Estate and Income Tax Planning for US Citizens living in Australia

The Global Financial Crisis, the Sovereign debt crisis and the Government deficits currently gripping the world all need to be resolved.

One way in which governments worldwide are looking to resolve these issues is to dramatically improve tax and financial services compliance.

Governments the world over are intent on improving tax revenues, which will in turn reduce their deficits.

For US Citizens, this means:

  • The potential for higher income and estate taxes
  • Vastly improved monitoring techniques of citizens and financial institutions
  • Far more stringent reporting requirements by citizens of their worldwide assets
  • Far less leniency and far more punitive penalties for non compliance
  • Estate and Income Tax Planning can be complex at the best of times.
  • Estate and Income Tax Planning becomes more complex when choosing to live outside of the US and one of you or your partner/spouse chooses to retain US citizenship.

Drawing on relationships in the US, Back9 is able to help US citizens in Australia navigate a broad range of cross-border issues including, but not limited to, those mentioned above.

Estate Planning Issues
  • No matter where you live you will need to have an up to date estate plan. That includes reviewing your will from time to time and where necessary, providing for the care and maintenance of minor children.
  • Consider the complexities and implications of managing the estate of a US Citizen living abroad. 
Estate Tax Issues
  • US Citizens and permanent residents (US Domiciles) are subject to US estate taxes on their worldwide assets regardless of where they reside at the time of death.  
  • There is currently an estate tax exemption where US Citizens and Domiciles are entitled to shield from estate tax the first $US5.12 million for decedents' estates in 2012.  However, this is set to go down to $US1 million in 2013.  The estate tax rate is 35% for 2012, and is set to rise to 55% in 2013
  • The lifetime gift tax exemption for US citizens is also set at $US5.12 million in 2012, and is set to go down to $US1 million in 2013.  The gift tax rate is currently 35% in 2012 and is set to rise to 55% in 2013
  • Complexities arise where the non-citizen spouse is the survivor unless provision has been made using a Qualified Domestic Trust
  • All citizens of the US are subject to federal transfer taxes on their worldwide assets: Estate tax, gift tax, generation – skipping transfer tax
  • Gifts and bequests to non US Citizen spouses that are subject to US federal transfer taxation are not eligible for the US federal gift and estate tax marital deductions.
  • Direct contributions by individuals to foreign charities are generally eligible for the US federal gift and estate tax charitable deductions, but are not eligible for the US federal income tax charitable deduction.
Income Tax Issues

If you are a US Citizen:

  • You must file a US tax return every year unless your income is less than $9,350 (for 2009) or have self employment contractor net income of more than $US400 per year
  • Permanent residents and US Citizens are taxable on their worldwide income (includes investment income and capital gains) regardless of whether they have filed a tax return in their country of residence.
  • Trusts can very easily become foreign trusts for US Federal income tax purposes with substantial disadvantages for US grantors and beneficiaries.
  • Income derived within Australian Superannuation accounts is treated as trust income for US income tax purposes and needs to be reported.
Reporting – Financial Accounts
  • If at any time during the US tax year, your combined highest balances in your foreign bank and financial accounts, for example, cash management accounts with stockbrokers, when added together, ever equal or exceed $US10,000 you must file a Reports of Foreign Bank and Financial Accounts (“FBAR”) form with the IRS by 30th June for the prior calendar year. The form is separate to the income tax return, filed separately and to a separate address.
  • In recent times the IRS has hired a substantial number of new employees to audit, investigate and discover Americans living abroad who have failed to file all necessary tax forms.
  • From 2010 a new law came into effect requiring all US Citizens to report all of their world wide financial assets if in total the value of those assets are $50,000 or more. Congress has left it up to the IRS to define what is a “financial asset”. This reporing will be separate to the FBAR’s.
  • If you own investments in a foreign corporation or own foreign mutual fund shares you may be required to file the IRS forms for owning part of a Passive Foreign Investment Company (PFIC) or incur additional taxes and penalties for your failure to do so. A PFIC is any foreign corporation that has more than 75% of its gross income from passive income or 50 percent or more of its assets produce or will produce passive income.
  • The IRS recently sent Agents to Australia and China to locate bank accounts owned by Americans who are not reporting income and the ownership of assets on the required IRS forms.

From 26 July 2012: New IRS Procedures For US Citizens Living Abroad

  • On 26 July 2012, the US Treasury released an intergovernmental Agreement for implementing the Foreign Account Tax Compliance Act to improve Offshore Tax Compliance. These provisions target non-compliance by US taxpayers using foreign bank accounts.
  • The IRS has announced plans for new streamlined procedures that will allow U.S. citizens residing overseas, including dual citizens, to get current with their tax filing obligations without facing penalties or additional enforcement action. Scheduled to go into effect on September 1, 2012, the new procedures will provide help to low compliance risk taxpayers who wish to correct previous failure to file timely tax documents, including income tax returns and Reports of Foreign Bank and Financial Accounts (FBARs). Those eligible for filing under the new procedures generally will have simple tax returns and owe $1,500 or less in tax* for any of the covered years; taxpayers presenting higher compliance risk will still be subject to heightened review and possible audit. Under the new procedures, taxpayers will be required to file delinquent tax returns along with appropriate related information returns for the past three years, as well as delinquent FBARs for the past six years. In addition to aiding overseas U.S. citizens with tax filing obligations, the IRS also plans to provide assistance regarding foreign retirement plan issues. Whereas tax treaties often allow for income deferral under U.S. tax law only if a timely election is made, the new procedures will allow for deferral in low compliance risk situations even where a timely election was not made.
    * Often due to foreign tax credits and the foreign earned income exclusion, expats living abroad, when filing all past year unfiled tax returns, end up owing no or very little US taxes. 
  • The new amnesty for Americans who report on missed filings is the latest in a series of deals the IRS has offered to bring more foreign income of Americans onto its radar. In 2009, the agency started the first of three wider programs to help Americans who stepped forward to make a clean breast of offshore bank accounts they had kept secret. All told, the initiatives have so far netted more than $5 billion in back taxes, interest and penalties.
  • The program that started in January has no closing date yet. Savers who kept more than $75,000 in an account they failed to report for a number of years could owe as much as 27.5% of that money as a penalty. For smaller caches, the penalty, which is based on the highest account balance at any time, could be 12.5%. Some taxpayers see penalties as low as 5%.
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