US Tax

6 common questions and their answers

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When your clients plan an expansion into the US, they will most likely ask you how to structure this. Should they just trade through their Australian entity? Or set up an entity in the US?

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How you structure into US public and private markets depends on whether you invest for cash flow or capital growth. How should you structure your passive investments in the US? Set up a US entity or trade through your Australian entity?

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There is a sharp distinction between the econcomic nexus for sales tax and the one for state income tax.

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We already mentioned PL 86-272 a number of times in past episodes. Frances Ellington mentioned it and then also Ed Antolin. Today let’s drill deeper because losing the protection that PL 86-272 grants you, can cost you a lot of money in state income taxes. 

While PL 86-272 is federal law and so applies to all 50 states, let’s discuss the technical advice memorandum California’s Franchise Tax Board issued. Because California is trying to limit the application of PL 86-272 and chances are that other states will follow suite.

And just one comment on the side: The state revenue office in California is called the Franchise Tax Board, in short FTB.

The speaker in this episode is Edwin Antolin of Vallejo Antolin Agarwal Kanter, or in short VAAK, in Walnut Creek, California about California’s technical advice memorandum to PL 86-272.

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Let’s talk about state tax sourcing rules. How do you determine which income is taxable in which state? If you sell into California but also into lots of other states, how do you determine what is taxable in California and what is taxable in other states? That is the question that Ed Antolin of Vallejo Antolin Agarwal Kanter, or in short VAAK in Walnut Creek, California will discuss with you.

To determine which net income is taxable where, you look at sales. You determine the sales for each state. And then you apply that percentage to your net income. That portion of net income is then taxable in that particular state. But in addition - if a particular state has the throwback rule - then any net income in tax-free states is then also added to your taxable income in that state.

What you do when you have sales in two states with a throwback rule. So let’s say you have sales in California and Colorado. Both states use the throwback rule. But then you also sell into Wyoming which has no state income tax. So the throwback rule applies. But which state gets that net income? California or Colorado?

If a state has a throwback rule like California, the sales gets thrown back to the state from which the goods were sent. For example, if you store inventory in CA and sell to a customer in WY, the sales are thrown back to CA. So the state that gets the throwback is the state from which the inventory was sent.

So in our example of California v Colorado. If the goods were sent from California, California gets to tax the Wyoming net income. And if the goods were sent from Colorado, then Coloardo gets to tax that income under the throw back rules since Wyoming has no income tax. So that makes it even more important to store your goods in a low tax state.

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In US update 24 Frances Ellington already gave you a first overview of Californian income tax. In this update let’s drill deeper with Ed Antolin of Vallejo Antolin Agarwal Kanter, or in short VAAK in Walnut Creek, California.

Just like with federal income tax, you have to distinguish between individual and corporate state income tax.  So the first question to Ed Antolin is: what triggers corporate income tax in California? Only physical presence or is there - just like with sales tax - an economic nexus?  

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Until June 2018 US sales tax was relatively straight forward. States could only charge you sales tax if you had a physical presence in the state, like a shop or a warehouse.

But then came the famous court case South Dakota v Wayfair,and there the Supreme Court decided on the 21st of June 2018 that the states were not limited to physical presence as a nexus, but could also charge sales tax based on an economic nexus. And so today pretty much all states charge sales tax - if they have sales tax - based on physical presence or an economic nexus. And so does California.

California - it has a population of 40m people and the 5th largest economy in the world after the US as a whole, China, Japan and Germany, and more productive than India or the UK.  So when your clients expand into the US, there is a high chance that a large part of their sales will be in California, and that puts Californian sales tax onto the table.

The speaker in this episode is Edwin Antolin of Vallejo Antolin Agarwal Kanter, or in short VAAK, in Walnut Creek, California. Ed will walk through the pitfalls of Californian sales tax.

In this episode we will also discuss the marketplace facilitator rules. 44 of the 50 states have implemented marketplace facilitator rules. And what this does it that it creates another nexus.

