Taxes for Expats – The US – New Zealand Tax Treaty
The US – New Zealand tax treaty was signed in 1982, with a protocol added in 2008. The purpose of the treaty is to prevent double taxation for Americans living in New Zealand and New Zealanders living in the US, however it doesn’t prevent US citizens living in New Zealand from having to file US taxes.
US taxes for expats in New Zealand
The US taxes based on citizenship, meaning that all US citizens and green card holders, including US expats living in New Zealand, with worldwide income of over $12,200 a year (in 2019), or just $400 of self-employment income, or just $5 of income if they’re married filing separately with a foreigner, are required to file a US tax return each year.
New Zealand on the other hand requires Americans to file New Zealand taxes if they have a permanent abode in the country, or if they spend at least 183 days in New Zealand in a 12 month period.
This leaves many US expats living in New Zealand having to file two tax returns, and also puts them at risk of double taxation.
Expats receive an automatic filing extension for their US taxes until June 15th (July 15th in 2020, due to Coronavirus), and they can request a further extension until October 15th if they need to. New Zealand tax returns are due by June 30th.
US expats in New Zealand may also have to file a Foreign Bank Account Report (FBAR), if they have a total (all accounts) of over $10,000 in non-US based bank, investment, and other financial accounts at any time during the year (and including any accounts that they have signatory authority or control over, even if not registered in their name).
“After the 2016 presidential election, visits from U.S. citizens to the Immigration New Zealand website soared.” – Forbes
The United States – New Zealand Tax Treaty
The United States – New Zealand Tax Treaty covers double taxation with regards to income tax, corporation tax, and capital gains tax, however, a clause called a savings clause in Article 1 paragraph 3 states that “the United States may tax
its citizens and United States companies as if the Convention had not come into effect.” This means that US expats still have to file US taxes on their global income.
However, the treaty allows US expats to avoid double taxation on their income earned in New Zealand by letting them claim US tax credits when they file their US tax return to the same value as New Zealand income taxes that they’ve already paid, when they file their US tax return.
For income earned (and so taxed first) in the US, the treaty allows Americans in New Zealand to claim New Zealand credits to the value of the US tax paid on this income, although they may have to pay some extra New Zealand tax on top, the New Zealand tax rates being higher than the US.
To claim US tax credits against New Zealand taxes paid, expats must file Form 1116 when they file their federal tax return. By doing this, the vast majority of US expats in New Zealand won’t end up owing any US income tax, as New Zealand has higher income tax rates than the US.
Alternatively, expats can claim another exemption called the Foreign Earned Income Exclusion by filing Form 2555, which simply allows them to exclude the first around $105,000 of their earned income from US taxation. Which exemption is most beneficial depends on each expat’s circumstances (e.g. their types of income, residency status, income levels, where their income originates, etc).
It is possible in some circumstances to claim both the Foreign Earned Income Exclusion and the Foreign Tax Credit, although they can’t both be applied to the same income.
The US – New Zealand Tax Treaty also allows the New Zealand government to share US expats’ New Zealand tax information with the IRS, as well as their New Zealand bank and investment account details and balances.
Some Americans in New Zealand will benefit from the treaty though, for example artists, teachers, athletes, students, as well as expats receiving dividends, interest, royalties, and pension income. Expats with these types of income should consult a US expat tax specialist to check. Expats who can claim a provision in the treaty should do so by filing IRS Form 8833.
Expats in New Zealand who are behind with their US tax filing because they were unaware that they had to file from abroad can catch up without facing penalties under an IRS amnesty program called the Streamlined Procedure, so long as they do so before the IRS contacts them about it.