End of Tax Year Finance Checklist for Australian Expats in the U.S.
As an Australian expat in the United States, the end of the tax year presents a unique set of challenges and opportunities. It’s important to note that unlike Australia, which runs from 1 July to 30 June, the tax year in the U.S. typically ends on 31st December.
Balancing the nuances of the U.S. financial system with your obligations back home in Australia can be a complex task. This guide is crafted to assist you in navigating these intricacies, ensuring you’re well-prepared as December 31st approaches, and have some tools to consider to make the most of your financial position for the year.
1. Understanding and Prepaying Tax Liabilities
One of the most critical steps you should consider is determining whether to pre-pay your country of residence’s tax liability before the year-end. The U.S. tax system allows you to claim a credit for foreign taxes paid, subject to strict criteria, but it’s essential that these taxes have actually been paid during the tax year for which the credit is sought. For instance, if you have $10,000 in capital gains taxed by both Australia and the U.S., you can only claim a Foreign Tax Credit on your U.S. tax return if you’ve already paid or accrued the tax in Australia during the year.
Consider this scenario: You’re living in California and have incurred capital gains from investments in Australia. If you wait until after December 31st to settle your Australian tax bill, you won’t be able to claim the Foreign Tax Credit on your U.S. tax return for this year. This could result in a significantly higher tax liability in the U.S. Therefore, it’s advisable to review your financial position and, if it makes sense, pre-pay your Australian taxes to optimise your U.S. tax return. Be sure to seek professional advice before making any tax payments in different jurisdictions to ensure that there are no unexpected consequences of doing so.
In addition to this, you should also consider strategies to minimise your Australian tax position with such strategies as superannuation contributions or prepayment of interest, but it’s important to seek advice on such strategies.
2. Utilising Foreign Earned Income Exclusion (FEIE)
The Foreign Earned Income Exclusion (FEIE) is another crucial element for you as an Australian expat. In 2023, the FEIE allows individuals to exclude up to $120,000 of foreign earned income from U.S. taxes. It’s important to note that this exclusion only applies to earned income and not to passive income like rental on a property or property portfolio or investment income, such as dividends from a share portfolio.
To qualify for FEIE, you must meet two criteria: having a foreign tax home and either passing the bona fide residence test or the physical presence test. The bona fide residence test requires you to be a resident of a foreign country for an uninterrupted period that includes an entire tax year. The physical presence test, on the other hand, requires residing in a foreign country for 330 full days within a 12-month period.
Let’s say you moved to New York in March 2023 for a new job. To meet the physical presence test for the 2023 tax year, you would need to ensure you’re physically present in a foreign country for 330 full days from March 2023 to March 2024. It’s a nuanced area and keeping detailed records of your travels is crucial to prove your eligibility for FEIE.
An additional point to remember is if you used the FEIE in one year and decided not to use it the following year, the IRS may deem you to have revoked your election for the exclusion, barring you from using it again for another five years. Therefore, it’s vital to consider your long-term plans and consult with a tax advisor to make the most of this exclusion. To use it again, you have to request permission from the IRS at a cost of ~$2,000, as it’s not a guarantee that permission will be granted either.
3. Roth Conversion Considerations
If your 2023 income falls below the FEIE limit of $120,000, it might be beneficial to consider a Roth conversion. This involves converting a portion of your pre-tax retirement funds, like a traditional IRA, to after-tax Roth assets. However, you must pay U.S. taxes on the converted amount in the current year.
Here’s where strategy becomes important. Suppose you’re in a year where your income is lower than usual, perhaps due to a career transition or a sabbatical. Converting to a Roth IRA in such a year could be advantageous as you would be paying taxes at a lower rate. Additionally, if you plan to retire in a tax jurisdiction that recognises or does not tax Roth accounts, this strategy could prove even more beneficial.
However, the decision to convert should not be taken lightly. For instance, consider your future retirement plans. If you intend to return to Australia, where Roth IRAs are not recognised, the tax benefits might not be as significant. Therefore, analysing your current and future tax situations is critical before making a Roth conversion.
4. Navigating U.S. Tax Forms for Expats
As an Australian expat in the U.S., it’s crucial to familiarise yourself with various U.S. tax forms to ensure compliance and optimise your financial situation. The forms you may encounter include:
U.S. Individual Income Tax Return (Form 1040): This is the standard form used to file individual income tax returns in the U.S. As an expat, you’re still required to file this form, reporting your worldwide income.
Foreign Earned Income (Form 2555): This form is used to claim the Foreign Earned Income Exclusion (FEIE), allowing you to exclude a portion of your foreign earnings from U.S. taxation.
Foreign Tax Credit (Form 1116): If you’ve paid taxes in Australia or another country, this form helps you avoid double taxation by crediting those amounts against your U.S. tax liability.
FBAR (FinCEN Form 114): This is required if you have financial interests in or signature authority over foreign financial accounts exceeding certain thresholds.
Forms for Specific Income Types: Depending on your income sources, you may need to file Schedule A for itemised deductions, Schedule B for interest and dividends, or Schedule D for capital gains.
It’s advisable to consult a tax expert familiar with both U.S. and Australian tax laws. They can provide tailored advice, ensuring you file the correct forms and take advantage of available tax benefits.
5. Managing Australian Property Investments
For Australian expats, effectively managing property investments back home is crucial, especially as the financial year-end nears. Ensuring your properties are in a rentable state through necessary repairs and maintenance not only preserves their value but these costs are typically tax-deductible in Australia. It’s also wise to review your mortgage rates; refinancing could lead to lower interest rates and, if your property is negatively geared, reduce your taxable income.