So California just like any other state can only charge you sales tax, if there is a nexus to California, a connection between you and California. And this nexus can be a physical presence because you store inventory in California, it can be an economic nexus because your sales in California exceed $500k, but the nexus can also be established when you sell through a marketplace facilitator, like Amazon, Etsy, eBay, Walmart and the lot. Then this facilitator becomes the retailer and is hence liable for sales tax. However, Shopify is not a marketplace facilitator. So the marketplace facilitator rules don’t apply to Shopify and Woocommerce and other platforms where the shopfront is basically yours and the platform just provides the backend.

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In this episode let’s look at California state taxes. Frances Ellington of GHJ Advisors in Los Angeles will give you a very helpful insight about Calfiornia sales and use tax, income and franchise tax.

And listen out for Public Law 86-272. That law might exempt your clients from Californian state income tax, if they don’t have a warehouse in California, not from their filing obligations but from the actual tax.

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For your Australian clients there is a high chance that US federal taxes are zero thanks to the double tax agreement with the US. But most US states don't consider these agreements, so while your client doesn’t pay any federal taxes in the US, they most likely still pay state taxes. So for your Australian clients US state taxes are often much more relevant.

Frances Ellington of GHJ Advisers in Los Angeles will walk you through state taxes across the US. Nexus will play a big role. And you will be surprised how fragmented the US is around state taxes. From the outside the US looks like a unified country holding one flag and pursuing one goal. But when it comes to state taxes, the US feels more like the European union, each state running their own show.

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No tax administration system works without tax identifiers. The ATO uses ACNs, TFNs and ABNs. The US uses SSNs, ITINs and EINs. 

Social security numbers (SSN) are used for tax purposes but also for social security. A social security number in the US is like an individual TFN plus a Centrelink’s CRN in Australia. SSNs are not relevant for us in Australia since most of us won’t be able to apply for an SSN. So we skip SSNs and instead focus on EINs and ITINs.

ITIN stands for Individual Taxpayer Identification Numbers. And you can apply for an ITIN if you need one. Anybody who needs one can get one. You just have to send your passport by courier to an IRS agent in Australia, pay a fee, do a Zoom interview and you have an ITIN.

EIN stands for Employer Identification Number. Without an SSN you can only apply by fax, phone or mail.

The speaker in this episode is Alex Oware of O & G Accounting in Lakewood, Colorado. Alex will cover EINs and ITINs, and also W-9, W-8BEN and W-8BEN-E. And at the end Alex will also touch on branch profit tax.

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As a multi member LLC, you have to file 1065, 5472, K1, K2, K3 as well as 8804 and 8805.

For a foreign member of a multi member LLC there is 1065 and K1 and then possibly also K2 and K3 listing the income allocated to the partners and then 8804 and 8805 listing any tax that has been withheld.

The speaker in this episode is Alex Oware of O & G Accounting in Lakewood Colorado.

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Let’s look at s882 and 864 one more time.

The term ‘limited force of attraction’ would make a good movie title, maybe a sequel to ‘The Accountant’. But putting Hollywood aside, The Limited Force of Attraction rule in s864 (c) (3) says that if you have a US Trade or business, then all your US sourced income is ECI. 

The speaker in this episode is Alex Oware of O & G Accounting in Lakewood Colorado.

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In the last episode, we looked at s882 of the Internal Revenue Code which covers foreign corporations with a US Trade or Business. Today let’s look at s864 (c ) of the Internal Revenue Code, which defines effectively connected income (ECI).

s864 is the definition section, and for us it is s864 (c ) that is particularly relevant since it defines effectively connected income. 

S864 (c ) has 8 paragraphs, but it is really only the first five that are relevant for us.

1 - Number 1 basically just says that the following rules apply to non-resident aliens as well as foreign corporations. So it doesn’t matter whether you are an individual or a company, the same rules apply to ECI. 

And it also says that if you don’t have a US Trade or Business, then you don’t have ECI.

2 - Number 2 discusses to what extent FDAP is treated as effectively connected income. So if you run a business and you also have interest, dividends, royalty income and so on, when do you treat it as FDAP and when as ECI.

3 - Number 3 says something very important. It says that apart from paragraph 2 - so the whole question whether FDAP income is treated as FDAP or ECI - apart from that, number 3 says that all US-sourced income is ECI. And this is big. This is the limited force of attraction rule. And it suggests anything that is not FDAP is ECI if you have a USTB.

