More than one million Australians lived and worked abroad by 2013, with the majority relocating to New Zealand, the U.K. and the U.S. Today, thousands of Australian citizens move to the U.S. each year and are immediately subject to the U.S. tax system, yet many Aussie expats either do not understand how the U.S. tax code will affect their overall financial holdings, or do not have an effective tax strategy in place to gain the most advantageous tax position.
If you’re an Australian living or conducting business in the U.S., you’ll want to understand the different ways in which each country taxes individuals and businesses. For example, you should understand how the Internal Revenue Service (IRS) will view your holdings in Australia—especially Superannuation funds. If you plan to operate a business in the U.S., it will be important to know the various business structures, so that you can choose the one that will best position yourself for financial success.
The international tax team at EFPR Group works closely with Australian expats in advance of their relocation in the U.S., or after arrival. We work with Australians who come to America to launch a new business, those who come here to expand an Australian business and Australian individuals who simply need our help in achieving the best taxable outcome. Some situations are straightforward while others quite complex—we’re ready to assist.
The following information provides a brief overview of the U.S. tax system in contrast with the tax structure in Australia. We also take a closer look at what business owners should know about doing business in the U.S. For comprehensive details and case study examples, EFPR Group offers two no-cost guides:
- “An Overview of the U.S. Tax System for Australian Expats”
- “A Business Tax Guide for Australian Businesses Expanding into the U.S.”
Australian Expat IRS Tax Reporting Requirements
Do you know what your tax liability will be in the U.S.? What about the taxation of worldwide assets, including income from foreign accounts? The U.S. tax system can be complex, so it is essential to understand tax reporting deadlines and penalties for noncompliance. The type of assets, investments and income you maintain overseas will dictate the layers of complexity for the reporting requirements you will have in the U.S.
Generally speaking, if you are considered a tax resident in the U.S., you will be subject to tax on your worldwide income, including income generated from a tax-deferred account in another country. This can present challenges for Australians moving to the U.S. who still have assets that earn income in Australia, especially when those assets don’t quite match up with similar instruments in the U.S. The best place to start is with an understanding of the various levels of taxation in the U.S.
Four Levels of U.S. Taxation for Australian Expats
Australians working in the U.S. should be aware of four levels of taxation in the U.S. federal income tax.
- Federal Income Tax: There are seven tax brackets, ranging from 10% to 37%.
- State Income Tax: Most states impose a state income tax, except for Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. State tax is generally in the range of 0-12.3%.
- Local Income Tax: The tax depends on where you work and where you live. Local taxes are not higher than 2% in general, however, there are exceptions such as New York City.
- Medicare/FICA: The U.S. Social Security tax is paid on earned income at a 6.2% rate up to a maximum wage of $147,000 (for 2022) while the Medicare tax is 1.45% on wages (with no maximum).
The U.S. income tax year is based on the calendar year. Tax returns and payment must generally be filed by April 15 of the following year. While extensions may be filed, interest and penalty may be charged on any tax paid after April 15.
In the U.S., married couples have the option to file jointly or separately on their federal income tax returns. By filing a joint tax return, you can benefit from several tax breaks compared to filing separately. In some cases, it could make more sense to file separate returns.
U.S. Business Entities
Australians planning to operate a business in the U.S. should be aware that the U.S. has different business entities, and the business structure you have in Australia may be treated differently in the U.S. The U.S. business structure includes limited liability companies (LLCs), partnerships, C corporations, S corporations and single-member LLCs. Depending on the entity you choose, you may be taxed separately at the corporate level (C corp) or have your income “pass through” to your personal income.
U.S. Reporting Requirements for Australian Expats
The type of assets, investments and income you maintain overseas will dictate the layers of complexity for the reporting requirements you will have in the U.S. For example, when a person owns or has a signature authority of an account with an annual aggregate balance exceeding $10,000 in foreign and overseas accounts any day of the calendar year, they must file a “Report of Foreign Bank and Financial Accounts,” or FBAR, with a division of the U.S. Department of Treasury. Those who must file include legal permanent residents (green card holders), individuals claiming a treaty tiebreaker and U.S. part-year tax residents. Additionally, Superannuation funds must be reported on the FBAR form each year.
Our free e-book, “An Overview of the U.S. Tax System for Australian Expats,” provides more information about U.S. reporting requirements. You’ll also learn more about how the U.S. taxes the sale of assets, the capital gains tax and how Superannuation funds are treated by the U.S. government.
U.S. Tax Brackets and Rates, 2022
|Rate||For Unmarried Individuals||For Married Individuals Filing Joint Returns||For Heads of Households|
|10%||$0 to $10,275||$0 to $20,550||$0 to $14,650|
|12%||$10,275 to $41,775||$20,550 to $83,550||$14,650 to $55,900|
|22%||$41,775 to $89,075||$83,550 to $178,150||$55,900 to $89,050|
|24%||$89,075 to $170,050||$178,150 to $340,100||$89,050 to $170,050|
|32%||$170,050 to $215,950||$340,100 to $431,900||$170,050 to $215,950|
|35%||$215,950 to $539,900||$431,900 to $647,850||$215,950 to $539,900|
|37%||$539,900 or more||$647,850 or more||$539,900 or more|
Business Tax Strategy for Australians Doing Business in the U.S.
If you are an Australian business owner with plans for expanding your business operations to the U.S., or moving your family to the States to launch a new enterprise, it is essential that you fully understand how you and your businesses will be taxed in the U.S. Understanding your Australia business and financial structure will be critical to tax planning and advice from the U.S. side. For example, you will need to consider all your Australian business ties as well as Australian Trusts and any other business or investment ties to Australia.
Business tax planning in the U.S. begins with determining the best structure for a company. In general, the income taxation of business income in most countries around the world can be separated into two approaches. First, if the business itself is a separate legal entity, then the income taxes are computed at a certain tax rate that is often different from income tax rates assessed on individuals. This approach is usually referred to as “corporation tax,” a “company tax” or an “entity-level corporate tax.” The corporate tax rate may be higher or lower than the individual tax rate.
The second approach is usually called a “flow-through approach” wherein the net income is considered to “flow down” to the individual owners who pay the tax on the business income at their personal tax rates. Most countries around the world recognize partnerships (both general and limited partnerships) as flow-through entities.
In addition to considering U.S. income taxes, every business owner must take the Australian tax system into account every time a decision is made. As an Australian resident, you are taxed on your worldwide income from all sources. As a result, you are required to report all income you receive from foreign business activity on your Australian tax return.
Which U.S. Entity Structure Makes Sense for Your Australian Business?
In 2017, the U.S. government enacted the Tax Cuts and Jobs Act (TCJA), the most sweeping tax reform in over three decades. As a result of a significantly reduced corporate tax rate, many U.S. business owners with companies structured as pass-through entities, such as S corporations, questioned whether they should change their business structure to become C corporations. For many current pass-through entities, the post-reform 21% flat tax rate is very attractive. However, it’s not that simple. For many American companies, remaining an S corporation may still be the better long-term tax strategy.
The U.S. is one of the world’s most complex economies, but it offers a wealth of opportunities to those Australians wishing to expand business operations or launch new businesses. Once you understand the essentials of the U.S. tax system, you will be better prepared to choose a U.S. tax strategy that fits well with your Australian businesses.
For more information, download our free e-book, “A Business Tax Guide for Australian Businesses Expanding into the U.S.” The EFPR international tax experts explain how businesses are structured in the U.S., and how they are taxed to help you navigate the process and succeed.
The International Tax team at EFPR Group works closely with our clients to arrive at the best approaches for your particular set of circumstances. For more information, please contact us today!