Consider the option of prepaying up to 12 months of interest on your property loan, allowing you to claim a larger deduction in the current financial year. Additionally, regularly reviewing the rental income of your properties is key. Adjusting rents to align with current market rates can enhance your returns, making your investment more profitable. It’s important to note that rental income typically must be declared in your US tax return, but it’s important to consider your net tax position, and the available strategies you have to reduce this.
6. Strategies for Shares, ETFs, and Managed Funds
Investing in shares, ETFs, and managed funds requires a clear understanding of the tax implications in both the U.S. and Australia. Your tax residency status is a crucial factor, determining your liabilities on capital gains and dividends. As an Australian tax resident, you are taxed on your global income, whereas non-residents are only taxed on income sourced from Australia.
Furthermore, it’s important to be aware of the Double Tax Agreements (DTAs) between the U.S. and Australia, which are designed to prevent double taxation on the same income. Understanding how these agreements impact your investments and tax liabilities is essential for effective financial planning.
When you’re delving into the world of investments as an Australian expat in the U.S., a key concept to grasp is the treatment of Passive Foreign Investment Companies (PFICs). U.S. tax law has specific reporting requirements for PFICs, which can include many non-U.S. mutual funds, ETFs, and other pooled investments. The tax implications can be onerous, as PFICs do not benefit from the preferential tax rates on capital gains and may be subject to punitive interest charges.
To minimise the tax burden and simplify filing, it can often be wise to:
Choose U.S. Domiciled Investments: Investing in U.S.-based ETFs and mutual funds can help to minimise PFIC exposure or obligations.
Consider U.S. Taxation on Global Income: For Australian tax residents, selecting investments that are tax-efficient in both the U.S. and Australia is crucial. This may involve balancing the investment choices with the potential tax costs and reporting obligations in both countries.
PFIC Reporting: If you hold investments that are considered PFICs, you’ll need to file Form 8621 for each PFIC you own. This can be a complex process, requiring the tracking of gains, distributions, and the potential “excess distributions” over the entire period of your ownership.
Tax Planning: Given the complexity of PFIC regulations, it may be advantageous to consult with a tax professional who specialises in cross-border taxation to avoid potential pitfalls.
By carefully selecting your investments with an eye towards the intersection of U.S. and Australian tax laws, you can minimise your tax exposure and administrative burden.
7. Australian Superannuation Considerations
Superannuation is an integral part of retirement planning for Australians, including those living abroad. Making concessional contributions, which are pre-tax contributions to your super fund, can be especially beneficial if you have taxable Australian income. You also have the option of making non-concessional contributions from after-tax income. While there are annual limits, these contributions can significantly enhance your retirement savings. Before making any contributions to your super fund, however, it’s impact to consider the impact on your situation and tax obligations in the U.S..
In the U.S., it’s important to review not only whether your superannuation will be treated as an Employee Benefits Trust or Foreign Grantor Trust, as this can significantly alter the tax treatment of your retirement savings. If an employee in the U.S. earns more than US$150,000 in 2023, then this can also impact the tax treatment on superannuation contributions, so it’s important to be mindful of this limit and your taxable income in any given year.
With SMSFs, the key risks include compliance with both Australian superannuation and U.S. tax laws, which can be especially complex if the IRS does not recognise the SMSF as a qualifying foreign pension fund. This could lead to a situation where the SMSF is subject to the punitive U.S. tax regime applied to foreign trusts
Regularly reviewing your superannuation, and overall retirement goals is important for any Australian expat living in, or planning to live and work in, the U.S.
8. Additional Tips for Australian Expats
Other key considerations for Australian expats in the U.S. include assessing the feasibility of early repayment of HECS & HELP debts. This can be a smart financial move, depending on your circumstances. Also, consolidating multiple superannuation accounts can streamline your finances and potentially reduce fees. If you own investment properties in Australia, ensure you have current depreciation certificates, or quantity surveyor reports. These certificates can maximise your tax deductions, thereby improving your overall financial position.
Conclusion
As we conclude our journey through the financial intricacies faced by Australian expats in the U.S., it becomes clear that managing your financial health is an ongoing process that requires understanding, diligence, and oftentimes, professional guidance. Whether it’s navigating tax forms, optimising your investment strategies, or ensuring your superannuation is working as hard as you are, the right advice can make all the difference.
At Ally Wealth Management, we understand the unique challenges you face. Our team of specialist expat advisers is dedicated to helping you unravel the complexities of cross-border finances. We invite you to book a complimentary meeting with us, where we can explore personalised strategies to safeguard and grow your wealth, no matter where your journey takes you. Reach out today and take the first step towards financial clarity and peace of mind.
Ally Wealth Management is the trusted ally in finance for Australians at home and across the globe. As both Australian expats and residents, the founders of Ally have a unique understanding of the common personal financial challenges faced.
Book your complimentary appointment with our team at Ally Wealth Management to discuss how we can help you to achieve your financial goals.
Ally Wealth Management Pty Ltd is a Corporate Authorised Representative of Sentry Advice Pty Ltd ABN 77 103 642 888. Sentry Advice holds an Australian Financial Services Licence (AFSL) No. 227 748.
General Advice Warning: The information contained herein is of a general nature only and does not constitute personal advice. You should not act on any recommendation without considering your personal needs, circumstances, and objectives. We recommend you obtain professional financial advice specific to your circumstances.