4 - Number 4 also says something very important. It says that foreign-sourced income - foreign in the eyes of the US - number 4 says that no foreign-sourced income is ECI unless there is an office or other fixed place of business in the US that earned this income.

5 - Number 5 then discusses what this office or other fixed place of business in the US would look like and role dependent agents or independent agents play. So basically what gives you an office or other fixed place of business? 

And that is basically it for us. Number 6 covers deferred payments, no. 7 real estate and no. 8 covers the sale of partnership interests, so we basically just have to worry about paragraph 1 to 5 of s864 (c ).

The speaker in this episode is Bryan Kelly of Wilkie, Farr & Gallagher in Los Angeles.

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The answer is that US-sourced income that is not effectively connected and not FDAP - so-called 'Non-ECI non-FDAP income' - is not taxable in the US if derived by a foreign person. US Sourced Non-ECI Non-FDAP income is not taxable in the US. 

But the question in this episode is: Why? How can US-sourced non-ECI non-FDAP income not be taxable in the US when s882 (b) (1) clearly says that it is included in the gross income of a foreign corporation?

It all starts with section 11. Section 11 says, "A tax is hereby imposed …on the taxable income of every corporation. The amount of the tax …shall be 21 percent of taxable income....In the case of a foreign corporation, the tax imposed by subsection (a) shall apply only as provided by section 882."

So that takes us to s882 (a), which says, "A foreign corporation engaged in trade or business within the United States …shall be taxable as provided in section 11…on its taxable income which is effectively connected with the conduct of a trade or business within the United States....In determining taxable income …, gross income includes only gross income which is effectively connected with the conduct of a trade or business within the United States." So far so good. All this is clear and straightforward. Now to (b).

"(b) In the case of a foreign corporation, except where the context clearly indicates otherwise, gross income includes only—

gross income which is derived from sources within the United States and which is not effectively connected with the conduct of a trade or business within the United States, andgross income which is effectively connected with the conduct of a trade or business within the United States.

And so this is the confusing bit. And then there is also s864 but we will cover s864 in the next episode.

The speaker in this episode is Bryan Kelly of Wilkie, Farr & Gallagher in Los Angeles.

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Multi member LLCs - LLC’s with 2 or more partners - why this fear of multi member LLCs?

f you have a multi member LLC, you have all the filing obligations, 1065, K1, K2, K3 and so on, but in addition - if your multi member LLC has a US trade or Business and hence effectively connected income, then you also have 37% withholding on any profits to individual partners and 21% withholding on profits to corporate partners - unless of course a treaty applies. So this is a real disadvantage if you trade from a country that has no treaty with the US - like Argentina, Brazil, Chile, Peru, Uruguay, Paraguay - in fact half of South America doesn’t seem to have a double tax agreement with the US, but that is a story for another day - so if you trade from one of those countries without a treaty, then the multi member LLC is a problem because of withholding tax on ECI. But if you are in Australia, the US-Australia treaty will protect you and no withholding tax applies.

The speaker in this episode is James Baker.

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Non-ECI Non-FDAP – how is US sourced income that is neither ECI nor FDAP taxed in the US if derived by a non-resident? This is the point of contention. One school of thought says that all US-sourced income is taxable in the US unless there is a specific exemption. But this is the minority. The majority - and the speaker in this episode is one of them - argues that US-sourced income that is neither ECI nor FDAP is not taxable in the US if derived by a non-resident. 

Let's use the example of an Australian Pty Ltd selling merchandise into the US from Australia. To what extent are the profits taxable in the US, disregarding the US – Australian Double Tax Agreement (‘DTA’ or ‘treaty’).

FDAP

Selling merchandise into the US is clearly not FDAP.  FDAP stands for fixed or determinable annual or periodic income. So think of interest, dividends, royalties, salaries, wages, annuities and so on – any income you pay or receive following a certain formula. That is FDAP. Not the sale of inventory.

The taxation of FDAP is straight forward. If US-sourced and not connected to a US trade or business, the payer has to withhold 30% withholding tax unless a treaty applies.

