If you are a US citizen or green card holder living in Australia, or an Australian working in the United States, US-Australia tax for expats comes down to one core problem: both countries want to tax you, and the fixes are not automatic. You file a US return on your worldwide income every year regardless of where you live, use either the Foreign Earned Income Exclusion or the Foreign Tax Credit to keep from paying tax twice on the same money, and file a separate set of disclosure forms for your Australian bank accounts and Superannuation. The disclosure forms are where the largest penalties live, and Superannuation is where the most money gets lost.
The United States taxes citizens on worldwide income no matter where they live. Australia taxes based on residency, and the Australian Taxation Office applies several independent tests, any one of which can make you a resident: a lifestyle-based “resides” test, a 183-day test, and a domicile test that presumes continuing Australian residency until you show your permanent home has moved abroad.1Australian Taxation Office. Your Tax Residency Most people reading this are tax residents of both countries at once, which is exactly the situation the treaty and the credit mechanisms are built for.
Foreign Earned Income Exclusion or Foreign Tax Credit
US citizens and residents in Australia have two main tools for avoiding double taxation on earned income, and the choice matters.
Under Section 911, qualifying taxpayers can exclude up to $132,900 of foreign earned income from US gross income for the 2026 tax year, with a separate housing exclusion of up to $39,870 depending on where you live.2Internal Revenue Service. Figuring the Foreign Earned Income Exclusion To qualify you must pass either the Bona Fide Residence Test, meaning you have been a genuine resident of a foreign country for an uninterrupted period covering at least one full tax year, or the Physical Presence Test, meaning you were outside the US for at least 330 full days in a 12-month period.3Internal Revenue Service. Foreign Earned Income Exclusion – Bona Fide Residence Test The exclusion covers wages and self-employment income only. Dividends, interest, rental income, and capital gains are not touched.
The Foreign Tax Credit works differently. It subtracts the income tax you paid to Australia directly from your US tax bill, and it applies to all categories of income including investment earnings. For most Americans in Australia, the FTC produces a better result because Australian rates generally exceed US rates on the same income. The credit often wipes out the entire US liability and leaves excess credits you can carry forward.
You cannot use both on the same dollar. If you exclude income under the FEIE, you cannot also claim a foreign tax credit on the Australian tax paid on that excluded income.4Internal Revenue Service. Choosing the Foreign Earned Income Exclusion Doing so can cause the IRS to revoke your FEIE election. You can, however, exclude your first $132,900 of earned income under the FEIE and then use the FTC on earned income above that amount and on all your investment income. Many cross-border advisors recommend the FTC alone for people in Australia because Australia’s higher rates tend to generate enough credit to zero out US tax without the extra paperwork.
The 1982 US-Australia tax treaty preserves both mechanisms for US citizens. Its savings clause lets the United States tax its own citizens as if the treaty did not exist, but the credit provisions in Article 22 survive that clause, so Australian tax you have already paid still offsets your US bill.5Internal Revenue Service. Convention Between the Government of the United States of America and the Government of Australia for the Avoidance of Double Taxation
Forms and Deadlines
US citizens abroad file the same Form 1040 as any domestic filer, reporting worldwide income.6Internal Revenue Service. About Form 1040, U.S. Individual Income Tax Return Attached to it, cross-border filers typically need:
- Form 2555 to claim the Foreign Earned Income Exclusion, documenting time outside the US and qualifying income.7Internal Revenue Service. About Form 2555, Foreign Earned Income
- Form 1116 to calculate the Foreign Tax Credit, with records of Australian tax paid.8Internal Revenue Service. Instructions for Form 1116
- Forms 3520 and 3520-A if you have an interest in Australian Superannuation.
The regular US filing deadline is April 15, but citizens and residents living abroad get an automatic two-month extension to June 15 without needing to request it.9Internal Revenue Service. U.S. Citizens and Resident Aliens Abroad – Automatic 2-Month Extension of Time to File A further extension to October 15 is available on request. Interest still accrues on unpaid tax from April 15 either way. Late-filing penalties run at 5% of unpaid tax per month, capped at 25%.10Office of the Law Revision Counsel. 26 U.S. Code 6651 – Failure to File Tax Return or to Pay Tax
Australia’s tax year runs July 1 through June 30, with individual returns due October 31.11Australian Taxation Office. Preparing Your Tax Return Because your Australian records are in Australian dollars, the IRS requires those amounts converted to US dollars using official Treasury or Federal Reserve rates.
