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A million apologies for the length of this post...it probably is an indication of how much of a mess my head is in over this issue.
I am an Australian who is moving to the US mid year (E3 Visa). I am already being asked to fill in forms seemingly committing me to either being a resident or non-resident for tax purposes. Now I know the ultimate answer will be I should get an OZ and US tax agent, but if there are any accounting-minded folks in the forum I would really appreciate you insights so I can fill in these forms. Alternatively, I'm hoping these are basic enough Qs that someone will be able to answer simply from having been there and done that before.
1.Someone has said I should try to stay a non-resident AT ALL COSTS and that means limiting my stay to 182 days in a year. It was even suggested that I go live in Canada and commute to work in the US to stay under the 183 day rule! What exactly is so bad about becoming a resident for tax purposes, and are there actually any upsides? Conversely, what is the advantage of being a non-resident?
2. If I submit forms now saying I will be a non-resident for 2008 and it turns out I can't keep to the 183 days, can I change my status, how do I do it, is it hard to do and are there any penalties/fees for changing one's mind?
3.Is it possible that one may have to be a resident in both the US and Australia for tax purposes. I'm keeping my flat here, and will continue to pay gas/water etc for the house sitters so I guess I am a resident still of Aus, but if I also go over the 183 days I will be a resident of the US at the same time! Is that going to cause me problems with both countries wanting to tax me for the same wages?
4.In the first half of the year I will have Australian income from a short term contract job here before I leave. This job includes lodgings and use of a car.
In Oz the tax year is 1 July to 30 June the next year. I will file a tax return for the OZ financial year ending 6/2008 and presumably pay my usual Oz tax on those earnings. A lot of my problems seem to come from the 2 countries not having the same dates for their tax years.
In the second half of the year I will have wages from my new US job (completely new employer and a US entity). If I have to be a US resident for tax, does that mean I will have to declare the money I earned in the first 6 months in Australia before I came, and be taxed on it in the US as well?
Likewise with my US wages, will I be taxed back in Australia on those even though I might have paid US taxes on that same money.
I imagine this is what I've heard about as "double taxation". I know we have a tax treaty with the US, but I can't seem to get a clear answer from the ATO or IRS web sites mainly because I think I will be a resident of both countries simultaneously. It's pretty reassuring if you are clearly going to be a non-resident for tax, but if you are a resident, this "being taxed on your worldwide income" talk is pretty ugly looking. So how does the treaty work if you are a US RESIDENT for tax purposes?
I had hoped that the treaty would mean that I would only have to declare and be taxed on my Australian earnings in Australia, and my US earnings in the US, but would that just be way too good and logical to be true?
4. Also If I am a US resident and have to declare my OZ earnings from the 1st 6 months, I've heard they call lodgings and use of a car earnings. How are they converted to earnings, and more importantly is there anything I have to do or keep records on now and bring with me to sort this out when I file in the US at the end of the year?
5. The thing that looks more certain I would be double taxed on is my investment income back in australia from interest etc on whatever money I leave behind. Is this right? I don't have much, so the double tax won't be much, but still every bit hurts!
6. Has anyone any experience of trying to stay a non-resident by proving a "closer connection to a foreign country"? Is this hard, and can it even be done if you have a job with a US employer?
7. Lastly (I promise!), is there anyone from Seattle who can suggest a person/s or agency of tax agents who may have experience in Australian/ Expatriate tax, or they have used and been happy with?
I'm not an international tax expert, but I can reassure you on one thing. If you do wind up as a resident of both countries, the US allows foriegn tax credits so that there will be no double tax. There may be special treaty provisions that impact you; often the international tax treaties will cover specific occupations (such as teaching, entertainment, etc.). Treaties also usually cover withholding taxes on different types of income and a lot of other technical things that may or may not impact your situation.
You need someone who specializes in international tax to work through your situation with you... this is way too complicated for a message board. Is your employer a large multinational corp? If so, ask your employer for a recommendation. If not, go to one of the larger, preferably national or international CPA firms. A small CPA firm *probably* won't have the expertise (yes, there are exceptions... but a national firm WILL have the expertise).
I would recommend staying out of Canada. That simply brings another country into the mix, it will likely trigger Canadian taxes, and it dramatically increases the complexity of the situation that your accountant will have to analyze (a lot more $$ in accounting fees, likely no benefit). There would then be another country's tax laws involved, TWO more treaties to analyze (Canadian/Australian, Canadian/US), another country's withholding taxes, etc. Your situation isn't that complex for a specialist, but with a third country it would be.
I shouldn't even comment on your other questions, because what little knowledge I have in this area involves US citizens working abroad... keep my reticence in mind when others who may not be qualified offer advice. Your questions involve a very specialized area of tax law.