If the Australian Pty Ltd has a US Trade or Business (‘USTB’) in the US and hence effectively connected income (‘ECI’) with this USTB, things are relatively clear as well. ECI is taxable in the US. Whoever this ECI is assigned to has to prepare a tax return and then pay tax in the US on this ECI unless a treaty applies.

Non-ECI Non-FDAP Income

Where it gets confusing is income that is neither ECI nor FDAP. How do you treat US-Sourced Non-ECI Non-FDAP? That is the point of contention

The minority argues that all US-sourced income is taxable in the US (disregarding any treaties). The only difference is how. So whether US-sourced income is ECI or not only matters for how it is taxed, not whether it is taxed.

But James Baker will argue in this episode that this is not correct. That a non-resident who derives income that is neither ECI nor FDAP has no taxable income in the US. And he bases his argument for ECI on s882 (a) (1) and for FDAP on s881 IRC.

s882 (a) (1) IRC

The majority of US tax advisers - at least the ones we spoke to - argues that s882 does not apply to non-ECI due to s882 (a) (1). They argue that a foreign corporation only needs to include income that is ECI.

s882 (a): “(1) In general

A foreign corporation engaged in trade or business within the United States during the taxable year shall be taxable as provided in section 11 or 59A, on its taxable income which is effectively connected with the conduct of a trade or business within the United States.”

s881 (a) IRC

And then there is s881 (a) that lists various forms of FDAP income (fixed or determinable annual or periodic) such as interest, dividends, royalties, wages, salaries, annuities and so on.

s881: “(a) Imposition of tax

Except as provided in subsection (c), there is hereby imposed for each taxable year a tax of 30 percent of the amount received from sources within the United States by a foreign corporation as—…”

Conclusion

And that’s it, they argue. Any income that is neither ECI nor FDAP is not taxable in the US if derived by a foreign corporation. You don’t even need the treaty to pull you out.

The speaker in this episode is James Baker of James Baker & Associates.

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Three factors determine how US primary tax law taxes LLC income – disregarding any treaty position:

1 – Source of Income: US or foreign-sourced?

2 – Business: US Trade or Business or not?

3 – Tax residency of partners: US persons or non-resident alien / foreign corporation?

Learn more about this in this episode with Gary Carter of GW Carter in Edina Minnesota.

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A single-member LLC is a popular way to sell from Australia into the US through a 3PL service. In this episode, Ross Treeby of Treeby Tax Limited will walk you through the US tax side of single member LLs.

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For US citizens living in Australia, the US taxation of Australian SMSFs is a huge question.

Unfortunately, there is no easy answer. The US taxation of Australian SMSFs is complicated.

In this episode, Marsha Dungog of Withersworldwide in San Francisco will walk you through the issues your Australian SMSFs face in your US tax return.

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For an expansion into the US is it best if your Australian trust holds LLC interests directly? Rather than going through a C-Corp?

Australian Trust Holds LLC Interests

When you expand into the US, you very quickly look at significant tax leakage and double taxation. And this despite potentially enjoying zero withholding tax (WHT). And despite potentially having NANE income under s768A ITAA97 or s23AJ / s23AH ITAA36. The reason for this tax leakage is two-fold. 

1 – The tax you pay in the US doesn’t go into your Australian companies’ franking account and,

2 – The withholding tax you pay might give you a foreign income tax offset (FITO), which gets lost as the income is distributed to shareholders.

And so for that reason setting up a trust who holds your US business within an LLC might be a way to avoid this double taxation since the trust beneficiaries can claim a FITO for the US federal income tax the trust paid in the US.

To find out more let’s listen to Bryan Kelly of Withers in Los Angeles.

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Should an Australian loan to US operations go to your US blocker? Or directly to your US trading entity?

Let’s say your Australian holding wants to give a loan to its US operations. How should you structure this loan? Should the Australian holding loan to your US blocker or directly to your US trading company?

That is the question Marsha Dungog of Withers in San Francisco will discuss with you in this episode. Here is what we learned. But Marsha Dungog explains all this much better than we ever could, so please listen in.

Australian Loan to US

Let’s assume your Australian holding holds 100% of a Delaware C-Corp which you use as your US blocker. And then this blocker holds 20% of an LLC with the other 80% held by a US holding, called HoldCo.

