A Practical Checklist For Australians Moving To The United States

Moving from Australia to the United States is exciting, but the first U.S. tax season can feel like stepping into a maze. The U.S. tax system is far more document-driven and globally focused than Australia’s, and many new arrivals are caught off guard by what the IRS expects.

The good news? With the right preparation before you move, your first tax season can be far less stressful. Here’s a checklist of items every Australian should gather and understand before relocating to the U.S.

1. Clear Records Of Your Move Date (This Matters More Than You Think)

Your exact date of arrival in the U.S. is critical. U.S. tax residency is not based on intention—it’s based on days physically present. You also need to have records of any dates you’ve left (even for temporary travel) the U.S. once you’ve moved.

Have on hand:

• Flight itineraries and entry stamps
• Visa start date
• Lease agreements or housing contracts
• Any travel dates after your move to the U.S.

These dates determine whether you’re treated as:

• A nonresident,
• A dual-status taxpayer, or
• A U.S. tax resident for that year

This classification drives everything that follows.

2. Copies Of Your Most Recent Australian Tax Returns

Bring at least the last two years of:

• Australian individual tax returns
• Notices of assessment
• PAYG summaries or income statements

These help:

• Establish income earned before U.S. residency
• Support treaty positions
• Substantiate foreign tax credits later

Even income that won’t be taxed again in the U.S. often needs to be reported.

3. A Full Snapshot Of Your Worldwide Income (Not Just Salary)

The U.S. taxes based on citizenship and residency, not source. Once you’re a U.S. tax resident, the IRS wants to see everything.

Prepare documentation for:

• Australian employment income
• Bonuses paid after you leave (even if earned before)
• Rental income
• Dividends and interest
• Trust or partnership distributions

If it earned money anywhere in the world, assume the U.S. cares.

4. Details Of All Australian Bank Accounts

Many Australians are surprised to learn that foreign bank accounts are a major U.S. compliance issue, not a minor one.

You’ll want:

• Bank names and addresses
• Account numbers
• Maximum balances during the year

Why this matters:

• Accounts may trigger FBAR and FATCA reporting
• Penalties for missing these forms can be severe even when no tax is owed

This includes everyday savings and transaction accounts. 

5. Information On Your Superannuation Accounts

Australian superannuation is one of the most misunderstood areas in U.S.–Australia tax planning.

Before moving, gather:

• Super fund statements
• Employer vs personal contribution history
• Withdrawal restrictions

The U.S. does not treat super the same way Australia does. In some cases:

• Earnings may be taxable annually
• Reporting obligations may apply even if funds are locked until retirement

This is an area where advance planning pays off.

6. Investment And Asset Purchase Records

If you own assets, documentation is essential to avoid double taxation later.

Bring records for:

• Australian shares or ETFs
• Property purchase contracts
• Cost base and acquisition dates
• Crypto transaction history

The U.S. uses different rules for:

• Capital gains
• Depreciation
• Currency conversion

Without records, you may pay more tax than necessary.

7. Visa And Immigration Documents

Your visa type can affect how the IRS views you.

Have copies of:

• Visa approval notices
• I-94 arrival records
• Employment authorization documents

Certain visas may qualify for:

• Treaty benefits
• Temporary exemptions from residency tests

But these benefits are time-limited and documentation-dependent.

8. Awareness Of The U.S.–Australia Tax Treaty

The tax treaty can:

• Prevent double taxation
• Modify how certain income is taxed
• Provide tie-breaker rules for residency

But treaties are not automatic. You must claim them correctly on your return.

Knowing this ahead of time helps avoid missed opportunities.

9. A Cross-Border Tax Advisor (Before You Need One)

Perhaps the most important item on this list isn’t a document—it’s expert guidance.

The U.S. tax system:

• Penalizes late or incorrect filings harshly (penalties for a single missing form can amount to tens of thousands of dollars)
• Requires proactive reporting
• Treats foreign assets with heightened scrutiny

Working with someone who understands both Australian and U.S. tax systems can save you time, money, and stress in your first year.

Final Thought

Your first U.S. tax season doesn’t start in April—it starts before you board the plane. A little preparation now can prevent expensive mistakes later and help you start your new chapter in the U.S. with confidence.

“All happy families are alike; each unhappy family is unhappy in its own way.”

Leo Tolstoy’s Anna Karenina (1878)

Anna felt trapped in her high society marriage in 19th-century Russia. The divorce was frowned upon by the Orthodox Church. Thus, she did not formally divorce Karenin and instead ran off with Vronsky. While most divorces nowadays are less dramatic, they are still unpleasant for both parties and quite complicated. International divorce adds more complications, confusion, and frustration since the divorce process is rarely “just family law.” A decree may be issued under Australian law and negotiated entirely in Australia, but U.S. tax outcomes for a U.S. citizen can still turn on U.S. rules—especially rules that hinge on status (married vs not married), tax residency (resident vs non-resident alien), and ownership/control of offshore accounts and structures.

The key difficulty is that cross-border divorce compresses multiple high-stakes determinations into one year:

• Your U.S. filing status may be determined by what is true on December 31, even if you separated long before that. 
• If your spouse is a non-resident alien for U.S. tax purposes, you generally cannot file a joint return unless a specific election applies. 
• “Divorce transfers are tax-free” is not always true in international divorces because the U.S. divorce-transfer nonrecognition rule generally does not apply when the recipient spouse is a non-resident alien. 
• Divorce often changes ownership and signatory authority over foreign accounts, which can change offshore reporting responsibilities, especially FBAR and Form 8938.

U.S. Citizens Living Abroad: The Baseline Is “Worldwide”

A persistent misconception in expat divorces is that living abroad changes who is a U.S. taxpayer. It does not. The IRS’s Internal Revenue Manual states plainly that U.S. citizens living or traveling outside the United States are generally required to file U.S. income tax returns and report worldwide income. 

That’s the baseline. Even if foreign tax credits, exclusions, or treaty positions reduce U.S. tax, the filing and reporting framework still exists, and divorce often changes what must be reported.

Your Spouse: “Resident Alien” vs “Non-Resident Alien” Drives Most Cross-Border Outcomes

For U.S. tax purposes, an “alien” is anyone who is not a U.S. citizen. IRS Publication 519 explains the core split: aliens are classified as resident aliens and non-resident aliens;

Resident Aliens – are generally taxed on worldwide income,

Non-Resident Aliens – are generally taxed only on U.S.-source income and certain income effectively connected with a U.S. trade or business. 

The IRS also summarizes the practical mechanics of classification: an alien is a resident alien if he or she meets the green card test or the substantial presence test, or makes certain elections (including an election under IRC §6013(g) or (h)). If the person does not meet those tests and does not elect, that person is a non-resident alien and must file Form 1040‑NR to report certain U.S. tax items.

In a U.S./Australia or any other foreign divorce where the non-U.S. spouse lives outside of the U.S. and does not meet U.S. residency requirements, the spouse is commonly treated as a non-resident alien for U.S. tax purposes. That single fact ripples into filing status, withholding, and property transfer consequences.

Filing Status: Why December 31 Controls Even If Your Divorce Is “Non-U.S.”

The year-end rule is statutory, not a “paperwork” detail.

U.S. tax law generally determines whether you are married as of the close of your taxable year. The joint return statute, IRC §6013(d), similarly measures marital status as of the close of the year for spouses with the same taxable year, and provides that individuals legally separated under a decree of divorce or separate maintenance are not considered married. 

Practical Meaning – A divorce finalized in early January can mean you were “married” for U.S. tax purposes for the entire prior year.

“Legally Separated” Is Meaningful In The U.S. Tax Sense

IRC §7703 states that an individual legally separated under a decree of divorce or separate maintenance is not considered married. That phrase matters because not all “separation” ideas used in foreign jurisdictions map neatly to U.S. divorce or separate maintenance decrees. When your divorce is governed by foreign law, you still need to identify whether you have a decree that the U.S. tax rules treat as ending “married” status.

Head Of Household: Possible, But Facts Matter

Many separated expat parents are interested in the Head of Household (HOH) status. IRC §7703(b) provides a “certain married individuals living apart” rule that allows a married person filing separately to be treated as not married if they maintain a household that is the principal place of abode of a qualifying child for more than half the year, provide over half the cost of maintaining the household, and the spouse is not a member of the household during the last six months of the year. 

In international divorces, HOH analysis becomes fact-intensive quickly:

• where the child actually lived,
• who paid household costs,
• whether the spouse was a member of the household during the last six months,
• and dependency entitlement mechanics.

So, while HOH can be a valuable filing status, in cross-border divorce, it should be treated as a fact pattern to prove, not a default assumption.

Married To A Non-Resident Alien Spouse: Why Married Filing Joint (MFJ) Is Often Blocked And How Elections Change The Landscape

The default rule: no joint return if either spouse is a non-resident alien.

IRC §6013(a)(1) provides a clear limitation: no joint return shall be made if either spouse at any time during the taxable year is a non-resident alien. However, non-resident aliens married to U.S. citizens or residents can choose to be treated as U.S. residents and file joint returns.

This is the first major “international divorce fork”:

• If the foreign spouse remains a non-resident alien and no election is made, you may be limited to separate filing (and the spouse may file Form 1040‑NR for U.S. income items). 
• If you want MFJ, you are typically talking about a statutory election regime.

The §6013(g) election (and related rule §6013(h)): MFJ becomes a choice, not a default.

IRC §6013(g) allows spouses to elect to treat a non-resident alien spouse as a U.S. resident for (1) income tax for the entire year, and (2) wage withholding for wages paid during the year.

Regulation §1.6013-6 provides a clear summary of who can elect.  The election is made by either the husband or the wife at year-end, when one spouse is a U.S. citizen or resident, and the other is a non-resident alien. Once an election is made, each spouse is treated as a U.S. resident for various Internal Revenue Code purposes and specific filing/administrative provisions for the entire year. 

The election is made by attaching a statement to a joint return for the first year; the statement must include identification (U.S. Social Security or taxpayer identification numbers) and be signed by both spouses. 

The election terminates if spouses are legally separate under a decree of divorce or separate maintenance; the regulation also provides timing for termination. 

Therefore, if you make the election, you and your spouse are treated as residents for income tax purposes for the entire year; neither spouse can claim under any treaty not to be a U.S. resident; both are taxed on worldwide income; you must file a joint return for the year you make the choice.