Reporting Foreign Accounts: FBAR and FATCA
These are the obligations that carry the heaviest penalties for the least amount of work, and they catch people off guard because neither is part of your tax return.
If the combined value of all your foreign financial accounts exceeds $10,000 at any point during the year, you must file a Report of Foreign Bank and Financial Accounts, known as FBAR, on FinCEN Form 114.12FinCEN.gov. Report Foreign Bank and Financial Accounts It covers bank accounts, brokerage accounts, and any account where you have signature authority. Filing is electronic through FinCEN’s BSA E-Filing system. The deadline is April 15 with an automatic extension to October 15 that requires no action.13FinCEN.gov. Due Date for FBARs Civil penalties for non-willful violations are adjusted for inflation each year and currently exceed $16,000 per account, per year.14Internal Revenue Service. Report of Foreign Bank and Financial Accounts (FBAR) Willful violations carry dramatically higher penalties.
Form 8938, the FATCA disclosure, is separate and gets filed with your tax return. Thresholds depend on where you live and how you file:15Internal Revenue Service. Do I Need to File Form 8938, Statement of Specified Foreign Financial Assets?
- Living abroad, single: total value exceeds $200,000 on the last day of the year, or $300,000 at any time during the year.
- Living abroad, married filing jointly: total value exceeds $400,000 on the last day of the year, or $600,000 at any time during the year.
- Living in the US, single: total value exceeds $50,000 on the last day of the year, or $75,000 at any time during the year.
- Living in the US, married filing jointly: total value exceeds $100,000 on the last day of the year, or $150,000 at any time during the year.
Form 8938 covers a broader range of assets than FBAR, including foreign stock, partnership interests, and financial instruments, not just bank accounts. Many people file both for the same accounts. The penalty for failing to file Form 8938 is $10,000, with additional penalties of up to $50,000 for continued failure after IRS notification.
Superannuation Is the Biggest Trap
The IRS does not recognize Australian Super funds as qualified retirement plans under Section 401(a), even though Super does the same job as a 401(k).16Treasury.gov.au. Submission Relating to Australia’s Tax Treaty Network – Updating the Australia – U.S. Tax Treaty Three consequences follow, and each one has caused real financial damage to people who did not know about it.
First, the IRS generally treats Super as a foreign grantor trust. That means Form 3520, reporting transactions with a foreign trust, and Form 3520-A, the trust’s own information return, are due with your tax return. Penalties for missing them are the greater of $10,000 or 35% of the gross reportable amount for Form 3520, and the greater of $10,000 or 5% for Form 3520-A.17Internal Revenue Service. Failure to File the Form 3520/3520-A Penalties These apply even if you owe no additional US tax on the account.
Second, the timing mismatch. Employer contributions to your Super are treated as taxable compensation on your US return in the year they are made, even though Australia taxes them at a concessional 15% rate inside the fund. Investment earnings inside the fund, including interest, dividends, and capital gains, are potentially taxable in the US each year rather than deferred until withdrawal. Australia taxes you later on the way out; the US wants its share now.
Third, PFIC exposure. If your Super holds Australian managed funds or unit trusts, those underlying investments may qualify as Passive Foreign Investment Companies under US tax law. Each PFIC holding requires its own Form 8621, and the default treatment taxes gains at the highest ordinary income rate plus an interest charge.18Internal Revenue Service. About Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund A single Super fund with several underlying managed funds can produce multiple Form 8621 filings. This is the area where a cross-border specialist earns their fee.
Capital Gains and Property Sales
Both countries tax capital gains, and the rules interact in ways that affect what you keep.