Another thing that might help you... the Internal Revenue Service, which is the tax collection and enforcement arm of the US government has a website: Internal Revenue Service
Go there and look under the link for PUBLICATIONS for Publication 519 (Tax Guide for Aliens), Publication 514 (Foreign Tax Credit for Individuals), Publication 513 (Tax Information for Visitors to the US), Publication 515 (Withholding Tax on Nonresident Aliens), and Publication 901 (US Tax Treaties). These are all free and can be downloaded. These publications may answer a lot of your basic questions, and will help you ask your tax advisor knowledgeable questions and be able to understand the advise you get.
Lola, thank you for taking so much time to reply. I really appreciate it.
I certainly don't see going to Canada as a good option, if but anything, there is so much I want to see and do in the US!
Thanks for the reassurance about the tax credits. I figured that that would be the case. Australian taxes are actually a lot higher then American tax rates, so I wonder if the amount I pay in Aussies taxes is greater then the US tax whether I would get a refund...now that really sounds too good to be true!
I have actually spent a lot of time sifting through those IRS documents you mention trying to find the answers. Unfortunately while they are good at giving general information for foreign nationals, it seems the specific problems of arriving mid year and coming from a country that has a tax year from July-June rather than the calendar year is too specific to find information on. I was hoping by posting here, someone, maybe another expat Aussie, maybe someone who has helped one before, might be able to help me understand the situation by virtue of their personal experience.
I will have to get a US expat tax expert come tax time 2008, however, my immediate concerns were how to fill in banking and payroll forms now that are asking me to commit to either resident/non-resident status, and whether I would have to seriously reconsider my current budget if I have to expect 2 tax bills, one from each country.
You really should speak to a qualified tax professional NOW, while you still have the opportunity to make decisions that can minimize your tax burden.
A specialist can easily determine whether it is best to be a resident or non-resident for US purposes, can easily determine the impact on your Australian tax situation, and can make the appropriate recommendations. If it is a matter of being over 183 days when that is not desirable, the appropriate advisor can suggest things like a long Christmas vacation home to bring you under the 183 days. That's one example... there are things that could be done proactively once you know what is the desired result. Retirement plans will need to be considered, since most US employers offer 401k plans. You'll need to decide whether to put money into such a plan, but unless you know what the tax implications are when you withdraw the money back in Oz, you won't know whether the US advantages really make it worth doing. There are social security issues... a lot of things to consider.
You really need to talk to a qualified advisor now, before you come over, so that you can make the appropriate choices. If you wait until it is time to file your 2008 tax return, whatever choices you've made, right or wrong, are set in stone.
About the difference in tax year (calendar for US, July-June for Oz)...
In the US you will be considered a "cash basis" taxpayer. That means that, for tax purposes, you look at what money you actually received and actually paid out. The tax year in Oz becomes irrelevant, because the US would look at what happened, cash basis, during the calendar year. Essentially, the off tax years don't matter at all... you simply need to look at what went into and out of your bank accounts (and payroll withholdings, but I'm trying to simplify).
For example, for foreign tax credit purposes, you would get a credit for tax payments made to Oz during the calendar year. I don't know what the rules are there for withholding or estimated payments, but let's say you determined that you needed to make an extra tax payment to Oz and you wrote the check on January 15, 2009. That payment would figure into your tax credit for the 2009 calendar year for US purposes because that's when the cash payment was made. If you had written that same check and put it in the mail on December 31, 2008, it would be taken into consideration for your 2008 US taxes.
Again, this means that there are opportunities for tax planning IF you see an advisor prior to the end of the tax year (depending on your situation, it may be more advantageous to have that tax payment to Oz in 2008 or vice versa). Once Jan 1 comes around, there's nothing an advisor can really help you with for the prior year, planning-wise. I highly recommend seeing a competent professional NOW, and also in late October or early November.
Thank you again Lola. You've been incredibly helpful.
I did think that it was going to be a case of however the tax year fell that would matter, its actually why I started to get worried about the possibility of double taxation because the first 6 months (when I am still working in Oz) falls in the "current tax year" of both Australia and the US. I will have to pay tax on that money in Australia by October, so hopefully we can pull even with the tax credits system in the US.
The really confusing issue for me now seems that I fall into the residency categories of both countries, at the same time. I've read the "tie breaker rule" in the Aus-US treaty, but I find it just vague enough to still be uncertain as to whom I will be considered to have a "closer connection" to and what exactly a "tax home" is. I'm trying to get Australian tax advice on this as well. Also, I've read something about the "start-up date" for US residency being the day you arrive in the US, so I'm still unsure if that means my first 6 months in Australia doesn't need to be declared because I wasn't a US resident in the first 6 months. In short, its the fine detail that I'm tripping up on.
I totally appreciate your view that one needs to strategise early to make the best of the situation. Its actually why I am pursuing it so early, before I've even booked my passage over infact!
Towards that end, could you share one last set of insights (and I take it from your excellent posts that you are very well poised to answer these Qs):
How should one go about finding a good CPA? Are there reliable professional bodies that list qualified persons, and areas of subspecialty (eg Expat tax)?
Is there any other qualifications, other than the CPA, that a good tax expert should have, or any professional associations that suggest competence and having kept up to date?
