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.