W-8-BENE

Whoever receives the loan from the Australian Holding, will need to receive Form W-8-BENE from the Australian Holding. W-8-BENE will tell the recipient of the loan what tax to withhold from any interest payments.

The form is not actually filed with the IRS, but just tells the loan recipient to withhold 10% from any interest payments it makes to Australia.

Loan to Blocker Corp

If the Australian holding loans to the blocker, Form 5472 will report this loan to the IRS. The blocker needs to file Form 5472 anyway since it has at least 25% foreign ownership. So the loan won’t change that. But the loan just means that there is more to report in the 5472.

Loan to LLC

If the Australian holding loans directly to the trading entity, the LLC reports the loan and interest payments to the IRS through Forms 1042-T, 1042-S and 1042.

So reporting-wise it doesn’t matter whether you go via the blocker or directly to the LLC. Either Form 5472 or 1042 will pick it up and report it to the IRS.

Loan or Capital

The issue with any cross-border loan is that the IRS might see these loans as a capital contribution. So it is really important that you charge and pay interest rates at market, not slightly below or above but right at market.

Interest above market will look like a repatriation of profits. Loans with an interest below market are at risk of being treated as a capital contribution by the IRS. So you are damned if you do and damned if you don’t.

Just like Australia, the US has Thin Cap rules.

Asset Protection

The advantage of giving the loan to the blocker is that – in case of a loan default – you have a US entity trying to get their money back and not a foreign creditor. 

Interest Payments

The majority shareholder – so in this case the US HoldCo – will dictate the accounting method for the LLC. So if the HoldCo uses cash accounting, that is what the LLC would use to account for the interest payments it makes.

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Using an LLC plus blocker is a popular setup among Australian businesses entering the US market. In this episode, Marsha Dungog of Withers in San Francisco will tell you how and why.

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You either just show dividends paid or you have to use a look-through approach for Australian companies in US returns. 

How are Australian companies picked up in US returns? So-called 1040s? Do you just record the dividend as income when paid? Or is it a look-through approach and you recognise income based on attribution? 

These are just some of the questions Seth Hertz of Expat US Tax will discuss with you in this episode.

Here is what we learned but please listen in as Seth Hertz explains all this much better than we ever could.

Australian Companies in US Returns

There are two ways to show Australian companies in US returns, so-called 1040’s. You either just show dividends when and as you receive them. Or you use a look-through approach and disclose their financial statements in Form 5471.

Of course, you would prefer to just show dividends paid. But unfortunately, you don’t have a choice.

Control

It all depends on whether you have control or not.

If you have control and hold – either directly or indirectly – more than 50% and hence control the company, then you prepare and attach Form 5471 to your 1040 and the income is attributed to you on an accrual basis. And watch out for GILTI – Global Intangible Low Taxed Income.

But if you don’t control the Australian company, then you just pick up dividends on a cash basis in your 1040.

Filing Obligations in the US

An Australian company usually doesn’t have a filing obligation in the US. Usually. But there is a long list of scenarios that would trigger a filing obligation for your Australian company in the US. Doing business in the US through a permanent establishment (PE) would be one example.

This is just a very short summary. Seth Hertz covers a lot more in this episode. Please listen in since we only touched the surface here.

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As a non-US tax resident, should you run your US business through an LLC or C-Corp?

If you use a C-Corp blocker, should your trading entity sit within an LLC or C-Corp? This is the questions Alfonso Nuñez of Andersen in San Francisco will discuss with you in this episode.

Here is what we learned but please listen in since Al Nunez explains this much better than we ever could.

LLC or C-Corp

You start with the end. If your ultimate goal is a capital gain upon exit and you don’t worry about profit distributions in the meantime, then you might as well place the trading entity within a C-Corp. When you sell your shares, any capital gain will be tax exempt in the US and possibly also in Australia, at least while you hold the profits within your Australian holding company.

But if profit distribution is your goal, then you face double taxation since the US doesn’t have an imputation system. So your C-Corp trading entity pays tax and then your C-Corp blocker pays tax again on the net amount it received. Far from ideal.