US Taxpayer Identification (ITIN) Mechanics

If the non-resident spouse does not have and is not eligible for a U.S. Social Security Number, he or she must apply for an ITIN. In a divorce year, this creates a practical timing issue: the ability to file as intended may depend on whether the spouse will cooperate in obtaining an ITIN.

Community Property Twist: Foreign Community Property Laws Can Matter (And The Election Can Switch Them Off)

International couples sometimes encounter community property concepts. IRC §879 addresses community income where one or both spouses are non-resident aliens and states that “community property laws” include those of a foreign country. It also provides that the §879 rules do not apply for any year in which a §6013(g) or (h) election is in effect. 

Even if Australian marital property isn’t “community property” in the U.S. sense, this section is a reminder that the Code sometimes explicitly contemplates foreign marital property regimes, and elections can change the default allocation framework.

Treaties And Dual Residents: When The Treaty Changes “How You Compute Tax”, But Not Necessarily Everything Else

Dual Resident Taxpayers: Treaty Tie-Breaker Can Require Form 1040-NR + Form 8833

If you are treated as a resident of a foreign country under a tax treaty, you are treated as a non-resident alien in figuring your U.S. income tax; for purposes other than figuring your tax, you will be treated as a U.S. resident. In a practical sense, it means that while you are not going to pay U.S. income tax on foreign source income, you will still need to report all non-US financial assets and file applicable international disclosure forms like 3520, 3520-A, 5471, 8865, etc.

Divorce Support And Cross-Border Cash Flows: Withholding-Agent Issues That Don’t Exist In Domestic Divorces

The cross-border “support” issue is often less about whether something is deductible (U.S. law changed in recent years for many divorces), and more about:

• recipient status (foreign or not),
• income sourcing, and
• withholding and reporting responsibilities.

Withholding Agent Concept (And Why Divorce Can Create One)

The IRS defines “withholding agent” broadly as any person required to withhold income tax on U.S.-source income received by a non-resident alien and others, and states that the withholding agent is responsible for submitting withholding information on Form 1042 and providing recipient information on Form 1042‑S. 

Many divorcing taxpayers do not realize they can become a “withholding agent” simply by agreeing to pay periodic amounts to a foreign recipient out of U.S.-source FDAP streams or other U.S.-source payments.

The non-resident alien withholding baseline and why it can matter in divorce.

Treasury regulations governing non-resident alien taxation explain that a non-resident alien not engaged in a U.S. trade or business is liable for a flat tax of 30% on certain U.S.-source amounts received during the year (subject to treaty limitation). IRS Publication 519 provides the same idea in plain language: dividends, for example, are generally taxed at 30% (or lower treaty) and are generally withheld at source; if not withheld correctly, a Form 1040‑NR may be required to claim refund or pay additional tax. 

Divorce is relevant because many settlements create:

• periodic payments,
• distributions from investment accounts,
• payments funded by dividends or interest,
• and third-party payments for the benefit of the foreign spouse.

These can create withholding and reporting tail obligations that need to be planned in advance, including documentation flow and timing.

For International Marital Gifting, There Are Two Different “Spouse” Regimes

Income tax regime governed by IRC 1041 and gift tax marital deduction under IRC 2523.

Marital deduction is disallowed for transfers to a spouse who is not a U.S. citizen at the time of the transfer. Instead, if the transfer otherwise qualifies (e.g., present interest), there is a special annual exclusion amount (inflation-adjusted). For the calendar year 2025, that amount is $190,000 ($194,000 for 2026). Citizenship drives your gift tax cap, but it does not magically convert a gift into a taxable sale or a basis step‑up.

Property Division: When “Divorce Transfers Are Tax-Free” Is False In International Divorces

The General Rule: IRC 1041 Nonrecognition For Spouse Or Incident-To-Divorce Transfers

IRC 1041(a) provides that no gain or loss is recognized on a transfer of property to a spouse or to a former spouse if the transfer is incident to divorce. Section 1041(b) provides carryover basis: the transferee generally takes the transferor’s adjusted basis.  A transfer is incident to divorce if it occurs within one year after the marriage ceases or is related to the cessation of the marriage. If our analysis stopped here, we would have a familiar US domestic non-recognition outcome.

The International Exception: IRC1041(d) When Spouse Is Non-Resident Alien

Section 1041(d) is explicit; Code section 1041(a) shall not apply if the spouse (or former spouse) receiving the transfer is a non-resident alien

This is the single most important property division issue in the U.S./foreign divorces involving a U.S. citizen spouse and a foreign spouse who remains a non-resident alien for U.S. tax purposes.

As a result, transferring appreciated property to a spouse who is a non-resident alien can be a taxable event for U.S. purposes (absent another nonrecognition provision).

Carryover basis still matters (even when  IRC 1041 does apply)

Even in cases where IRC 1041 applies (e.g., transfers between two U.S. people), the carryover basis rule means that the divorce settlement often shifts built-in gain. For portfolio-heavy couples, “equal value” does not mean “equal after-tax value.”

Transfers In Trust Where Liabilities Exceed Basis

Section 1041(e) provides that IRC 1041(a) does not apply to certain transfers in trust to the extent liabilities exceed basis.  For business-owner divorces involving trusts and leveraged assets, this provision can be relevant. Trust-based settlement structures should be reviewed not only for family-law goals but also for U.S. income tax consequences, including debt and basis mechanics.

Post-Divorce Compliance Reset: FBAR, Form 8938, And Foreign Trust Reporting

Divorce changes facts. Offshore reporting rules often attach to facts like ownership, signatory authority, beneficial interests, distributions and loans, and whether you are elected into broader residency treatment.

A useful approach is to treat post-divorce compliance as a “reset” exercise rather than a continuation of pre-divorce assumptions.

FBAR

A U.S. Treasury reporting requirement that can change with signatory authority.

Every U.S. citizen or resident alien with an interest in or signature authority over foreign financial accounts exceeding $10,000 in aggregate value at any time during the calendar year must report that relationship. The report is filed electronically on FinCEN Form 114 and is separate from the tax return; failure to file may result in civil and criminal penalties. 

Divorce relevance: even if the accounts didn’t change, divorce often changes who is a signer or owner, which can change reporting requirements in the divorce year.

Form 8938 (FATCA)

A broader “specified foreign financial assets” concept.

You may have to file Form 8938 if you are a resident alien for any part of the year, or a non-resident alien who makes an election to be treated as a resident to file a joint return (among others). 

Specified foreign financial assets include foreign financial accounts and, if held for investment, foreign stock and securities, interests in foreign entities, and financial instruments/contracts with non-U.S. issuers/counterparties. 

Penalties can apply for failure to file Form 8938 and for understatement of tax related to undisclosed assets. 

Divorce relevance: if you previously filed jointly and later file separately, or if you are considering a §6013 election in the divorce year, Form 8938 scope and thresholds can change. 

Foreign Trusts And Non-U.S. Trusts

Why do business-owner divorces require special attention?

Many U.S./Australia divorces involve family structures and entities that behave like trusts for Australian purposes or are classified as non-U.S. trusts under U.S. rules. Certain types of foreign accounts or entities are classified as non-U.S. trusts (an example could be certain superannuation accounts). If a U.S. citizen or resident is considered the beneficiary, trustee, or owner, certain information reporting forms may be required, with separate deadlines and penalties for failure to file. 

Form 3520 is filed yearly by an owner of a non-U.S. trust to report ownership, and also for certain contributions/loans to, distributions/loans from, or large gifts from non-U.S. persons/entities; generally filed by the due date (including extensions) of the individual’s return. 

Form 3520‑A is filed yearly by the trustee of a foreign trust with a U.S. owner and is generally due March 15 for a calendar-year trust; a six-month extension may be requested by March 15. 

Divorce Relevance – Divorce is often the first time a U.S. spouse sees trust deeds, trustee statements, trust distributions, or intercompany loans in one place. That is precisely the moment when a controlled “cleanup” plan should be considered if past years were inconsistent or incomplete.

A Practical Checklist Specific To U.S. Citizens Divorcing Foreign Spouses

Year-end marital status: determine what is true on December 31 for U.S. purposes. 

Spouse U.S. tax status: confirm whether the Australian spouse is a non-resident alien. 

MFJ election decision: if MFJ is desired, evaluate the §6013(g) election and its consequences (worldwide income inclusion, treaty limitations, ITIN, and termination timing). 

Divorce property transfers: identify any appreciated property being transferred to a spouse who remains a non-resident alien; §1041 nonrecognition may not apply.

Withholding/FDAP awareness: identify any U.S.-source income streams being paid to a foreign recipient and treat withholding/reporting as part of the settlement administration. 

Offshore reporting reset: rebuild the offshore asset/account/entity/trust inventory after separation and again after final orders; ensure ownership and signatories match what is reported.

International Divorce Is Manageable, But It Rewards Early, Structured Planning

If your divorce is revealing previously undisclosed foreign accounts, inconsistent prior-year offshore reporting, or trust/entity structures that were never fully integrated into U.S. filings, the most effective next step is often a structured offshore disclosure cleanup plan built around the divorce timeline—so ownership changes, trust reporting, FBAR/Form 8938 posture, and any required information returns can be corrected in a controlled, consistent way before asset division and post-divorce filing positions become fixed. 

A Practical Guide For Australians And Globally Mobile Founders

For Australians moving to the United States — as executives, investors, or globally mobile founders — the U.S. personal tax system can feel both familiar and foreign. The rules are extensive, the terminology takes getting used to, and the way deductions operate is fundamentally different from Australia’s.

Where Australia offers targeted deductions within a tightly defined framework, the U.S. system blends statute, history, case law, and political compromise. For internationally mobile taxpayers, that combination creates both unexpected pitfalls and valuable planning opportunities.

This article provides a clear guide to the most significant deductions available on a U.S. personal tax return, complete with examples that reflect the situations Australians commonly face.

1.  Above-The-Line Deductions — The Most Valuable Deductions You Can Claim Without Itemising

Above-the-line deductions reduce Adjusted Gross Income (AGI), which then determines eligibility for further deductions and credits. Reducing AGI is often the single most powerful tax optimisation strategy for globally mobile individuals.

