Australians moving to the USA: Key Differences in the Australian and US tax system

April 2, 2021

Like any overseas move, moving from Australia to the United States will mean that you will encounter a brand new taxation system. 

If you’re used to the Australian tax system, the US system may seem a lot more complicated. For a brief overview of the differences see this comparison table:

AustraliaUnited States
Tax Year1 July to 30 June1 January to 31 December
Tax AuthorityAustralian Taxation Office: ATOInternal Revenue Services: IRS
Income Tax (residents)As an Australian you are taxed at a tiered individual income tax rate that ranges from 0% to 45%.Federal Income Tax is charged at tiered individual rates between 10% and 37%. Unlike Australia there is no initial tax free threshold.

Most States also impose a personal income tax which varies between states. Typically the state tax rates are under 10%. 
Income Tax (non-residents)Australia typically only taxes non-residents on income that is sourced in Australia. The tax free threshold doesn’t apply, and the first $120,000 of Australian income is taxed at the rate of 32.5%. (Up to a maximum of 45% for every dollar over $180,000). There may be some limitations and exclusions depending on the relevant double tax agreement. The US typically only taxes non-residents on income that is sourced in the US. Passive income (for example dividends, rent, royalties) is taxed at a flat 30% (unless a specific tax treaty specifies a lower rate). Effectively connected income (income earned through a business or personal services) is taxed at the same graduated rates as for a US person. 
Social Security Tax RateNot applicableThe US charges additional social security taxes, which is payable by both the individual and their employer. There is a cap on the maximum wage that is subject to this tax each year. 
Medicare Australians are taxed for a medicare levy on all of their income, unless they are under low income rate thresholds. The medicare levy rate is currently 2% of taxable income. High income earners are also charged a medicare levy surcharge, unless they have appropriate private health care coverage. The rate of medicare levy surcharge is between 1 and 1.5% depending on the individual’s taxable income level.  In Australia many medical services and public hospital services are provided free for all Australians under the medicare system. This is what the medicare levy and medicare levy surcharge tax levies pays for.The US also charges a medicare tax on all individual income. The rate is currently 1.45%. Employers are required to withhold an extra 0.9% medicare tax when an individual’s wage exceeds $200,000 in a year.   Unlike Australia, the US does not provide universal health care for its citizens. In the US each individual is responsible for funding their own health care. This means that instead of the medicare taxes going towards a general public funding pool for universal healthcare, they go towards your Medicare Hospital Insurance for when you are a senior. Medicaid is available to help support low income earners. 
Health InsuranceIt is optional for an individual to pay for private health insurance, which covers private health care as well as services that aren’t covered by medicare. High income earners will be exempt from the additional medicare levy surcharge if they take out private health insurance with adequate hospital coverage.In the US an individual is responsible for health insurance (most employers do provide health insurance coverage) in order to get their health care services covered, or partially covered, by their insurance provider. Medicaid is available to assist low income earners to access free or reduced cost health care. 
Sales TaxGST is a federal tax charged at 10% on most goods and services. Basic essentials are exempt. Sales taxes apply on most goods and services, and these are levied by the various state governments. These taxes range from 0 to 13.5%. 
Tax Return Due DatesThe financial year ends on 30 June. Individual tax returns are due for lodgement by the 31 of October (however extensions typically apply until May in the following calendar year where an individual uses a tax agent to lodge their return and they have no outstanding obligations). The financial year aligns with the calendar year in the US, meaning the tax year ends 31 December. Tax lodgements are due by 15 April the following year. Self-employed and small business owners are required to make quarterly reports to pay estimated taxes that are reconciled with the annual filing. 
Income from your Australian Superannuation FundTaxation on superannuation income streams and lump sums is taxed differently depending on whether you have reached the preservation age, and the type of super income stream that is paid. Distributions from an Australian superfund are typically exempt from US tax provided the benefits are appropriately claimed and reported. 
RetirementOnce you reach preservation age (60), your retirement benefit from your superannuation fund is tax free.

Aged pensions form part of your taxable income, however if you have no other income then your pension won’t exceed the tax free threshold. 
Your income stream from any 401(k) plan, social security or pension are taxed depending on your income sources and overall level of income.

As you can see, there are a number of key differences in the way taxes are levied and collected in the US. Much of this is due to the additional authority of the states to impose both income and sales taxes for their own jurisdictions. This means that the exact amount of taxes you will be faced with will, ultimately, depend exactly where in the states you are moving to.

Dianne Lee

Dianne Lee

Dianne has over 15 years of business tax experience and has experienced the expat lifestyle having worked in New York and studied in South Korea. Her areas of specialty include tax residency, capital gains tax planning, employee share schemes and family trusts.

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