So start-ups in Silicon Valley are more likely to use a C-Corp + C-Corp structure. But if you are a more traditional business looking at long-term expansion and not a quick exit, then C-Corp + C-Corp probably won’t work for you and you need to look at just one C-Corp and/or an LLC.

Consolidation

If your C-Corp blocker holds at least 80% of the C-Corp trading entity, you can probably consolidate and avoid double taxation in the US. But if you hold less than 80% in the trading C-Corp, then consolidation is off the table and you face double taxation.

These are just some quick notes. Please listen in since Al Nunez goes into a lot more details and shares many more insights than we listed here.

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When you expand your business into the US, what types of US corporations are there to choose from?

When your clients expand their business into the US, you will need one or two US corporations to optimise their US tax affairs. But what type of corporation?

That is the question Al Nunez of Andersen in San Francisco will discuss with you in this episode. Here is what we learned but please listen in as Al explains all this much better than we ever could. 

US Corporations

For federal tax you have three types of US corporations – S-Corps, C-Corps and then LLCs.

S-Corps

S-corps are only suitable for US tax residents. Foreign residents can’t hold a share in an S-Corp. So if you are a resident of Australia and not the US, S-Corps are off the table.

LLCs

LLC stands for Limited Liability Corporation.

They are a state law concept, so it is really important that you choose a suitable state to create your LLC.

Under federal tax law LLCs are treated as a sole trader or partnership (depending on how many members you have) unless you make an election in time for the LLC to be treated as a corporation.

C-Corp

C-Corps are the closest thing to our Pty Ltd. You can use a C-Corp in combination with an LLC. You can set up your business directly in a C-Corp or just use the C-Corp as a blocker. make sure you create your C-Corp in a suitable state.

Where

Some states in the US are better than others when it comes to forming your LLC or C-Corp. You need to look for simplified corporate governance rules as well as low state taxes.

There are seven US states with simplified corporate governance rules – Nevada, Ohio, Washington, Texas, South Dakota, Wyoming and – the most popular of all – Delaware.

South Dakota and Wyoming impose neither a corporate income tax nor a gross receipts tax.

Nevada, Ohio, Washington, and Texas have no corporate income tax but charge a gross receipts tax. 

Delaware imposes an income tax on businesses that operate there. But if you are merely incorporated in Delaware without any operations there, then no corporate income tax. However, the state receives a significant amount of revenue from the annual stock-based franchise tax imposed on corporations formed there

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In March and December 2020 all eligible US residents received US stimulus cheques. How do you treat those in Australian tax returns?

For US purposes stimulus cheques are refundable tax credits and as such are not recognised in Australian tax returns. But don’t take our word for it. Seth Hertz of Expat US Tax will explain all this in much more detail. Here is what we learned.

US Stimulus Cheques

Two sets of cheques. Two sets of legislation. Two dates – March and December 2020. Two support packages. But for tax purposes both the same thing.

Both US stimulus cheques are refundable tax credits in the US. If you haven’t received a cheque, you can claim the stimulus in your 2020 US return (Form 1040). The cheques are just a prepayment of the tax credit you are entitled to via your tax return.

Four Different Thresholds

The stimulus payments have four different thresholds – one for each of the four filing status in the US.

Preliminary Data

The US administration used the 2019 and for the payment in March, the 2018 tax information, since in March 2020 many of the US tax returns hadn’t been lodged yet for 2019. But all this is only preliminary.

In the end it all depends on your income in 2020. So if you didn’t receive a cheque, since your 2018 or 2019 income was too high. You can still qualify, if your 2020 significantly dropped thanks (or no thanks) to the pandemic.

First and Second Package

The first package was $1200 for an adult. $500 for a child. The second one in December was $600 for anyone whether it is an adult or a child. 

Effect on Australian Tax Returns

If most of your income is in Australia, then these US stimulus cheques will have little effect on your tax position, since you pay your tax in Australia and just handa foreign tax credit to the US.

But if most of your income is in the US, then these cheques will effect your tax position in Australia, since the cheques will reduce the foreign income tax offset (FITO) you can claim. The cheques reduced the tax you pay in the US. And hence reduce your FITO in Australia.