Retirement Contributions: IRA, SEP IRA And Solo 401(k)

Contributions to traditional IRAs may be deductible depending on income and employer-plan participation. For self-employed founders operating in the U.S., SEP IRAs and Solo 401(k)s offer substantial deductible contributions.

Example:
Michael, an Australian executive earning USD 160,000 in the U.S., contributes to his employer’s 401(k). Because he is already covered by that plan, his IRA contribution is not deductible due to income limits.

However, if Michael were self-employed and earned the same amount, a SEP IRA could allow deductible contributions of tens of thousands of dollars.

Health Savings Accounts (HSAs)

Unique to the U.S., HSAs allow deductible contributions, tax-free earnings, and tax-free withdrawals for medical expenses. Australians often find HSAs to be one of the most generous structures in the U.S. system.

Example:
Sarah, an Australian relocating to California, switches to a qualifying high-deductible health plan and contributes USD 8,300 into an HSA for her family.

This contribution is fully deductible, grows tax-free, and withdrawals for medical expenses remain tax-free. No Australian equivalent exists.

Self-Employed Deductions

For entrepreneurs and consultants, these include:

• Self-employed health insurance
• Half of self-employment tax
• Qualified retirement plan contributions
• Certain business expenses

Example:
An Australian consultant billing USD 220,000 through a U.S. LLC deducts:

• USD 9,000 in self-employed health insurance
• USD 8,000+ for half of self-employment tax
• USD 20,000–40,000 in retirement contributions

These deductions significantly reduce taxable income.

2. Standard Deduction vs. Itemised Deductions — The Annual Decision

Each taxpayer chooses either:

• The Standard Deduction, or
• Itemised Deductions, if they exceed the standard deduction.

Standard Deduction Example:

David and Emma, an Australian couple living in Texas, have:

• USD 6,500 property tax
• USD 3,000 charitable gifts

Total: USD 9,500

The standard deduction is much higher, so they do not itemise.

Itemised Deduction Example:

An Australian family living in New York has:

• USD 23,000 state income tax
• USD 14,000 property tax (but SALT capped at USD 10,000)
• USD 18,000 mortgage interest
• USD 12,000 charitable gifts

Their itemised deductions total USD 40,000, higher than the standard deduction, so they itemise.

3. State And Local Tax Deduction (SALT) — Now Capped At USD 10,000

Before 2017, many high-income earners benefited from large SALT deductions. Today, the deduction for:

• U.S. State Income Tax
• U.S. Local Taxes
• U.S. Property Taxes

Is capped at USD 10,000 per return.

Example:
Grace, an Australian senior executive in San Francisco, pays:

• USD 45,000 state income tax
• USD 15,000 property tax

Despite paying over USD 60,000, she may deduct only USD 10,000.

Important:
Foreign taxes do not count toward SALT. They belong to the foreign tax credit calculation, not deductions.

4. Mortgage Interest Deduction — Still Valuable, But Limited

Interest paid on qualifying mortgages for U.S. residences is deductible, subject to limits.

• Up to USD 750,000 of acquisition debt (for loans after 2017)
• Older mortgages may retain the USD 1 million limit

Example:
A couple buys a Los Angeles home with a USD 900,000 mortgage taken in 2021. Only interest on the first USD 750,000 is deductible.

Foreign Mortgages – Interest may be deductible if the loan is secured by the property, but foreign property taxes fall under the USD 10,000 SALT cap, reducing overall benefit.

5. Charitable Contributions — A Generous And Flexible Deduction

Charitable gifts remain a highly effective deduction for high-income taxpayers.

Key Points

• Must be made to U.S. qualified charities
• Cash gifts deductible up to 60% of AGI
• Appreciated assets deductible up to 30% of AGI

Example: Cash Donation

A Sydney entrepreneur working in the U.S. donates USD 50,000 to a U.S. 501(c)(3). Fully deductible.

Example: Appreciated Stock Donation

If the founder donates USD 50,000 in stock purchased for USD 10,000:

• USD 50,000 deduction
• No capital gains tax on the USD 40,000 appreciation

Foreign Charity Contributions – Donations to Australian charities are generally not deductible unless channelled through a U.S.-recognised “friends of” organisation.

6. Medical And Dental Expense Deductions — Only For Major Costs

Medical expenses are deductible only to the extent they exceed 7.5% of AGI.

Example:

A family with AGI of USD 200,000 incurs USD 25,000 in medical expenses.
Deductible portion = 25,000 – (7.5% × 200,000)
= 25,000 – 15,000
= USD 10,000

For high earners, only significant medical events typically produce a deduction.

7. Investment-Related Deductions

Investment Interest

Interest on margin loans is deductible up to net investment income.

Example:
Liam pays USD 12,000 interest on a margin loan and has USD 18,000 in investment income.
He may deduct the full USD 12,000.

Capital Losses

Capital losses offset capital gains and up to USD 3,000 of ordinary income.
Excess losses carry forward indefinitely.

8. The Qualified Business Income (QBI) Deduction — A Major Benefit For Eligible Founders

Eligible owners of U.S. pass-through businesses (LLCs, partnerships, S corps) may deduct up to 20% of qualified business income.

Example:

Tom runs a logistics LLC and earns USD 300,000.
He may claim a USD 60,000 QBI deduction, subject to wage and property basis tests.

Specified Service Businesses – Consulting, accounting, financial services, and similar professions face phase-out limits.

Example:
Lisa, an Australian consultant earning USD 220,000, is within the phase-out range and still receives a partial QBI deduction.

9. International Mobility Considerations — Where Australians Often Get Caught

Superannuation Contributions 

Australian super contributions are not deductible for U.S. tax purposes.

Foreign Property Tax

Property tax on homes in London, Singapore or Sydney does not escape the SALT cap.
Only USD 10,000 total may be deducted.

PFIC And Foreign Trust Advisory Fees

These are not deductible, as miscellaneous itemised deductions remain suspended until at least 2026.

Conclusion

The U.S. deduction framework is powerful but complex. For Australians and other globally mobile founders, the goal is to understand which deductions reduce AGI, which are capped, and which are unavailable for foreign assets and pensions.

Used properly, these deductions can significantly reduce U.S. tax liability while maintaining full cross-border compliance — a balance every global individual needs.

The “One Big Beautiful Bill Act” (OBBBA), signed into law on July 4, 2025, is the most sweeping U.S. tax overhaul since 2017. 

While it extends many Tax Cuts, it also introduces new provisions that affect inbound and outbound expatriates. 

Below we summarize key changes and considerations, including new deductions, changes to foreign earned income provisions, reporting obligations, and residency rules.

New Deductions Or Changes For Foreign Nationals Moving To The U.S. (Inbound Expats)

Moving Expense Deduction

Unfortunately for new U.S. residents, OBBBA permanently disallows the moving expense deduction (and the exclusion for employer-paid moving reimbursements) for non-military taxpayers. 

This means foreign nationals relocating for work can no longer deduct their moving costs (which had been suspended under TCJA and now will not return). 

In practice, inbound employees should negotiate tax gross-ups on moving packages, since moving benefits are fully taxable. Only active-duty military (and certain intelligence community members) remain eligible for the moving expense deduction.

Standard Deduction And Dual-Status Issues

OBBBA locked in a much larger standard deduction (now $15,750 single / $31,500 joint for 2025 and indexed) as a permanent feature. 

However, non-resident aliens still cannot use the standard deduction. 

A foreign national who arrives mid-year will file as a dual-status alien, generally paying U.S. tax only on U.S.-source income for the non-resident portion of the year, but with no standard deduction for that part. 

If they qualify, they might elect to be treated as U.S. resident for the full year (under IRC §7701(b)(4)) to claim the standard deduction – but that subjects their full-year worldwide income to U.S. tax. 

These first-year elections rules are unchanged under OBBBA, so careful timing and modeling is needed to decide the optimal filing status.

Tax Treaty Provisions

Inbound taxpayers should also review tax treaty provisions. If a treaty tie-breaker would treat them as resident of their home country for part of the year, they may use that (since they are not U.S. citizens, the treaty saving clause doesn’t bar it), though doing so can be complex. 

OBBBA did not create any new inbound tax exemptions or basis step-ups – meaning new residents receive no automatic step-up in basis for assets they owned before moving. 

Planning Tip. For inbound individuals – consider disposing of highly appreciated foreign assets before becoming a U.S. resident, or to be prepared for U.S. tax on the full gain if sold post-arrival (since U.S. basis will generally be original cost).

“Remittance Tax” On Outbound Transfers

A novel provision imposes a 1% excise tax on certain money transfers from the U.S. to foreign recipients (effective for transfers after 2025). 

This is aimed at cash remittances – for example, an expat worker in the U.S. sending cash to family overseas via a money transfer service would pay a 1% tax, collected by the remittance provider. 

However, transfers from U.S. bank accounts or by U.S. debit/credit card are exempt, so immigrants and foreign workers in the U.S. can plan around this by using bank-to-bank transfers instead of cash remittance services to avoid the fee. 

While not a “deduction,” this new tax is a consideration for inbound expats who regularly send funds abroad.

Other Inbound Notes

OBBBA’s major individual tax cuts (rate reductions, bigger child credits, etc.) generally benefit U.S. residents and citizens across the board, including recent arrivals. 

For example, the Child Tax Credit (CTC) was increased to $2,500 per child (from $2,000). 

However, the act tightened ID requirements. Now at least one parent filing jointly must have an SSN to claim the refundable portion of the CTC. 

This is actually easier than the initially proposed rule that both parents have SSNs – a relief for mixed-nationality couples. 

Children still need SSNs (ITINs don’t qualify) as before. Inbound expats should obtain SSNs for themselves and their U.S.-citizen children as soon as possible to maximize credits.

Finally, note that state tax obligations might still follow a new arrival (if they establish residency in a U.S. state). 

OBBBA temporarily raised the federal state and local tax (SALT) deduction cap from $10k to $40k (through 2029, with AGI phase-outs). This provides some relief if a new resident pays significant state/local taxes. 

However, non-residents and dual-status filers generally cannot benefit from the standard deduction or SALT deduction unless they elect full-year residency, so the practical benefit is limited to those fully subject to U.S. tax.

Changes For Americans Moving Or Living Abroad (Outbound Expats)

Foreign Earned Income Exclusion (FEIE) And Housing Exclusion

The FEIE – a key tax break for U.S. expats – continues unchanged in mechanism, with annual inflation adjustments. 