If you sell a home in Australia that qualifies as your principal residence, you can exclude up to $250,000 of gain from US tax, or $500,000 if married filing jointly, under Section 121, provided you owned and lived in the home for at least two of the five years before sale.19Office of the Law Revision Counsel. 26 U.S.C. 121 – Exclusion of Gain from Sale of Principal Residence Australia has its own main-residence exemption that often eliminates Australian capital gains tax on a primary home. Together, these frequently leave little or nothing owing on either side.
Investment property is harder. Australia taxes capital gains at your marginal rate but offers a 50% discount for assets held longer than 12 months by Australian residents. The US taxes long-term gains at 0%, 15%, or 20% depending on your income. Australian capital gains tax paid generates a foreign tax credit against your US liability. The credit generally prevents true double taxation on the gain itself, though matching cost basis between the two systems takes care because each country calculates it differently.
The Net Investment Income Tax Gap
The 3.8% Net Investment Income Tax applies to investment income when your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly).20Internal Revenue Service. Topic No. 559, Net Investment Income Tax Investment income here means capital gains, dividends, interest, rental income, and royalties.
Foreign tax credits cannot offset the NIIT. The IRS has confirmed that credits under Sections 27(a) and 901(a) apply only against Chapter 1 tax, while the NIIT is imposed under Chapter 2A.21Internal Revenue Service. Questions and Answers on the Net Investment Income Tax Even if the FTC wipes out your entire regular US tax on Australian investment income, you can still owe 3.8% on that same income. For higher-income earners with significant Australian investments, this is genuine double taxation that the treaty does not fix.
Social Security Under the Totalization Agreement
A separate US-Australia totalization agreement keeps workers from paying into both social security systems for the same work. Employees temporarily sent from one country to work in the other generally stay in their home country’s system. An Australian employer sending a worker to the US on a temporary assignment can request a certificate of coverage from the ATO, exempting that employee from US Social Security contributions during the assignment.22Social Security Administration. Totalization Agreement with Australia The same applies in reverse for Americans posted to Australia.
Self-employed US citizens who reside in Australia get a notable benefit: the agreement exempts them from US Social Security self-employment tax entirely.22Social Security Administration. Totalization Agreement with Australia Request a letter of exemption from the Social Security Administration and attach a copy to your US return each year. Self-employed US residents stay covered by US Social Security regardless of where their clients are. The agreement also lets workers combine coverage periods in both countries to qualify for benefits they might otherwise miss, such as the Australian age pension or US Social Security retirement benefits.
Leaving Australia Triggers a Deemed Disposal
When you stop being an Australian tax resident, Australian law treats you as having sold most of your non-Australian assets at market value on the date your residency ends. That deemed disposal can produce an immediate capital gains bill on gains you have not actually cashed out.23Australian Taxation Office. How Changing Residency Affects CGT
You have two choices. Pay Australian capital gains tax on the deemed disposal at the time you leave, or elect to defer the taxable event so the assets remain within the Australian capital gains system until you actually sell them. Deferral means Australia retains the right to tax the full gain when you eventually dispose of the assets, not just the portion that accrued while you were resident. The 50% discount for assets held longer than 12 months is also reduced for the period you were a non-resident.
One exception: taxable Australian property, which includes Australian real estate and interests in entities whose value derives mainly from Australian real property, stays inside the Australian capital gains net regardless of your residency. Moving to Texas does not remove an investment property in Sydney from Australian tax.
Two Things That Are Not Covered by the Treaty
The US-Australia treaty binds the federal government, not the states. Roughly a dozen US states, including several large ones, do not conform to federal tax treaties when calculating state income tax. If you live or work in one of those states, you can owe state tax on income that the treaty exempts at the federal level. Worth checking before you choose where to establish US residency.
On the Australian side, US citizens working in Australia who qualify as foreign residents for Australian tax purposes during all or part of the year can claim an exemption from the Medicare levy. Full-year foreign residency gets a full exemption. Part-year foreign residency still qualifies for the period you were a foreign resident, provided you had no dependants during that period, or all your dependants also qualified.24Australian Taxation Office. Foreign Residents Exemption From Medicare Levy The exemption is claimed on your Australian return. At 2% of taxable income, it is meaningful money, and it is a cost that would not have produced a usable foreign tax credit on your US return anyway.