Summary

So when you prepare an Australian tax return for a US citizen, you can ignore the cheques. They are neither income nor NANE.

Just look for the US tax ultimately paid in the US. That is the FITO you can claim in Australia.

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How do you ‘read’ an US individual tax return for Australian tax purposes?

Your US clients will probably give you their US individual Tax Return – also referred to as Form 1040 – which you then build into their Australian tax return. But how do you ‘translate’ this form into an Australian tax return? 

This is the question we asked Seth Hertz of Expat US Tax in Sydney. Here is what we learned but please listen in as Seth explains all this much better than we ever could.

Schedules

When you prepare a US individual tax return, you often deal with a large number of schedules which can be confusing. So just remember that Form 1040 is the final answer. Everything feeds into the 1040.

All schedules feed into Form 1040 in some shape or form. Sometimes schedules A, B and C will feed into schedules 1, 2 and 3. Sometimes A, B and C feed directly into the 1040. It is not always 100% one way or the other. But the 1040 is the final destination for everything. You will always find the final summary in Form 1040. 

Thanks to all these schedules the US individual tax return can be huge. Returns with well over 100 pages are common.

Exempt Interest

US bonds are often issued to finance federal or state infrastructure projects. The interest on these is often tax-free, hence a popular way to offset your tax liability. Interest deemed exempt in the US is usually assessable income in Australia

Qualified Dividends

Qualified dividends also come tax-free. Organisations who benefit the common good might qualify to distribute qualified dividends. Qualified dividends are assessable income in Australia

Capital Gains and Losses

In the US you can offset US$3,000 of capital losses against ordinary income, the rest against capital gains. The Australian tax return will not recognise the offset against ordinary income.

Foreign Tax Credit

American residents living in Australia usually amass a high amount of foreign tax credits over the years in their US tax returns, since the tax rates in Australia are so much higher. However, these foreign tax credits can only be offset against foreign income. So you can only use them if you move into a low or zero tax country after living in Australia. The foreign tax credits expire after 10 years.

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This is a short overview of what we learned in this interview with Seth Hertz of Expat US Tax. But please listen in as Seth explains all this much better and in a lot more detail.

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US v Australian tax for individuals – how do you ‘translate’ a US tax return into an Australian tax return?

US citizens living in Australia are tax residents and hence assessable on their world-wide income in both countries. But what does this look like in practical terms?

How are Australian franking credits and super guarantee payments treated in a US tax return? And how are exempt interest and qualified dividends in the US treated in an Australian tax return?

These are just some of the questions we ask Seth Hertz of Expat US Tax in this episode ‘US v Australian tax for individuals’.

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Whenever your client is a US citizen or Green Card holder, you will probably need to consider the rules around US tax for individuals.

To help you look after your US clients, we asked Seth Hertz – Tax Director of Expat US Tax – for a general overview of US tax for individuals. 

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Aliens do exist. There are around 7 billion aliens living all over the world. In fact you are probably one of them. And not just any alien, but a nonresident alien, maybe even a nonresident alien spouse. “But I am Australian and live in Australia,” you might object. “I have never been out of space, let alone overseas. How can I be an alien?”

This is how. You are not a US citizen. That makes you an alien per US tax legislation. You live in Australia and don’t have a Green Card. That makes you a nonresident alien. And maybe you got a spouse who is a US citizen or resident alien. That makes you a nonresident alien spouse. Will, you one day get a US tax assessment? Covering your worldwide income since the day you met? When do you fall into the claws of the US tax system? And when are you safe?

Jane Bruno of Bruno American Tax Services will give you the answer.

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Are you or your client a US American living in Australia? There are over 100,000 US Americans living down under. Not a huge number compared to other nationalities migrating to Australia, but still a big group and rapidly increasing.

As a US citizen or resident alien, the US will tax your worldwide income even while you live in Australia. So you got the Australian tax system to deal with plus the US. Both countries will want to tax your income. How does that work? How do you avoid paying tax twice? What is a Foreign Earned Income Exclusion? How to qualify for a foreign tax credit? And what is a nonresident alien? 

Jane Bruno Bruno American Tax Services will give you the details.

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