For 2025, the FEIE cap rises to $130,000 per qualifying individual (up from $126,500 in 2024). 

Married couples who both qualify can exclude up to $260,000 of foreign wage or self-employment income. 

The foreign housing exclusion/deduction was also adjusted. The base housing amount is $20,800 and the general housing cost limit about $39,000 for 2025 (with higher caps for certain high-cost cities abroad). 

Bottom line. Americans abroad can exclude a bit more income due to inflation indexing; OBBBA did not restrict these exclusions. 

Expats should continue to track their bona fide residence or physical presence test status carefully each year to maintain FEIE eligibility – the law did not change the qualification tests (12+ months abroad or 330-day rule).

Foreign Tax Credit (FTC) And Tax Treaties

One initial concern was a provision known as Section 899 (nicknamed the “revenge tax”) that would have penalized Americans in countries with “unfair” taxes (initially aimed at nations with digital services taxes, etc.), effectively limiting the use of foreign tax credits in those cases. 

Good news. After international pushback, Section 899 was removed from the final bill. Thus, U.S. expats retain full access to the FTC* to offset foreign income taxes paid, and no new surtax will apply on income from any particular country. 

The FTC system remains as before, so Americans abroad can generally credit foreign taxes dollar-for-dollar against U.S. tax on the same income (up to limits), helping avoid double taxation in high-tax countries. 

In fact, one tweak in OBBBA actually improves FTC usage for some expats. The act reduces the “deemed paid” foreign tax credit haircut from 20% to 10%. 

This mostly affects those with GILTI (Global Intangible Low-Taxed Income) from controlled foreign corporations – now renamed “Net CFC Tested Income” – where previously only 80% of foreign taxes were creditable. Going forward, 90% of foreign taxes on GILTI/NCTI will be creditable. 

For an entrepreneur abroad who owns a foreign corporation, this could modestly lower U.S. tax on high-taxed foreign earnings (since more of the foreign tax can offset U.S. tax). 

Other international business provisions – like making the CFC look-through rule permanent and restoring certain attribution rules – may ease tax burdens on expats with complex structures.

No Switch To Pure Residency-Based Taxation (Yet)

Despite hopes in the expat community, OBBBA did not end citizenship-based taxation. 

U.S. citizens and green card holders are still taxed on worldwide income regardless of residence. President Trump had promised to “end double taxation” on Americans abroad and supported a residence-based taxation (RBT) proposal, but that was not included in this bill. 

A separate bill (the LaHood RBT Act) was introduced and may be debated later, but as of now nothing has changed: Americans abroad must continue filing annual U.S. tax returns, FBARs, etc., on their worldwide income and assets. 

The FEIE and FTC remain the primary tools to mitigate double taxation. 

Tax treaties also remain in effect, but remember the “saving clause” in U.S. treaties generally prevents U.S. citizens from using treaty residency tie-breakers to avoid U.S. tax. 

OBBBA did not alter any treaty provisions or the saving clause. (In practical terms, a U.S. citizen cannot use a tax treaty to claim non-residency and escape U.S. tax – you’d have to expatriate to do that. For long-term green card holders, using a treaty to be treated as a non-resident can trigger the expatriation rules – see below.)

Foreign Housing, Meals, And Other Deductions

Aside from the FEIE/housing exclusion adjustments noted, OBBBA didn’t take away expat-specific deductions. 

For instance, the housing exclusion formula under §911 remains in place. 

Some expats who work for foreign employers may have access to tax-equalization or housing reimbursement plans – those too are unchanged by the law (though employers might need to recalibrate tax projections given other changes). 

One Item To Note. If an outbound U.S. employee was hoping the moving expense deduction might be restored for their move abroad, that is not the case – as mentioned, moving expense write-offs remain disallowed for civilians. Employers should gross-up any moving allowances for U.S. employees relocating overseas, since those payments will be taxable compensation to the employee.

Estate And Gift Tax Relief

Many Americans abroad worry about U.S. estate tax on worldwide assets. 

OBBBA increased the unified estate/gift tax exclusion to $15 million per individual (up from ~$14M). This high exemption (available through 2030) greatly reduces the number of expats subject to U.S. estate tax. 

It also presents a planning opportunity. Wealthy expats considering renouncing U.S. citizenship can use the large gift exemption now to shed assets and potentially get their net worth below the $2 million “covered expatriate” threshold. 

By utilizing the $15M exemption to gift assets tax-free now, an expat could avoid the exit tax entirely upon expatriation. (For example, an American abroad with $10M net worth can gift, say, $5M to a trust for their children – using up part of the $15M exemption – and thereafter be under $2M net worth, avoiding covered expatriate status if they renounce.) 

Caution. The $15M exemption isn’t guaranteed forever; it’s set to revert (likely to ~$6M) in 2031 unless extended. 

Thus, expats with estate tax concerns might act sooner rather than later. OBBBA did not otherwise change the exit tax regime under §877A – any U.S. citizen or long-term green card holder who expatriates with net worth above $2M (or failing other tests) still faces the mark-to-market exit tax. 

Proper planning (now aided by the high exemption) remains crucial.

New Reporting Burdens And Compliance Changes (And Planning Responses)

A major theme of OBBBA is increased tax compliance and enforcement, including for international filers. 

Key changes that inbound/outbound taxpayers should note:

• Expanded Foreign Asset Reporting – The law authorizes lower thresholds for FATCA Form 8938 and FBAR reporting and even for foreign gift reporting. While the IRS hasn’t yet announced new limits, OBBBA gives Treasury the green light to “lower the bar” for reporting foreign accounts and assets. Currently, U.S. expats must file an FBAR (FinCEN 114) if aggregate foreign accounts > $10,000, and Form 8938 if foreign financial assets > $200,000 (single) at year-end. These thresholds could drop, meaning more expats may have to file these forms going forward.
  
  Foreign gifts/inheritances – Today, a U.S. person must file Form 3520 if they receive > $100,000 from a foreign individual or > ~$18,000 from a foreign corporation/trust.
  
  OBBBA significantly lowers these thresholds (exact new amounts TBD). 
  
  This means more expats will trigger Form 3520 filings for even modest gifts or bequests from abroad. 
  
  While such foreign gifts remain non-taxable, the penalty for failing to report can be 25% of the gift – so this is a serious compliance point. International tax advisors should flag any inbound gift to a client, no matter how small, to see if it now requires a report.
  
• Accelerated Deadlines & Shorter Extensions – The Act directs alignment of some expat filing deadlines closer to domestic deadlines. U.S. taxpayers abroad have traditionally enjoyed an automatic 2-month filing extension to June 15, with further extensions to October (and even December in some cases). OBBBA shortens this window. Expect tighter due dates for international filings, possibly ending the automatic June 15 extension. 
  
  For example, the due date for filing a Form 3520 or Form 5471 might be pulled forward. We await IRS guidance, but practitioners should prepare expats to file earlier and not rely on lengthy extensions. The era of casually filing an expat return in October might be over – timely attention to April 15 (or a nearer date) is advised once rules are clarified.
  
• Stiffer Penalties and Enforcement – Congress has hiked penalties for international non-compliance across the board. Failure to file an FBAR, Form 8938, 5471, 3520, etc., will carry even heavier fines than before, and the IRS is mandated to step up international enforcement (with funding previously allocated to IRS enforcement largely preserved). Also, expect greater data sharing between IRS and foreign tax authorities. 
  
  For expats, this means less margin for error – every foreign account, asset, and entity must be reported meticulously. 
  
  It’s prudent to perform a “compliance check-up”. Ensure all past FBARs and international forms have been filed (the Streamlined Procedures remain an option to clean up past omissions, ideally before penalties hit). 
  
  OBBBA’s message is clear: the compliance net is tightening.
  
• Small Business and Investment Tweaks – Expat entrepreneurs will face some new wrinkles. OBBBA instructs Treasury to limit Section 179 expensing and certain small-business deductions on foreign assets/businesses. 
  
  In practice, if an American abroad owns a foreign business or rental property, they may not be able to immediately deduct equipment purchases (§179) placed in service overseas as liberally as a domestic business. 
  
  There may also be new anti-abuse rules for expats claiming business losses or expenses from abroad. 
  
  Details will emerge in IRS guidance, but tax professionals should be prepared to recalculate assignment cost projections for employers and reassess expat entrepreneurs’ estimated taxes. 
  
  On the investment side, note that no relief was provided from the PFIC rules or the transition tax/GILTI regime that hit many expats after 2017 – those remain in effect. (If anything, as noted, GILTI was slightly modified to be more inclusionary by reducing the §250 deduction to 40%, but high foreign tax credits mitigate its impact for many.) 
  
  Expats should continue to avoid foreign mutual funds (PFICs) or be ready to file Form 8621 annually.

Planning Opportunities

Despite increased burdens, OBBBA opens some planning avenues:

• Use of the Higher FEIE and Credits – With a ~$130k exclusion, expats on the margin might newly avoid all U.S. tax by ensuring salary splits or housing allowances that maximize use of the FEIE + housing exclusion. Also, the slightly larger Child Tax Credit can mean bigger refunds for those with qualifying kids (make sure to claim the Additional CTC if eligible).
• Estate/Gift and Expatriation Planning – As discussed, the $15M lifetime exclusion offers a window for high-net-worth expats to reorganize wealth (gifts, trust funding, etc.) while U.S. estate tax is minimal. It can facilitate an exit strategy or simply provide peace of mind that one’s estate won’t be taxed absent very large assets.
• State Tax Considerations – Expats retaining state residency (or planning a move abroad mid-year) might benefit from the temporary SALT deduction increase if they itemize. For example, an expat who sells a U.S. home or has high state tax in the year of departure can potentially deduct up to $40k of it federally now – factor this into timing (maybe accelerate income/transactions into 2025-2029 to utilize the higher cap).
• Remittance Tax Avoidance – Inbound foreign workers should shift from cash remittances to bank transfers, as noted, to legally avoid the 1% excise.

In short, global tax planning is more critical than ever. 

Expats should coordinate U.S. and foreign tax strategies. For instance, a reduction in U.S. tax by FEIE could expose them to unused foreign tax credits (since you can’t claim credit on excluded income), so one might choose the FTC over FEIE in certain scenarios to maximize overall benefit. Each expat’s situation must be modeled under the new rules to uncover the best approach.

