US Citizens – Has Your Financial Advisor Ever Asked If You Are A US Citizen?

Contributed by Norbert Cornell - Contact Norbert at norbert@accountants.com.au or 61 2 99568008 or 61 437381288

The reason for the question is that US citizens do not escape the tax jurisdiction of the USA when they no longer reside in the United States or even if they have never resided in the US.The law also applies to former US citizens if the principal purpose for renouncing their US citizenship was tax avoidance.

The Australia US Convention only excludes social security payments,government pensions,alimony and child support payments paid to US citizens who are residents of Australia from the US tax net.

A US citizen earning worldwide income greater than the filing threshold will be required to lodge a US Federal Income Tax Return with the IRS each year.In addition they may be required to lodge an additional return to the Treasury of the US State in which they either receive income sourced in that State or are still considered residents in that State.

Although most US citizens residing overseas who have minimal US sourced income will have nil or minimal tax to pay,it is still recommended that they file US returns.Why?The IRS can disallow the exemption which excludes non US employment income from US taxable income is concessional if they discover you owe US income taxes and have not filed the appropriate returns.Also, the filing of a US income tax return starts the clock with respect to the Statute of Limitations which can limit the periods the IRS will be able to audit prior years.

The more important issue especially for those who have resided outside the US for a long period is that they and their advisers assume the Australian tax treatment of any income and capital gains is the same as in the US.(examples of normal everyday transactions where the differences can result in a material US tax impact are sale of the Australian home,receipt of discretionary trust distributions,receipt of deceased estate benefits from relatives,the receipt of tax free pensions or lump sums from their Australian superannuation funds.

The IRS have also indicated that the earnings of self managed superannuation of US citizens may require reporting to the IRS even prior to distribution of members.

You should be seeking advice on what US taxation issues may arise from your current financial and estate arrangements as well as the US tax treatment of any future financial,tax or estate planning strategies.