How Does The HEART Act Exit Tax Affect US Resident Australian Expats


With the introduction of the Foreign Account Tax Compliance Act (FATCA) the spotlight has been on US citizens who live outside of the United States relinquishing their US Citizenship thanks to the IRS’s ability to tax them globally on their income and assets however one element that isn’t often discussed are the ramifications for US resident Australian expats who has been living in the United States for a long period of time.

The HEART Act, which was passed on the 17th of June 2008, created a new Section 877A and introduced a new expatriation tax law effective from the 2009 calendar year. This law was primarily designed to prevent US citizens renouncing their citizenship and avoiding paying tax to the IRS however under the act it also encompasses lawful permanent residents or green-card holders who are considered long term residents. The IRS defines a long-term resident as any individual who is a lawful permanent resident of the United States in at least 8 taxable years during the period of 15 taxable years ending with the taxable year during which the expatriation occurs.


How Does This Act Affect US Resident Australian Expats?

Due to the popularity of becoming a US resident Australian Expat, a lot of Australians often participate in the annual Green Card lottery with a view to moving to the US and living the dream on Uncle Sam’s green card however after a period of time they find out that the grass isn’t often greener on the other side and they plan for their return to Australia.

A lot of US resident Australian expats are aware that they have to relinquish their green card but what they don’t know is that they maybe exposed to a exit tax as they are considered a long term resident which suddenly allows the IRS to tax them on their worldwide assets even though you may not have sold anything.


What Is The Trigger for a US Resident Australian Expats To Be Classified As A Covered Expatriate?

To be caught up in the Exit tax there are three triggers which may classify you as a “covered expatriate” and any of them can cause you to be slugged with a hefty tax bill on your departure.

  1. Net Worth – is your net worth over USD$2 million? If you own assets, both in the United States and other countries (including Australia) greater than this amount, then this will trigger the exit tax. If you are a couple then your net worth is calculated separately and as long as you own your assets equally you could have a net worth of up to USD$4 million without triggering the exit tax. However if one spouse or partner holds most of the assets, and even if your combined assets are below USD$4 million, then that spouse or partner may still be considered a covered expatriate.
  2. Tax Liability – is the average of your net annual income tax liability over USD$162,000? If so then this is a trigger for the exit tax. Please note this is based on your tax liability, not your annual gross income.
  3. Compliance – if you cannot certify 5 years of US tax compliance than this may also trigger the exit tax as you will be considered a covered expatriate.


How Does the IRS Calculate the Exit Tax for US Resident Australian Expats?

The Exit Tax is calculated as if you sold all of your assets, not just those in the United States. If you are classified as a covered expatriate the first USD$699,000 (in the 2017 tax year) of the capital gain is excluded from any calculations or USD$1.4 million for those US resident Australian expats who have either a spouse or partner and they file a separately.

For any amount greater than USD$699,000 (or USD$1.4 million for couples) then you maybe taxed as high as 23.8% (includes the 3.8% Net Investment Income Tax (NIIT) and 20% Capital Gains Tax (CGT) as at the 2017 tax year.


What’s The Net Result for US Resident Australian Expats?

When you consider the strong equity and Australian property markets it may not take a lot of assets to exceed the USD$2 million limit if you own a property in Sydney or Melbourne as well as a Australian superannuation fund and a 401K located in the United States.

Before you look to make any changes, whether that be where you live or hold assets, its always a good idea to seek professional advice. Atlas Wealth Management is proud of the services that we provide to US resident Australian expats.


Disclaimer – The above commentary is general in nature and should not be construed as tax or financial advice. Please consult a licensed tax accountant and financial adviser to determine whether the above information is suitable for you.

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