Residency Tie-Breakers, Dual-Status And First/Last-Year Residency Cases

OBBBA did not change the fundamental residency rules for tax purposes – but it adds context:

• Dual-Status Taxpayers – Individuals who are U.S. resident for part of the year and non-resident for part (e.g. the year of arrival or departure) will still file split-year returns as before. One caveat. Because the standard deduction is now permanently high and still unavailable to non-residents, dual-status filers get no standard deduction (and no personal exemption, as exemptions remain $0) for the non-resident portion. 
  
  This can result in higher taxable income in a split year. 
  
  Strategies remain the same – e.g., if arriving late in the year, consider electing to be treated as a full-year resident (if eligible under the first-year election rules) to claim the full standard deduction and credits, especially if foreign income for the pre-arrival part was low or already taxed abroad. 
  
  Conversely, if departing mid-year, one typically does not want to be taxed as a U.S. resident for the full calendar year. In those cases, use the “last-year” residency termination rules (IRC §7701(b)(2)(A)(iii) and (B)) by showing a closer connection to the new country and limited U.S. presence after departure. 
  
  OBBBA introduced no new relief or complexity in these calculations – it’s status quo. 
  
  However, watch the new accelerated filing deadlines. A dual-status taxpayer can’t procrastinate filing until October; if extension periods are reduced, they may need to file by spring with all necessary information on worldwide income ready. 
  
  Early coordination with foreign employers for income statements is advised.

• Tax Treaty Tie-Breakers – Many U.S. tax treaties have residency “tie-breaker” provisions that determine a single country of residence when both countries claim someone as a resident in a given year. 
  
  As noted, U.S. citizens cannot fully escape U.S. taxation via treaty due to the saving clause (the U.S. reserves the right to tax its citizens as if the treaty didn’t exist). 
  
  OBBBA did not amend any treaties or the saving clause. For non-citizens, such as a foreign national who becomes a U.S. resident but remains a tax resident of their home country, the treaty tie-breaker could be invoked to treat them as non-resident in one of the countries. 
  
  That process remains the same – though one should be mindful – if a long-term green card holder uses a treaty to be treated as non-resident of the U.S., that action can be considered a form of expatriation (essentially a surrender of their green card for tax purposes) potentially subjecting them to the exit tax under §877A. 
  
  OBBBA did not change this anti-treaty-shopping rule for long-term residents. 
  
  Thus, dual-status and treaty positions should be taken with caution and full disclosure (Form 8833 is required for treaty-based return positions).
  
• Increased Scrutiny – While the rules haven’t changed, the enforcement environment has. The law’s new reporting and documentation demands could indirectly affect residency determinations. 
  
  For example, more aggressive information reporting might flag an individual who claims to be a non-resident via a treaty tie-breaker but still has significant U.S. indicia. 
  
  In practice, an American abroad who asserts treaty benefits (say, to exempt foreign pension income under a treaty article) might face more IRS questions under the new regime. 
  
  Treaty-based positions should be thoroughly supported by contemporaneous evidence (residency certificates, proof of foreign tax paid, etc.). 
  
  Likewise, first-year and last-year residency cases may see heightened IRS scrutiny – e.g., if someone claims to have left the U.S. for good in June, the IRS may more often request proof of foreign residence for the remainder of the year. It’s advisable to document travel dates and foreign ties more rigorously in anticipation of this stricter oversight.

Bottom line. The residency definitions (substantial presence test, green card test, etc.) are unchanged – no new “residency tie-breaker certificate” or election was created in OBBBA (the mooted RBT proposal would have allowed citizens to elect non-resident status, but it’s not law). 

So the familiar complexities of dual-status returns and treaty tie-breakers remain. 

The difference post-OBBBA is a less forgiving compliance atmosphere. 

Entry and exit dates should be carefully planned, to maximize the use of any available exclusions/credits in split years, and ensure all required statements (e.g., dual-status statement, treaty disclosure) are properly attached to returns. 

Given the new law’s emphasis on enforcement, taking meticulous care with these cases will be critical.

Conclusion

The One Big Beautiful Bill Act of 2025 brings a mix of tax cuts, new rules, and tightened compliance that expats must navigate. 

For inbound expats, there’s relief in the form of permanent lower tax rates and higher credits, but also the loss of any moving expense offset and a new remittance tax to consider. 

For outbound Americans, the status quo of worldwide taxation continues – mitigated by an even larger FEIE and FTC preservation – but accompanied by more reporting obligations and potential penalties. 

Notably, the “worst-case” provisions feared by expats (like the Section 899 FTC surtax) were averted, making this law, in some ways, less punitive than expected. 

In fact, some experts call it expat-friendly due to the higher exclusions and the groundwork laid for future residence-based reform.

Still, the administrative burden on expats will rise. More forms (FBAR, FATCA, 3520) at lower thresholds, stricter timelines, and vigorous enforcement mean taxpayers must be ever diligent. 

There are also subtle planning points – from exploiting the temporarily generous estate exclusion, to adjusting tax equalization policies for employers, to revisiting whether FEIE or FTC yields a better outcome under the new rates. 

Each expat’s scenario will be unique under OBBBA, so personalized analysis is key.

IRS/Treasury Guidance. As of mid-2025, the IRS has begun issuing guidance on implementing OBBBA’s provisions. 

For example, guidance was promised on the new tip and overtime deductions (with transition relief for 2025 reporting), and we anticipate further instructions on international provisions (e.g. how to apply the new excise tax or any changes in reporting thresholds).

In summary, expat taxation in the post-OBBBA era will require careful attention but also presents new opportunities. 

By understanding the law’s changes – higher deductions and credits, preserved exclusions, and new compliance rules – inbound and outbound taxpayers alike can minimize their tax liability while staying fully compliant with both U.S. and foreign laws. 

The 2025 tax year will be a test run for many of these changes, so proactive planning in late 2025 and early 2026 will be essential. 

With thoughtful planning, Americans abroad and foreign nationals in the U.S. can navigate the One Big Beautiful Bill’s provisions to their advantage, or at least avoid its pitfalls, and move forward with greater confidence in their tax positions.

If you’re an Australian living in the United States, taxes can seem daunting. But knowing whether you’re a resident or nonresident alien—and understanding what that means for your tax situation—is simpler than you think. 

Here’s a straightforward guide to clarify your tax obligations in the U.S.

Who Are You In The Eyes Of The IRS?

The U.S. Internal Revenue Service (IRS) categorizes people living in the U.S. into two main groups:

• U.S. Persons (citizens, green card holders, or individuals meeting the substantial presence test)
• Foreign Persons (nonresident aliens)

How Do I Know If I’m A Resident Alien?

If you’re not a U.S. citizen but live or work in the U.S., you’re either a resident alien or a nonresident alien for tax purposes. The distinction matters a lot:

• Resident Alien: You’re taxed similarly to a U.S. citizen, meaning you’re required to report and pay taxes on your global income.
• Nonresident Alien: You’re taxed only on income sourced from the U.S.

You become a resident alien if you pass one of two tests:

1. Green Card Test: If you have permanent residency (a “green card”), you’re automatically a resident alien.
2. Substantial Presence Test: If you spend at least 31 days of the current year in the U.S., and a total of 183 days during the past three years (calculated by a special formula), you’re a resident alien.

Certain visas, like student (F, J, M, Q) or teaching visas, have special rules—these days may not count towards residency, at least initially.

Resident Alien Taxes: Reporting Worldwide Income

If you’re a resident alien, you must:

• Declare your global income, including income earned outside the U.S.
• Use standard U.S. tax forms (usually Form 1040 or 1040-SR).

The good news is you may qualify for tax relief through:

• Foreign Earned Income Exclusion (Form 2555): Excludes up to a certain amount of foreign income.
• Foreign Tax Credit (Form 1116): Reduces double taxation by crediting taxes paid to foreign governments.

Key Tax Forms For Resident Aliens

Here are common tax forms you’ll likely encounter:

• Form 1040 or 1040-SR: U.S. Individual Income Tax Return
• Form 4868: Application for Automatic Extension (extends filing, but not payment deadlines)
• Form 2555: Foreign Earned Income Exclusion
• Form 1116: Foreign Tax Credit
• Schedule B, C, D, E: Reporting various income types (interest, business income, capital gains, etc.)
• FinCEN Form 114 (FBAR): Reporting foreign bank accounts
• Form 8938 (FATCA): Reporting specified foreign assets

Nonresident Alien Taxes: Paying Only On U.S. – Sourced Income

As a nonresident alien, your tax obligations differ:

• You only pay taxes on U.S.-sourced income.
• Income is classified as either:
  • Effectively Connected Income (ECI): Tied to active U.S. trade or business, taxed at graduated rates similar to U.S. residents.
  • Non-Effectively Connected Income: Usually taxed at a flat 30% (or lower treaty rate) and includes passive income like dividends and royalties.

Tax Forms For Nonresident Aliens

Nonresident aliens typically file:

• Form 1040-NR: U.S. Nonresident Alien Income Tax Return
• Form 8843: For exempt individuals (students or trainees)
• Form W-7: Application for an Individual Taxpayer Identification Number (ITIN)

When Are My Taxes Due?

• Resident Aliens: Generally due by April 15th each year. Extensions are available until October 15th if requested by April 15th (Form 4868).
• Nonresident Aliens:
  • Employees (subject to withholding): Due April 15th.
  • Others (not employees or without withholding): Due June 15th.
  • Extensions available (also via Form 4868).

Special Situations & Extensions

• Out of the Country? You automatically receive a two-month extension to June 15th if your primary residence or business is outside the U.S. Additional extensions (up to December 15th) are available upon request.

Important: Tax Treaties & Exceptions

Australia and the U.S. have a tax treaty to prevent double taxation. If applicable, you must:

• File Form 8833 to disclose treaty-based positions.
• Understand treaty specifics, which could lower withholding rates and reduce tax burdens.

Penalties And Compliance

Non-filing or late filing can incur penalties and interest charges. Green card holders who do not file tax returns risk losing their U.S. residency status.

It’s critical to stay compliant with all forms and filing deadlines to avoid unnecessary penalties.

Help When You Need It

Navigating the complexities of U.S. taxes as an Australian expat can be challenging – it is highly recommended you seek the services of a qualified CPA who understands expat taxes. 

