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Never underestimate the unbridled joy involved in navigating the US tax system. It seems like a foregone conclusion if you were to judge solely on the sheer number of US tax-related threads started by expats in Facebook groups and communities across the country each week.
Australian expat tax is just one example. In truth, US tax for expats feels complicated, confusing and can leave you with more questions than when you started.
Those questions don’t seem to slow, no matter the time of year, so we went to three accounting firms/accountants to get their opinions on the tax situations for Australian expats in particular. Now all Aussies around the world will know better when it comes to their expat taxes.
We spoke with Australian expat and international tax preparer Glenn Hines from American Tax for Expats, David Tzimenakis from expatriate tax specialist accountancy firm US Global Tax, and international tax attorney John Castro from international tax firm Castro & Co.
1. Is tax software (such as Turbotax for expats) adequate in filing US expat tax?
The cynic in me (and you) already know how a group of accountants is going to answer this question about tax software for expats. And I was skeptical too when I first moved here, so I bought into taxation software to file my first year’s taxes, just like most people give into turbo tax for expats.
That was a mistake, probably a bigger mistake for me than most people who aren’t mathematically challenged. Apart from some deductions that the software didn’t know to ask me about, I also ended up missing a few other important bits and pieces.
The moral of my story is that I would definitely err on the side of caution by getting your US taxes done by a professional expat tax attorney. And I recommend that to anyone who asks about US tax software for expats.
“The most common mistakes I see would be in their first year, either doing [taxes] themselves or getting someone that is not well versed in all the international expat nuances to do them,” Glenn Hines of American Tax for Expat said.
“I always say that a Podiatrist is a physician with MD after their name, but you would not go to one for a brain injury. There are so many small things with expat stuff that you can make a mistake on.”
David Tzimenakis, an expat tax specialist of US Global Tax adds that even something as little as an offshore bank account can have a big impact on your US taxes.
“Whilst complying with US regulations can be made easy with software such as Turbo Tax, even having as little as just a bank account in Australia can result in a raft of additional forms being required, which Turbo Tax or similar software will not pick up on, ” Mr. Tzimenakis said.
2. How do I choose a suitable accountant to file my US taxes since I’m an expat?
We’ve already got a great post about finding an accountant to support your Australian and US tax obligations, but why not take the opportunity to ask the people who work in the field what we should be looking for?
“I would suggest checking the firm’s background, ensure that they fully understand the US tax system, the tax treaty, and Australian taxation also,” Mr. Tzimenakis said.
“Be wary of firms that do not have the appropriate expertise, attempting to gain work with they are not qualified to do… Just mainly ensure that you have a good discussion with any tax accountant before you engage them, ensure that they are appropriately qualified.”
While Mr. Hines suggests asking how many expat clients a firm or individual accountant has to gauge whether they have the appropriate expertise.
3. What is an FBAR and what is it used for?
You’ll hear acronyms like FBAR bandied about in Facebook groups and expat forums, but what do they actually mean? It stands for Foreign Bank Account Report and you can read more about the IRS definition at the previous link. However, it basically means you must declare any foreign financial account that exceeds certain thresholds.
International tax attorney John Castro, from Castro & Co, said that most Australian expats in the US will need to file an FBAR here.
“The FBAR is required if the cumulative balance of all of your non-US bank accounts, in the aggregate when converted to US, exceeds $10,000 USD, which is usually the case,” Mr. Castro said.
Mr. Hines points out that the US is “one of just a few countries that taxes their citizens and residents on their worldwide income”.
“This is not always a bad thing. Many Australians try to hide money as it is “none of their business” but it IS their business and in many cases, they are only hurting themselves.”
4. How should my Australian superannuation be handled in the US?
The age-old question that is asked at least once a fortnight online is about US tax on Australian superannuation. Mr. Tzimenakis says that Australian superannuation “almost always need to be reported, wither it be straight forward FBAR reporting, or more complex Trust and [Passive Foreign Investment Company] reporting, it must always be declared”.
