)
-If you only have a small amount of US income and think you might need to apply for a US mortgage in the next two years maybe you should use only the credit but not the exclusion. You’ll be in a slightly higher bracket for your small US income but your 1040 gross income will still be really high, which might help with proving income for a loan application.

Help on filing:
For the Foreign Earned Income Exclusion, complete for 2555 or 2555ez and then enter the excluded amount (negative) on form 1040 line 21.
http://www.irs.gov/fi...­
Form 4868 Application for Automatic Extension
http://www.irs.gov/fi...­
Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad
http://www.irs.gov/pu...­

http://en.wikipedia.o...­

Turbo tax and most other online filing systems don’t cater for forms 2555 or 1116 (at least not for free), but filling out the actual forms is just as easy and then you can mail it to the US government for about $1.25 at Auspost.

Forms to file
1040 Federal US individual Tax Return
http://www.irs.gov/pu...­
Instructions: http://www.irs.gov/pu...­
2555 Foreign Earned Income Exclusion
http://www.irs.gov/pu...­
Instructions: http://www.irs.gov/pu...­
2555 easy: http://www.irs.gov/pu...­
1116 Foreign Tax Credit
http://www.irs.gov/pu...­
Instructions: http://www.irs.gov/pu...­

6251 Alternative Minimum Tax (you may have to file but likely won’t owe more)
http://www.irs.gov/pu...­
TD90-22-1 Report of Foreign Bank Accounts (you’re supposed to tell the US government about all of your foreign accounts)
State form (depending on your state) http://www.irs.gov/pu...­

Tax bracket table: http://www.irs.gov/pu...­

What is your Australian income?
Foreign income=Gross income from your payslips/PAYG + LAFHA + super + AU interest/dividends/investments. Your AU PAYG form will be from July 1 – June 30 so you’ll need to add up your individual payslips and interest payments from Jan 1 – Dec 31.

AUD$ to USD$ conversion. You have to report numbers in USD and there are many different acceptable ways to do the conversion. In the end you won’t owe anything regardless so the rate you pick is kind of irrelevant unless you want to show a high adjusted gross income for a mortgage application. Two possible methods are to take the rate from Dec 31st or Average the rates from Jan 1st and Dec 31st.

Lines 1-6 – filing status (single/married/etc) and number of dependants
Line 7 – Wages, salary, tips, etc (including AU salary but not AU interest)
Line 8a – US interest + AU interest
Line 9a – US dividend income + AU dividends
Lines 10-20 – a bunch of other credits, etc most of which won’t apply.

Line 21 Foreign income exclusion from for 2555 (subtract exclusion amount from total income to get adjusted gross income). This line is for “other income” and what you’re doing is putting a negative amount for the exclusion.
Line 22 – combine 7-21 (essentially subtracting 21 from 7+8).

Line 23-36 – other expenses/deductions most of which won’t apply
Line 37 – you adjusted gross income (most likely equal to line 22)

Line 40 – standard deduction $5950 (most likely just the standard unless you have mortgage interest and then you might want to itemize)
Line 42 - subtract $3800 for each dependant in lines 1-6
Line 43 – taxable income (add/subtract everything from previous lines)

Line 44 – tax owed. Look up your taxable income in the tax table http://www.irs.gov/pu...­
Line 45 – Alternative minimum tax – probably won’t change anything. form 6251 http://www.irs.gov/pu...­

Line 47 Foreign Tax Credit from form 1116 (subtract from US tax liability)
Lines 48-60 – other taxes/credits that probably aren’t applicable
Line 61 – total tax after foreign tax credit


Disclaimer: I am not a tax professional and this information is not to be considered tax advice. I’m am just a normal US citizen who’s been living abroad and doing my own taxes for 8 years.

I also may not reply to emails on this topic based on capacity.
Sean
user 100740192
Sydney, AU
Post #: 1
Hi Ben,

I've come to a few of the Expat events and arrived at this post off of google :) I found it very helpful, but had a question:
How do you calculate the AU tax paid for the Foreign Tax Credit? Since Australia and USA have different financial years I don't really know how much tax I paid on my:


  • interest from my savings account (passive income)
  • earned income (general income)


I do know the taxes I owed and paid for the Australian financial year, but I don't know what they would be over the US financial year...
Any tips? I know there are other countries around the world that have different financial calendar years, but I can't find the answer to my question anywhere!
Benjamin
BenGuapo
Group Organizer
Sydney, AU
Post #: 24
I'm not a tax advisor, but you you can work out your withholdings from your payslips and then estimate how much you might get back. You could also use your tax rate based on your tax bracket for the amount you'll pay on your interest. In advance you could use the AU etax software to figure out how much you will pay when you do do your AU taxes.

In the end you pay more taxes in AU than the US so you won't owe anything--you can even overestimate your AU income or underestimate you AU tax paid if you're concerned about it and you probably still won't owe anything.
Sean
user 100740192
Sydney, AU
Post #: 2
Thanks Ben. Very helpful.
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