If you’re planning to relocate permanently from Australia to the United States, understanding how your assets will be taxed is crucial. Whether you own shares, rental properties, or other investments, both countries have complex tax rules that may apply. Proper planning helps ensure you’re not taxed twice on the same gain.

What Happens To Your Asset Values When You Move To The U.S.?

Important: Contrary to what many assume, the United States does not automatically reset or “step-up” the tax value (basis) of your assets when you become a U.S. tax resident. Instead, your original purchase price typically remains the basis for calculating your future U.S. taxes. This means you may face U.S. taxes on gains that occurred even before moving to America.

Example (Shares):

Say you bought shares in a major Australian bank years ago for AUD $30,000. By the time you relocate to the U.S., they are worth AUD $150,000. Later, as a U.S. tax resident, you sell them for AUD $180,000. Without special planning, the U.S. taxes you on a gain of AUD $150,000 (AUD $180,000 minus your original AUD $30,000 purchase price)—even though most of that appreciation occurred while you lived in Australia.

Australia’s Exit Tax: What Is It?

When you cease Australian tax residency, Australia imposes a tax on your worldwide capital assets, treating most as if you’ve sold them at their current market value (Income Tax Assessment Act 1997, section 104-160). This “exit tax” effectively taxes your accumulated gain up to that point.

Example (Shares Continued):

At departure, your shares valued at AUD $150,000 (original cost AUD $30,000) would trigger Australian Capital Gains Tax (CGT) on the AUD $120,000 gain immediately—even though you haven’t actually sold them.

Risk Of Double Taxation

If no special steps are taken, you face paying tax twice:

• First – Australia taxes your AUD $120,000 gain at the time you leave.
• Later – The U.S. taxes the entire AUD $150,000 gain when you sell the shares, including the AUD $120,000 already taxed by Australia.

Clearly, this is not ideal. Fortunately, the U.S.-Australia Tax Treaty provides two valuable solutions.

Solution #1: The Treaty Basis Step-Up (Paying Australian Exit Tax)

Under Article 13(5) of the U.S.-Australia tax treaty, you can elect to treat your assets as sold and immediately repurchased at their market value at the time you cease Australian residency, effectively “stepping up” your basis for U.S. tax purposes.

Example (Shares):

Using the treaty election, your U.S. tax basis for the shares is reset to AUD $150,000—the market value at your departure from Australia. Later, when you sell these shares in the U.S. for AUD $180,000, you pay U.S. tax only on the AUD $30,000 gain accrued after moving. This prevents double taxation, as the pre-move AUD $120,000 gain was already taxed by Australia.

Solution #2: Deferring Australia’s Exit Tax (Exclusive U.S. Taxation)

Australia offers an alternative: you may defer the immediate payment of the exit tax (ITAA 1997, section 104-165). Instead of paying tax upfront, you defer taxation until the actual sale of your assets. Under normal circumstances, this deferred asset would remain taxable by Australia.

However, Article 13(6) of the U.S.-Australia treaty states that if you move to the U.S. and defer Australian exit tax, Australia relinquishes its right to tax that gain, granting exclusive taxing rights to the U.S.

Example (Shares With Deferral):

You defer the Australian exit tax on your shares. Several years later, as a U.S. resident, you sell these shares for AUD $180,000. Australia no longer has the right to tax this gain. Only the U.S. will tax you, applying tax to the full AUD $150,000 gain (original AUD $30,000 cost basis to AUD $180,000 sale price).

This approach gives you cash-flow flexibility at departure (no immediate tax payable), and you may benefit if U.S. tax rates are lower.

How These Rules Impact Different Types Of Assets – Practical Examples

Example 1: Rental Property

Suppose you bought a Sydney apartment as an investment property 10 years ago for AUD $500,000. It’s now worth AUD $1,200,000. You relocate to the U.S. permanently:

Example 2: Portfolio Of International Shares

Suppose you invested AUD $100,000 into global shares now worth AUD $400,000 when you leave Australia for the U.S.:

• Australian Treatment At Exit
  Australia taxes the AUD $300,000 gain immediately (shares aren’t Australian property, so they face immediate exit tax).
• U.S. Without Treaty Step-Up
  Later selling at AUD $450,000, U.S. taxes AUD $350,000 (AUD $450,000 sale price less original AUD $100,000 cost), again double-taxing most of the gain.
• With Treaty Step-Up
  By electing the treaty basis step-up, your U.S. tax basis is reset to AUD $400,000. Selling later at AUD $450,000, the U.S. only taxes AUD $50,000, preventing double taxation on pre-move gains.

Example 3: Shares In Your Australian Business

You founded a small Australian business, investing AUD $200,000 initially. By relocation time, it’s worth AUD $1,000,000.

• Australian Treatment
  Australia imposes exit tax on your AUD $800,000 gain at departure, unless you defer.
• U.S. Without Treaty Step-Up
  Selling later at AUD $1,200,000, the U.S. taxes AUD $1,000,000 (full gain from initial AUD $200,000), causing double taxation on AUD $800,000 already taxed by Australia.
• With Treaty Step-Up
  Treaty election resets your U.S. basis to AUD $1,000,000. Selling later for AUD $1,200,000, you only pay U.S. tax on AUD $200,000, protecting you from double taxation.

How To Make A Treaty Election?

To claim this valuable treaty-based step-up, you’ll typically file IRS Form 8833 (Treaty-Based Return Position Disclosure) with your first U.S. tax return as a resident, clearly electing the treaty basis step-up under Article 13(5).

Key Points To Remember

• The U.S. generally does not reset your tax basis on relocation.
• Australia’s exit tax rules may cause double taxation if ignored.
• The U.S.-Australia tax treaty offers a treaty-based step-up or exclusive taxing right to the U.S., protecting you from double tax.
• Proper planning is essential. Evaluate your choices carefully, ideally with professional advice, to choose the best strategy for your situation.

Understanding these tax implications early helps you confidently and efficiently transition your financial life from Australia to the U.S.

For Australian expatriates residing in the United States, inheriting property, shares, or cash from Australia involves several important tax considerations. 

While Australia does not have an inheritance tax – the U.S. has an estate tax that could potentially apply under certain circumstances. 

Additionally, the tax treatment of inherited assets differs between the two countries, particularly concerning capital gains tax (CGT) in Australia and income tax obligations in the U.S.

This article provides a detailed, accurate guide to understanding:

• How the U.S. and Australia treat inheritances
• The correct cost base rules for inherited assets in Australia
• What taxes you need to consider when selling or earning income from inherited assets
• Key reporting requirements for expats receiving an inheritance from Australia

Let’s dive in.

Understanding U.S. Estate Tax And The 1953 U.S.-Australia Estate Tax Treaty

Unlike Australia, the United States has an estate tax, which applies to the total value of a deceased person’s U.S.-situated estate. 

However, the “Convention Between the Government of the United States of America and the Government of the Commonwealth of Australia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Estates of Deceased Persons” (1953 U.S.-Australia Estate Tax Treaty) provides certain protections for Australian expats.

How U.S. Estate Tax Applies To Australian Expats

 If You Inherit Assets From Australia

• No U.S. estate tax applies when you inherit property, shares, or cash from an Australian estate.
• However, once you own the asset, any future income, dividends, or capital gains from selling the asset will be taxable in the U.S.

If You Own U.S. Assets When You Die

• U.S. estate tax applies to U.S.-situs assets (e.g., real estate, U.S. stocks, U.S. businesses).
• The 1953 U.S.-Australia Estate Tax Treaty allows Australians to claim the same U.S. estate tax exemption as U.S. citizens.
• In 2024, the U.S. estate tax exemption is $13.61 million—meaning no U.S. estate tax applies if your worldwide estate is below this amount.

If your worldwide estate exceeds this threshold, U.S. estate tax could apply at rates of up to 40%.

Key Takeaways

1. If you inherit assets from an Australian estate, the U.S. does not impose estate tax on you.
2. If you own U.S. assets when you die, your estate could be taxed—but only if your worldwide estate exceeds $13.61 million.
3. The 1953 treaty protects Australians from double taxation on estate matters.

Inheriting Property In Australia While Living In The U.S.

Australian Tax Implications: Capital Gains Tax (CGT) On Sale

While inheriting property itself is tax-free, Australia imposes capital gains tax (CGT) when you sell the inherited property. 

The rules for calculating the cost base (original value for tax purposes) depend on when the deceased acquired the property.

Correct Cost Base Rules For Inherited Property In Australia

When the Deceased Acquired the Property	Your Cost Base
Before 20 September 1985 (pre-CGT asset)	The market value of the property on the date of the deceased’s death.
Before 20 September 1985, but a major improvement was made on/after that date	The market value of the original asset + the cost base of the improvement at the date of death.
On or after 20 September 1985 (post-CGT asset)	The deceased’s cost base at the date of death, unless:  The property was the deceased’s main residence and not used to generate income before death, in which case the cost base is reset to market value at the date of death.

When The Deceased Acquired The Property	Your Cost Base
Special disability trust property	The cost base is the market value at the date of death.

Selling Inherited Property & Australian CGT

If you sell the property within two years, you may qualify for a CGT exemption (if the deceased’s main residence was not used for rental income).

If the property was an investment property, CGT applies based on the correct cost base.

U.S. Tax Implications

No U.S. tax applies when you inherit the property.

However if you sell the property, the IRS will tax the capital gain, but you can claim a foreign tax credit for Australian CGT to avoid double taxation.

If you rent out the property, you must report rental income in the U.S. and may owe tax.

Inheriting Shares In Australia While Living In The U.S.

Australian Tax Implications

• No tax is due at the time of inheritance.
• If the deceased acquired the shares before 20 September 1985, the cost base is  the market value at the date of death.
• If the deceased acquired the shares on or after 20 September 1985, your cost base is the deceased’s cost base at the date of death.

U.S. Tax Implications

• No U.S. tax applies to the inheritance itself.
• Any dividends from Australian shares are taxable in the U.S. as foreign income.
• When you sell the shares, you must report the capital gain to the IRS.
• If you pay Australian CGT, you can claim a foreign tax credit in the U.S.

Inheriting Cash In Australia While Living In The U.S.

Australian Tax Implications

No tax applies to inherited cash in Australia.