Some firms treat the reporting of your superannuation to the US authorities a little differently, so it pays to check how they will handle it. Mr. Castro recommends steering clear of firms that “will mistakenly treat your Australian superannuation fund as a taxable foreign grantor trust”.
“Our firm is one of only three firms in the entire US that properly treat superannuation funds as non-taxable accounts pursuant to the Australia-US Income Tax Treaty.”
Basically, it is important to ensure that you’re not paying US tax on your superannuation fund’s growth each year, according to Mr. Castro. The firm has a video on this topic here.
5. What are the most common mistakes that you see in US taxes for expats?
The answer to this question is resoundingly clear no matter who you ask – US expats seem to underestimate the complex nature of our tax situation, such as for the expat tax Australian’s face. There is a big difference between expat taxes in Australia vs USA.
Mr. Tzimenakis said that many clients think that their financial situation is simple, but it can be difficult to “accurately judge what is simple from US perspective”.
“Items such as superannuation accounts held in Australia can sometimes require trust and investment fund reporting. This is just one example of the complexities people face,” he said.
Asking questions in Facebook groups or online forums and taking the answers as gospel, is another common mistake that Mr. Hines sees.
6. Should I send money back to Australia from the US now that the Australian Dollar is low?
It sounds like a fantastic idea – sending your US dollars back to Australia to pay bills or debts. But Mr Hines warns that this might not be all it’s cracked up to be.“…I hear many people crowing about sending money home to pay down mortgages. This, at the moment, can be a costly error due to the Foreign Exchange (Fx) currency gain/loss rules.,” he said.
“When a US person (citizen, PR or tax resident) has a debt in a non-functional currency (ie not USD) and then retires that debt, then an Fx calculation is needed.”
Put simply, if you incurred a $10,000 debt in Australia, when the Australian dollar was at parity with the US dollar, it would have cost you $10,000 USD to pay it back. But once the Australian dollar became worth 70c to the US dollar, your Australian debt will only cost you $7,000 USD to pay back, leaving you with an extra $3,000 of “currency gain”, which must be declared as income on your US tax return.
“The baseline for this [rule] is just $200 USD! And the bad news, if you make an Fx loss [there is] no benefit to you. This is going to come into play big time this year for those Aussies with rentals who want to sell prior to the July 1st rule change in Australia with regards to Capital Gains Tax exemption,” Mr. Hines said.
“So the solution… is to refinance your debt prior to coming to the US, so your basis is closer to the current rate of exchange.”
7. What about US tax on the capital gains of selling US stock?
If you’re worried about the Capital Gains Tax implications of building up a stock portfolio in the US, Mr Castro notes that non-residents are not subject to US tax on their capital gains from the sale of stock.
“Residency is determined when the stock is sold. Therefore, you can start building a US investment portfolio now and, if and when you terminate your US residency with proper timing, you can liquidate the entire portfolio and lawfully avoid US tax on the resulting capital gain,” he said.
8. I think I made a mistake on a past US tax return. Do I have any recourse to fix it?
There are opportunities to file amendments with the Internal Revenue Service, but there are time limits and other criteria that you must meet before filing them.
“You can fix many things with amendments, some things may require a higher level of recourse due to the exposure to possible large penalties that international [situations] bring [such as] FBAR,” Mr Hines said.
“There are two remaining amnesty programs. There were three but one was discontinued as of September 2018… The key to these two programs when new Australians arrive is to fix their mistakes ASAP, as one program (the cheaper one) has a requirement that you have been out of the US for 330 days in one of the three previous filing years that have passed.”
It’s always important to remember that each individual tax situation is different regarding the US taxes expats pay and this information is meant as a guide and not as individual advice. Please consult a tax accountant before making any decisions, especially if you are wanting to set up a business in America.
Please note that this post is not an endorsement for, or sponsored by, anyone. However, I have used Glenn Hines’ expertise to help with my own taxes. I hope that the tips and tricks I have shared help you out with your expat life, as they certainly did help me!