Money Saving Tips For US Expats In Australia

While all US citizens must file a US Federal Tax Return each year, the US has put a number of deductions and exclusions in place in order to help you offset your US tax liability and avoid the dreaded ‘dual-taxation’.

First Things First: Australian Taxation

Currently, non-residents living and working in Australia for more than six months are likely to be taxed on worldwide income, as well as income earned in Australia during their visit. However, a non-resident employee does not have to pay tax in Australia if his employer is resident in another country with which Australia has a double tax treaty (such as the US), and the employee is in the country for less than 183 days in the fiscal year.

The Foreign Earned Income Exclusion (FEIE)

This is the most important exclusion to note! For the 2014 tax year, expats can exclude the first $99,200 of foreign earned income from US taxation. ($100,800 for 2015!) To be eligible for the FEIE, you must pass one of two residency tests: The Physical Presence test (PPT) or the Bona Fide Residence test (BFR).

Under the PPT, you must be physically present inside a foreign country for 330 of any 365-day period. This means FULL days, so any time you spend traveling between the US and Australia cannot be included in the 330 days. Track your time carefully, as just one day too many in the US can cost you thousands!

The Foreign Tax Credit and the Foreign Housing Exclusion

High-income earners in Australia could reach the top marginal tax rate of 47%. Since you then exceed the amount excluded under the FEIE, you are still left with income which incurs a US tax liability. The Foreign Tax Credit provides a dollar-for-dollar credit on the taxes you pay to Australia to offset this ‘leftover income’. The Foreign Housing Exclusion allows you to deduct some of your living expenses up to a certain limit (which is higher for certain cities with a higher cost of living). The base limit for 2014 is $15,872, which is calculated at 16% of the FEIE for the year.

This example explains how these exclusions help a married individual in Liverpool offset US tax:

Australia income: $140,000
Taxes paid Australia income: $40,000
Living expenses: $24,872
Housing expenses for exclusion: $9,000 ($24,872-$15,872)

Exclude $99,200 with the FEIE and $9,000 of living expenses, for a total exclusion of $108,200, or 77.285% of income ($108,200/$140,000).

Now you must exclude 77.285% of the Australian tax you paid.

77.285% x 40,000 = $30,914.29

This is the amount of tax that can NOT apply towards US tax liability, which leaves $9,085.71 that CAN be used. ($40,000 – $30,914.29)

Adjusted gross income: $140,000 – $140,000 = $31,800.

Now for the deductions. Deduct $12,400 for the standard married deduction and $7,900 for personal exemptions for a final taxable income of $11,500.

It is a pretty safe bet that the US taxes on $11,500 will be less than the $9,085.71 available to offset US taxes. Not only does this mean this individual pays no US taxes this year, s/he can take the leftover portion of that credit and ‘carry it forward’ for up to 10 years and use it to offset future taxes!

These aren’t the only ways to reduce your US tax liability, but they are by far the most common. Filing US taxes may be confusing but by using the exclusions, deductions and credits the IRS has created for Americans abroad, you can likely avoid paying anything to Uncle Sam.

Greenback specializes in the expert preparation of US expat tax returns for Americans living in Australia and around the world. If you’d like Greenback to prepare your US expat tax return, simply click here to get started or visit www.greenbacktaxservices.com for more information.