U.S. Tax Implications

• No U.S. tax applies to the inheritance itself.
• If you receive over USD $100,000 from a foreign inheritance, you must file IRS Form 3520.
• Failing to file Form 3520 can result in penalties of $10,000 or more.

U.S. Reporting Requirements For Australian Inheritances

Form	Who Needs to File?	What It Reports
FBAR (FinCEN Form 114)	If foreign financial accounts exceed $10,000	Foreign bank accounts, superannuation, shareholdings
Form 8938	If foreign assets exceed $50,000 (single) or $100,000 (joint)	Foreign financial assets, including shares
Form 3520	If you inherit $100,000+ in a single year	Reporting large foreign inheritances to the IRS

Final Takeaways: What You Need To Know About Inheritance As An Australian Expat In The U.S.

• No U.S. estate tax applies to inheritances from Australia due to the 1953 U.S.-Australia Estate Tax Treaty.
• Australia has no inheritance tax, but CGT applies when selling inherited property or shares.
• The correct cost base for inherited Australian assets depends on when the deceased acquired them.
• Rental income and dividends from Australian assets must be reported in the U.S.
• If you receive more than $100,000, you must file IRS Form 3520 to report it.
• Foreign tax credits can help prevent double taxation on asset sales.

The above is a general overview of inheritance considerations for Australians living in the US. There may be nuances in your personal circumstances that may need specific tax advice. It is important you obtain individual advice specific to your situation.

Moving to the United States as an Australian expat is an exciting step, but it also comes with a range of financial and tax implications that can be confusing. 

One of the most significant concerns we encounter for Australians relocating to the U.S. is how their Australian superannuation is treated. Unlike other investments, superannuation has unique tax and reporting requirements that can significantly impact your financial position.

This article explores how your Australian superannuation is treated in the U.S., the disclosures and forms you need to file, the consequences of contributing to super while living in the U.S., and what happens when you access your super while residing in America.

How Is Your Australian Superannuation Treated In The U.S.?

Superannuation is a cornerstone of retirement planning for Australians, but once you move to the U.S., its classification under American tax law becomes complicated. 

The main challenge arises from the fact that the U.S. does not recognize Australian superannuation as a tax-deferred retirement account like a U.S. 401(k) or IRA. Instead, the U.S. views superannuation in one of two ways:

1. Foreign Trust – The Internal Revenue Service (IRS) may consider your super fund as a foreign grantor trust, subjecting it to complex U.S. tax and reporting requirements. This classification may lead to additional tax liabilities, particularly when earnings inside the super fund are realized.
   
2. Foreign Pension – In some cases, the superannuation fund may be classified as a foreign pension, which can offer a more favorable tax treatment. However, there is no definitive IRS guidance on this, leading to inconsistent application of tax rules.

Taxation Of Superannuation In The U.S.

Regardless of its classification, the U.S. generally taxes superannuation in ways that differ from Australian tax laws. While contributions and earnings may grow tax-free in Australia, the U.S. may tax contributions, earnings, and distributions differently. Key considerations include:

• Employer Contributions: Employer contributions to your super fund may be considered taxable income in the U.S. in the year they are made.
  
• Investment Earnings: Earnings within your superannuation fund, such as dividends and capital gains, may be subject to annual U.S. taxation, even if they are not distributed.
  
• Withdrawals and Distributions: The tax treatment of superannuation withdrawals varies, but in many cases, distributions may be taxed in the U.S. as ordinary income, even if they are tax-free in Australia.

The range of outcomes noted above depends on the type of superannuation fund you have.

Self Managed Superannuation Funds

For expats in the USA that have a ‘Self-Managed Superannuation Fund’ urgent attention is needed toward restructuring your Superannuation Fund BEFORE you move to the USA.

Remaining the Trustee of an Australian Superannuation Fund after you move to the US – even inadvertently – causes a number of serious tax issues both in Australia (not the focus of this article) and the USA.

One of the major issues is that you are personally taxable on the income of the Australian Self-Managed Superannuation Fund as it arises. This can add materially to your USA tax bill and should be avoided.

What Disclosures And Forms Do You Need To File?

As an Australian expat living in the U.S., you must comply with stringent reporting requirements related to your superannuation. 

Failure to do so can result in significant penalties. Some of the key forms and disclosures include:

1. FBAR (Foreign Bank Account Report) – FinCEN Form 114
   • If the total value of your non-U.S. financial accounts (including superannuation) exceeds $10,000 at any time during the year, you must file an FBAR.
   • Superannuation accounts are generally considered foreign financial accounts and should be included in the FBAR filing.
2. Form 8938 (Statement Of Specified Foreign Financial Assets)
   • If the total value of your foreign financial assets (including superannuation) exceeds certain thresholds ($50,000 for single filers, $100,000 for married filers living in the U.S.), you must file Form 8938 with your tax return.
   • This form is in addition to the FBAR and provides the IRS with detailed information about your foreign financial accounts.
3. Form 3520 (Annual Return To Report Transactions With Foreign Trusts)
   • If your superannuation is classified as a foreign trust, you may need to file Form 3520 to report contributions and distributions.
4. Form 8621 (Passive Foreign Investment Company – PFIC) Reporting
   • If your superannuation fund holds certain types of investments (e.g., managed funds), you may have to file Form 8621 to report Passive Foreign Investment Company (PFIC) income.

Consequences Of Contributing To Super While Living In The U.S.

If you continue making superannuation contributions while residing in the U.S., you may face unintended tax consequences:

• U.S. Tax on Contributions: Since the U.S. does not recognize super contributions as tax-deferred, employer contributions may be taxable to you in the year they are made.
• Double Taxation Risks: While contributions may be tax-free in Australia, they may be taxable in the U.S., leading to double taxation.
• Compliance Burden: Additional contributions increase the complexity of reporting and could result in higher U.S. tax compliance costs.
• Potential Loss of Benefits: Depending on how your super fund is classified, additional contributions could subject you to PFIC rules, leading to unfavorable tax treatment.

What Happens When You Can Access Your Super And Are Living In The U.S.?

When you reach preservation age and become eligible to withdraw your superannuation, you must consider how the U.S. will treat these withdrawals:

• Australian Tax Treatment – In Australia, lump-sum withdrawals from super after the age of 60 are typically tax-free.
• U.S. Tax Treatment – The U.S. may treat these withdrawals as taxable income, potentially subjecting them to ordinary income tax rates.
• Foreign Tax Credits – You may be able to offset some U.S. tax liability by claiming foreign tax credits, but this depends on the tax treaty’s applicability and how your super is classified.
• State Taxes – If you live in a U.S. state that imposes income tax, super withdrawals may also be subject to state taxation.

Strategies For Managing Your Super As A U.S. Based Expat

To minimize your tax burden and compliance obligations, consider the following strategies:

1. Pause Contributions While In The U.S.
   • Avoid making new contributions to super to prevent triggering additional U.S. tax and reporting obligations.
2. Review Your Super Investments
   • Assess whether your super fund contains investments subject to PFIC rules, and consider adjusting your investment mix.
3. Work With A Tax Professional
   • Given the complexity of superannuation taxation in the U.S., consult a tax advisor experienced in cross-border taxation.
4. Plan For Withdrawals
   • If you intend to withdraw super in the future, explore tax-efficient withdrawal strategies to minimize your U.S. tax liability.

Key Takeaways For Australians Living In The USA With Superannuation

Navigating superannuation as an Australian expat in the U.S. is challenging due to differing tax treatments and complex reporting requirements. 

Understanding how your super is classified, ensuring compliance with U.S. tax laws, and proactively planning for contributions and withdrawals can help you avoid unnecessary tax burdens. 

Given the nuances of cross-border tax regulations, seeking advice from an international tax firm is essential to optimize your financial situation while living in the U.S.

By staying informed and proactive, you can ensure that your superannuation remains a valuable asset for your retirement, regardless of where you reside.

Managing taxes can be challenging, particularly when living overseas. 

Many Australian expats in the USA wonder, “What happens with taxes on Australian shares I still own back home?”

If you’re an Australian expat in the USA, there are a few things to know about the tax implications of holding Australian shares. 

You may already be aware of how the franking credit system in Australia works and how tax credits are tied to dividends. 

However, the US doesn’t have an equivalent system. 

Here’s how taxes on your shares work when you’re a US tax resident.

What It Means To Be A US Tax Resident

Let’s assume you’ve moved to the USA and are now a US tax resident. 

When you lived in Australia, you paid tax on all your worldwide income. 

Now, as a US tax resident, you’ll only need to pay Australian taxes on assets with a direct link to Australia.

However, the USA also taxes worldwide income, so income from both Australian and US sources must be reported. US tax rates vary by income type—ordinary income, capital gains, and qualified dividends, each with its own rate.

Owning Australian Shares

If you own shares in Australian companies, here’s how taxes apply to dividend income from those shares.

• Franked Dividends: In Australia, franking credits are added to dividends to reduce double taxation. For expats, these credits usually cover Australian taxes, so you won’t pay additional Australian taxes on franked dividends. However, no tax refund is provided for these credits, even though they offset your Australian tax obligation.
• Unfranked Dividends: Unfranked dividends don’t come with franking credits, so they’re taxed differently. Under the Australia/USA tax agreement, Australia caps the tax on unfranked dividends for US residents at 15%. Be sure to notify the share company that you’re a non-resident so they can apply the correct withholding tax; otherwise, you may need to report it later your tax return.
• Reporting in the USA: The USA considers dividends from Australian shares as taxable income. However, you may be able to claim the franking credit or tax withholding as a foreign tax credit, which reduces your US tax bill.

Inheriting Australian Shares

Australia doesn’t have an inheritance tax. So, when you inherit shares, they’re either valued based on their market price on the date of death or the original cost base paid for the asset. It depends on when the asset was acquired by the deceased. This amount becomes your “cost base,” which you’ll use later to calculate any capital gains tax if you sell the shares.

In the US, while beneficiaries aren’t directly taxed on inherited assets, an estate tax could apply to the estate if it’s large enough. The fair market value on the date of inheritance serves as your cost base for capital gains. 

Buying & Selling Australian Shares

Purchasing shares in Australia as a non-resident doesn’t trigger any immediate tax consequences. In usual cases non-residents don’t pay tax on the sale of Australian listed shares.

