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Whenever your client is a US citizen or Green Card holder, you will probably need to consider the rules around US tax for individuals.
US Tax For Individuals
To help you look after your US clients, we asked Seth Hertz – Tax Director of Expat US Tax – for a general overview of US tax for individuals.
Here is what we learned but please listen in as Seth Hertz explains all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
Worldwide Income
For Australian income tax it doesn’t matter what your nationality is. All that matters is whether you are an Australian resident for tax purposes. And if you are, you are assessed on your worldwide income.
For US Tax law nationality matters a lot. The US treats their citizens as residents for tax purposes, even if they don’t live in the US. And as a US tax resident you also report your income on a worldwide basis.
And so most of the over 100,000 US citizens and Green Card holders living in Australia are tax residents in Australia because they live here. But they are also tax residents in the US because they have a US passport or Green Card. And so they are taxed on their worldwide income in both countries – Australia and the US.
Residency
To determine whether somebody needs to prepare a tax return in the US, you start with residency. Is someone a US tax resident or not? A US tax resident is any US citizen, any US Green Card holder and others who meet the ‘substantial presence test’ in the US. This test is based on days of presence in the US.
Once you have established that somebody is a US tax resident, then they only need to lodge a US tax return if their income exceeds minimum income threshold. And by the way, in Australia you lodge a tax return, but in the US you file a tax return.
Thresholds
The income thresholds are CPI adjusted each year, but are currently around US$12k and US$ 24k for a couple. But they can be a lot lower. If you are a US citizen married to an Aussie who is not affiliated to the US and hence you file as ‘married filing separately’, then your filing threshold might be as low as US$5 of income per year.
Filing Status
In the US, an individual falls into one of 5 possible filing statuses. Single, Married Filing Jointly, Married Filing Separately, Head of Household and Qualifying Widow(er).
Whether you are married or not is determined as of 31 December. If you marry on 31 December, you are considered married for that year. If you divorce on 30 December, you can only file as a Single in that year. For Head of Household you need US citizen dependants with a social security number.
Australia doesn’t make this distinction. In Australia, all individuals lodge their tax returns as ‘Single’, called an ‘Individual Tax Return’ as opposed to a partnership, company, trust or SMSF return.
Substantial Presence
Under the US Tax Code you are a US resident for tax purposes, if you are a US citizen or a Green Card holder or you meet the substantial presence test.
The substantial presence test consists of two conditions. It says that if:
1) You spend at least 30 days in a particular year in the US and
2) You spend at least 183 days in the US over 3 years, whereby you count all days you are present in the US this year plus 1/3 of your presence in the year before plus 1/6 of your presence two years before – if the total of all this hits 183 or above,
then you have passed the substantial presence test. You are a tax resident of the US for that part of the year.
It sounds like an achievement, but the downside is that you now need to lodge a US tax return, provided that your income exceeds the income thresholds. It doesn’t mean you have to pay US tax – it just means that you need to lodge a return.
Non-Resident v Resident Alien
An alien is anybody who is not a US citizen. If they hold a Green Card or pass the substantial presence test, they are a resident alien. If they don’t, they are a non-resident alien.
Assessable Income
If you are a resident of the US for any portion of the year, you are required to report your income on a worldwide basis.
Tax Year
The US tax year is the calendar year. Australia’s tax year ends on 30 June. So in theory, you need to look at the date of each transaction and allocate it accordingly. But that can be a lot of work, and so in practice there are easier approaches, such as:
If income is evenly spread from year to year, ignore the different tax years and recognise the same income in both returns – US and Australian.
If income is material, use a 50/50 approach. Cut the income in half and recognise half this year and half the previous year.
But these short-cuts have not been approved by the ATO and probably wouldn’t if asked. However, if these short-cuts don’t result in a materially different tax outcome, they will probably get an unofficial nod.
Due Dates
In the US income tax is due on 15th April. Even if you receive an extension to file, you still start paying interest from the 15th of April. If you live overseas, you get an automatic filing extension of another two months to 15 June and you can even apply for an extension to 15 October. But no matter your lodgement due date, you still pay interest from 15 April.
All this feels quite harsh when you compare this to our May deadline in Australia when registered with a tax agent.
However, if you are not using a tax agent in Australia then the deadline is the 31st of October which is four months. In the US it is 3.5 months. So it is fairly on par. From a global perspective the Australian concession of an additional 7 months when you have a tax agent is unusual.
Double Taxation
To support US Americans working overseas, the US Tax Code offers three concessions. Foreign Tax Credits – Foreign Earned Income Exclusion and – Foreign Housing Concession.
Australia on the other hand only offers one concession to its residents: Foreign Tax Credits.
Foreign Tax Credits
The US only allows foreign tax credits against foreign sourced income, but not US sourced income. So if you have high foreign tax credits coming from Australia, you can only use these if you move to a country with a lower tax rate. UAE, Hong Kong, Singapore and a few South East Asian countries would fit the bill.
Capital Gains and Losses
The US allows up to US$3,000 of capital losses to be recognised against ordinary income. In Australia it is zero.
Negative Gearing
In the US you can negatively gear to some extent, but it is very limited and subject to income thresholds. In Australia on the other hand there is no cap on negative gearing.
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So this is a very brief and fragmented overview of US tax for individuals that Seth covers in this episode. Please listen in as Seth explains all this much better than we do. And please have a look at the next two episodes that look more at the differences between US and Australian tax.
MORE
US Tax While Living in Australia
Australia’s Tax Residency Rules are Broken
Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 05 March 2022
Tax Talks spoke to Seth Hertz - Tax Director at Expat US Tax - for more details.