Are there any questions one should ask a CPA, and any answers they should be giving, to encourage confidence?
Does bigger always mean better? Should one necessarily look only at the big firms? In Australia there are accounting firms like KPMG and Price Waterhouse etc, but most people wouldn't got to them for personal tax unless they had complex scenarios, mainly because of the expense. There are lots of accountants who deal in all things financial throughout the year including tax, but there are also tax agencies that do only tax returns and essentially only come into play at tax time, like HR Block. People can walk in and just get their tax returns done. From your inside perspective, what sort of level of operation should I target as credible for my sort of issues?
I tried googling for an expat tax expert in Seattle, and struggled to find much except an internet service. In my mind, I've always felt these things needed to be dealt with face-face, but is that old fashioned of me?
There seem to be groups outside Seattle, but would it be unwise to engage someone from another State then the one you are living in?
I think I've mentioned before, that it was always my plan to get a tax expert when I got to the US, but I've been given forms from banks etc asking me to declare my residency/non-residency status now, and while I'm still confused about a lot of things, I have at least worked out that that is not something to take lightly, and presumably something difficult to change if I go over the 183 days! It seemed an over reaction to pay for an overseas tax opinion before I even got into the country all for the sake of filling in a form, but I'm beginning to wonder if I might have to do that.
A million thank you's again. It is wonderful to find people generous with their knowledge.
I used to work at KPMG and can give you some advice regarding your issues/ However, as Lola mentioned, it would be best to speak to a tax consultant with specific knowledge in the area. The big firms are pretty costly but if you are being sent on assignment, your company should be willing to pay for the cost. If not, you would probably like to look at a private accountant.
1. Even if you did live in Canada, you would likely be considered a tax resident. Under either circumstance, there is no real issue in being a tax resident in the US unless you plan on getting citizenship. Realise that US citizenship means they have the right to tax you on your worldwide income regardless of where you live.
2. You declare your tax position when you file your tax return (April 15 in the US) and when you will be in a position to determine if you meet the 183 days test or not.
3. Depending on your circumstances, you may be considered a resident in both countries for tax purposes. Do you own your flat or are you renting it? How long do you intend to stay in the US? Assuming you have a job in the States and can show that you are working and living there, you can break residency in Australia.
4. You will not be taxed in the US on the income you earned prior to being a tax resident of the States (I assume you are an Australian citizen or at least, a non-US citizen). Effectively, you should only be taxed in the US on US income (You will need to file a part-year tax return in the US and will need an accountant to file this properly). In addition, if you are a non-resident in Australia, you will not be assessed on employment income so long as it does not relate to Australian service. Further, there are other tax breaks for non-resident Australians (If you leave mid-way through the Australian tax year, you will need to file a part-year tax return in Australia as well. This should be fairly straightforward but an accountant would ensure this is done properly).
5. Again, investment income is treated differently as you will (most likely) be a non-resident in Australia. In this situation, you will be not be taxed on interest and dividends per say. However, you will have to pay a flat 10% on Australian interest and 15% on Australian dividends (this is known as withholding tax). However, you can claim a credit for this tax in your US tax return and this will ensure that you do not get double taxed. Further, Australia does not tax non-resident capital gains unless it is property/property related (it is a bit more technical than this but I assume your situation is fairly straight-forward)
6. It is nearly impossible for you to be treated as a non-resident of the US if you are working there. I suggest taking the position that you are a resident of the US and a non-resident of Australia for the period you are working there.
7. Sorry, can't help you there. You will probably be better off finding someone in Australia to help you as you will need to think about certain tax issues that you can take advantage of as a result of your situation.
I hope that helps. Also, if you are going away for a long period of time, you will need to get off the electoral roll in Australia and suspend your private health insurance. Further, you should advice your financial institutions to withhold the non-resident withholding tax to save you the hassle of paying this later.
Cheers,
Enigma
Edit: There may be state tax obligations depending on which state in the US you will be working in. From memory, Washington does have state taxes. You will need to file a part-year return for the state as well and declare your income similar to your federal return
Last edited by Enigma_Syd; 03-15-2008 at 07:36 PM..
Reason: Additional information
I find myself in a similiar situation to yours above now in July 2008 - did you end up finidng a tax expert in the US to help with your international tax return? If so, could you let me know. I am worried about being classified as a US resident for tax purposes now that I am back in the states on holiday - will exceed the substantial presence test if I stay more than 31 days it appears......
Further, Australia does not tax non-resident capital gains unless it is property/property related (it is a bit more technical than this but I assume your situation is fairly straight-forward)
Hi Enigma, are you talking about capital gains in Australia or in the USA?
I assume if for example you sell shares in Australia and make a Profit you will be taxed in Australia for this gain and not in the US.
I think you can wait until you return to Australia an become a resident for Tax purposes again do so.
If you know anything about this I would appreciate being enlightened.
Last edited by Karls; 09-18-2009 at 10:07 PM..
Reason: Title to be added
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