There is a narrow category of share sales that would be taxable in Australia, however. Generally, these relate to shares in companies that have Australian real estate.

The US imposes a capital gains tax, with different rates for long-term and short-term holdings. You may claim the Australian tax paid as a credit against any US tax due on the same capital gain to avoid double taxation.

Understanding Double Taxation

Australia and the USA have a tax agreement to prevent double taxation. 

This means that while you’ll need to report your income in both countries, you can usually apply tax credits for Australian taxes paid against your US taxes on the same income.

Using The Check The Box Election To Simplify Tax Treatment

For Australian expats with ownership stakes in Australian companies or entities, the Check the Box Election can offer significant tax flexibility and may simplify your US tax obligations.

The Check the Box election is a choice US taxpayers can make to treat an Australian business entity (such as a private company) as either a corporation or a pass-through entity for US tax purposes. 

If you choose to treat the company as a “disregarded entity” (for a single-member entity) or a partnership (for a multi-member entity), the income flows directly to you as the individual taxpayer. 

This may allow you to avoid some of the more complex reporting and potentially double-taxation issues that can arise with foreign corporate ownership.

However, if you opt to treat the Australian company as a corporation, it will be taxed separately, which can sometimes be advantageous but will introduce reporting requirements (such as filing Form 5471). 

Please consult with us further so we can better advise you of your position.

Holding Shares Through a Passive Foreign Investment Company (PFIC)

If your shares are held through a Passive Foreign Investment Company (PFIC), special US tax rules apply, which could increase your tax bill. 

The IRS defines a PFIC as a foreign corporation earning mostly passive income or holding mostly passive income assets.

US shareholders of a PFIC may face complex tax rules. 

To reduce tax, you might consider specific elections like the Qualified Electing Fund (QEF) or mark-to-market options, but these require filing IRS Form 8621.

Controlled Foreign Corporation (CFC) Rules

Under CFC rules, the US may tax you on undistributed income if you own a significant stake in a foreign corporation. If, along with other US taxpayers, you own more than 50% of an Australian company, the company may qualify as a CFC, requiring you to report certain types of income in the US.

Seek Professional Advice

International tax can be complex, and tax rules change often. It’s wise to speak with a CST tax advisor as we provide advice in both US and Australian tax advice.

Whether you have already moved to the United States or are planning to, there are tax implications for Australian expats to consider. 

For example, how does the Australia-US tax treaty apply to capital gains on the realization of assets, and what will your Australian and US tax obligations be? 

These are just a few questions this article will answer for you.

What Is Capital Gains Tax?

To begin, it is crucial to have a comprehensive understanding of capital gains tax concerning Australian expats. 

Capital Gains Tax or CGT is a tax on the profit made from selling an item classified as an asset. In Australia, as in the United States, CGT is complex and different from other taxes. Let us review both Australian and US CGT and then bring them together.

Australian CGT Tax

In Australia, CGT applies to any asset acquired after 20 September 1985. 

Selling an asset for more than it costs means you have a capital gain and must pay CGT. If an asset is sold for less than it cost, this results in a capital loss that can offset against current or future capital gains.

Generally, if an Australian tax resident makes a capital gain and the asset sold was held for at least 12 months, the 50% capital gain tax discount will apply. This results in half the capital gain being included in assessable income and being assessed at marginal rates of tax – which may vary between financial years. See the ATO website for the current individual tax rates. 

There are potential exemptions from the capital gains tax regime, including the main residence exemption.

A person’s main residence, which was moved into as soon as practicable after purchase and continues to be a person’s main residence for the entire ownership period, and on sale, if still a tax resident of Australia, will be exempt from CGT.

In relation to the main residence exemption, new laws passed in 2019, which came into effect 1 July 2020 now mean a total loss of this exemption if the property is sold while the taxpayer is a non-resident of Australia. There are some exceptions known as life events but careful planning is required to ensure the preservation of this exemption.

US CGT Tax

Under US law, the tax rate applied to capital gains depends on the asset’s holding period.

For assets held more than a year, you pay long-term capital gains tax, usually lower than the tax on ordinary income.

For assets held for less than a year, short-term capital gains tax rates apply, equal to your normal income tax rate.

Your income also determines the percentage of CGT you pay in the United States.

Your US CGT rate will depend on your taxable income. It is best to check the IRS website for the most current income thresholds for which CGT rate applies. 

There are also special circumstances under which your capital gains might be taxed at a higher rate. For example, net capital gains from selling collectibles (such as coins or art) are taxed at a maximum 28% rate.

Australia-US Tax Treaty And Its Impact On Capital Gains Tax

For Australian expats in the US, the Australia-US Tax Treaty is particularly important to understand. First signed into law in 1982, the treaty has been updated several times since then to address changes in areas such as superannuation and non-US investments.  

The Australia-US Tax Treaty determines where your tax obligations lie between the two countries. The overarching goal of the treaty is “avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income.” 

As we explain in this article, the Australia-US Tax Treaty, allows the tax paid in one jurisdiction to be claimed as a tax credit in the other jurisdiction, in the event that the income is assessable in both.  

For example, if the US sourced income is first taxed in the US and the income is then assessed in Australia, the tax first paid in the US will be taken up as a foreign tax credit against the tax assessed on the income. If the foreign tax credit covers the Australian tax, then any excess foreign tax credits are lost. If there is a shortfall after the foreign tax credit is applied to the assessed Australian tax, then extra tax will be required to be paid.

Tax Obligations When Selling A Former Main Residence In Australia

Let us look at an example to demonstrate how the Australia-US Tax Treaty affects Australian expats when selling their former main residence. 

An Australian couple moves to the US and lives there for eight years. They have decided to sell their former main home in Australia (purchased in 2015 for AUD1,000,000 and now worth AUD3,000,000).

Australian Tax Considerations

This couple would be classified as foreign residents and would not qualify for the CGT main residence exemption. As such, they will pay Australian CGT tax on the AUD2,000,000 (AUD3,000,000-AUD1,000,000) capital gain. 

However, if this Australian couple moves back to Australia and are considered residents for tax purposes and they reestablish the home as their main residence, depending on the length of their absence from Australia and whether they rented the property out or left it vacant, will determine whether a full or partial main residence exemption exists.

This example makes it clear that planning the timing of the sale of your former primary residence can and will have material tax implications. With that in mind, it is critical to get professional tax advice to optimize any potential or upcoming CGT liabilities.

It is important to note Australia also offers certain life event exemptions if they occurred during the time this family lived abroad, which could make them eligible for the CGT main residence exemption. 

The life events this includes are:

• You, your spouse, or your child under 18 had a terminal medical condition
• Your spouse or your child under 18 died
• The CGT event happened because of a formal agreement following the breakdown of your marriage or relationship

USA Tax Considerations

Any income earned, including employment income and realized capital gains, is subject to US tax. Australians who have become US tax residents, including green card holders and those in the US for over 183 days in the last two years, are taxed on worldwide income. This would include the AUD2,000,000 capital gain.

However, the U.S. allows a foreign tax credit for U.S. residents on US taxes owed against any tax already paid to Australia or vice versa. 

The Australia-US Tax Treaty requires that the combined taxes paid in both countries cannot exceed the total tax that would otherwise have been payable in the country where the sale occurs.

Australia And USA Combined Tax Considerations

If the Australian couple decided to sell their former main residence in Australia while being a non-resident for tax purposes, they will need to declare this income on both the Australian and US income tax return. 

As the property is situated in Australia, the first taxing rights reside with Australia. Tax will be applied at non-resident marginal rates on their AUD2,000,000 capital gain.  

For the US CGT, the tax on their AUD2,000,000 capital gain would be calculated depending on their combined income and the CGT rate applicable. 

Thankfully, this couple would not have to pay both the full amount of tax in Australia and the US, as the tax treaty allows taxpayers in each jurisdiction to avoid double taxation. In this case as Australia has the first taxing rights, the US would give the couple a tax credit for the tax paid in Australia and the excess tax paid will be carried forward.

CGT On Selling Shares Originally Purchased In Australia

Let us assume an Australian citizen moves to the US for a period of five years. During this time, they decided to sell the shares purchased while they resided in Australia.

The first aspect to consider is what their choice was when then became a non-resident of Australia. If an Australian tax resident moves to the US and becomes a non-resident and they hold a share portfolio, the choices on cessation of residency with respect to the share portfolio is either to take a deemed disposal or ignore the deemed disposal and treat the shares as Taxable Australian Property. 

A deemed disposal involves comparing the purchase price of the shares to the market value of the shares on the date that residency ceased. Importantly, there is no cash received with respect to this type of CGT happening and so if there is a large accumulated capital gain, then there will be a tax bill that requires payment from other funds. 

If the latter option is chosen (ie. they choose to treat the shares as Taxable Australian Property), any future sale of these shares are connected with Australia and a capital gain or capital loss requires calculation and reporting in the Australian income tax return, even as a non-resident.

Fortunately, the treaty provides a paragraph where future sales of this portfolio can be subject to tax solely in the US. If a choice is made to have future sales subject to tax solely in the US, then the deemed disposal on cessation of residency is ignored.

CGT On Inheritance In Australia

If an Australian citizen has lived in the US for 15 years and inherits an investment property and shares, what are the tax implications in both Australia and the US?

Inheriting Property

The original property was purchased for AUD500,000 and has a current market value of AUD2,500,000. If the property was sold on when inherited, there will be a capital gain of AUD2,000,000 (AUD2,500,000-AUD500,000). As Australia has the first taxing rights, tax will be applied at non-resident rates.

If they had no other Australian sourced income for the year in which the property was sold, tax on the capital gain of AUD2,000,000 would be AUD875,350.

The USA CGT tax on their AUD2,000,000 capital gain would be calculated depending on their combined income and the CGT rate applicable.

The Australian citizen would not have to pay both the AUD875,350 Australian CGT and US CGT as the treaty allows taxpayers in each jurisdiction to avoid double taxation. In this case, the US would give the person a tax credit totaling AUD875,350.

Inheriting Shares

If they inherit shares, they can choose to have any future sales solely taxed in the US under the Australia-US Treaty.

Get Help Navigating CGT For Australian Expats

There are many intricacies and challenges to navigating tax laws between countries. The information in this article may not cover some variables relevant to your circumstances and as such it is recommended you seek tax advice for your specific situation.