When we advise US-Australian couples, we realized that the planning challenges they face are quite different from those experienced by couples of the same nationality.
The most pressing financial challenges for US-Australian couples revolve around tax planning, arguably the most complex facet of serving Australian and American clients.
Improper tax planning for US-Australian couples can cost them dearly. At Areté Wealth Strategists, we find opportunities to potentially save our clients a lot of money and provide as much value as possible as your financial planner.
1. Legal vs. Tax Residency
In the US, immigration authorities and tax authorities are not in alignment regarding the definition of residency. US immigration laws define residency differently than US tax laws, and these definitions are regulated by different government agencies.
When it comes to matters of legal residency, the US Department of State and the US Citizenship and Immigration Services (USCIS) are two of the most important players, while the IRS is responsible for residency relative to tax implications.
According to US immigration laws, there are four categories of legal residency:
Permanent or conditional residents
Non-immigrants (e.g. temporary residents)
The IRS has fewer qualms about the categories of residency. According to the IRS, US citizens and legal permanent residents are always considered US tax residents, even if those individuals are not living in the US. The IRS defines non-citizens as US resident aliens or nonresident aliens (more on this in section 2 below). Only nonresident aliens are excluded from US tax laws.
As your financial advisor, this distinction is important to know because US citizens who have married a non-US citizen are still subject to US taxes, even if the citizen is living in their spouse’s home country (or any other country, for that matter).
2. Tax Treatment of Non-US Citizens
As stated above, the IRS considers a non-citizen an ‘alien,’ which falls into one of two categories: resident aliens and nonresident aliens. For US-Australian couples with one spouse who is not a US citizen, these distinctions are essential to understand for tax consequences.
Resident Alien (RA)
US resident aliens may either be green card holders or permanent residents for a given calendar year and are taxed the same as US citizens. We must report your worldwide income on your US tax returns subject to their US income tax rate.
Under the Heroes Earning Assistance and Relief Tax (HEART) Act, green card holders and long-term residents may be subject to a hefty exit tax on their held assets if they relinquish their green card or permanent resident status and leave the US.
This means that non-citizen spouses who lived in the US but are now leaving for another country must make the difficult choice to continue paying US income taxes or pay an exit tax after leaving the country. Our understanding of the HEART Act and how it affects you can significantly impact the tax recommendations we make.
Nonresident Aliens (NRA)
Nonresident aliens are not US citizens and do not reside in the US. Nonresident aliens are only taxed on income they earn that is effectively connected with a US trade or business. To a limited extent, they may also be taxed on any investment income if that income is derived from US sources.
This means that if a US citizen and their non-US-citizen spouse live in another country, the non-US-citizen spouse does not have to pay income taxes to the US on income earned outside of the US (unless the couple files taxes jointly). The flip side of this is that the US citizen spouse needs to file their taxes as either Married Filing Separately, which has some undesirable tax implications, or the NRA spouse must opt for a 6013(g) election.
3. Situs of Assets
Situs is a Latin term that means “position” or “site,” which in the law is a term that refers to the location of property for legal and tax purposes. Tangible property, such as real estate, physical currency, and vehicles located in the US are easily identifiable as US situs property.
It is more complex to determine the location of intangible property such as brand names, patents, trademarks, and copyrights. By some standards, assets such as stocks, bonds, life insurance policies, and qualified retirement plans are also considered intangible property.
Some intangible assets that would not be considered US situs property are US-listed American Depository Receipts (ADRs), stock of foreign companies, publicly traded bonds, and offshore mutual funds.
It’s important for us to understand the concept of US situs property because nonresident aliens are generally only subject to transfer taxes (i.e. gift and estate taxes) on assets that are considered US situs property, which has important implications for estate planning.
Assets not considered US situs property may not be subject to transfer taxes if a US non-citizen spouse elects to become a resident, citizen, or joint filer of the US.
4. Source of Income
Source of income refers to which country income is deemed to originate from. The country from which income is derived has first taxing rights to that income, and whether any further income tax is owed to more than one country is dependent on several factors.
Of course, the source of income and subsequent tax implications for the US citizen spouse will have an impact on whether they should file their taxes as Married Filing Jointly or Married Filing Separately.
The relative tax rate of the US over the source or resident country plays a role in whether income tax is owed to the US. For example, if the foreign country has higher tax rates than the US, you may be able to claim a tax credit that would reduce your taxable income for the US.
The US does allow for a Foreign Earned Income Exclusion (FEIE), which means that expats can exclude income up to a certain amount from being taxed by the US. The amount is upwards of $100,000 but is adjusted each year for inflation ($108,700 USD in 2021). If the US citizen spouse makes above this amount, they will need to consider their filing status even more carefully.
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At Areté Wealth Strategists, we are experienced and qualified in the domestic and cross border matters of Australia and the United States. We bring strategy, structure, clarity, confidence and compliance to our clients’ global financial lives and keep it that way.
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Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual.