“My question is that while calculating taxes , do i add net income from australia which is Gross income minus taxes or gross income before taxes . “---->If you file the Form 11116, then you need to report Gross income from sources within country on 1116 Part 1 g 1a.you need to report net income on line 6 of the form 1116 .
“If i add gross income from Australia , that means i am paying tax in usa on the taxes i paid in Australia.”---->No ; as said above, you need to report your net income on line 6 of Form 1116. You are NOT subject to double taxation. I assume that you’re a US citizen or US resident under either US Tax Law or UN INS Rules, a resident for tax purposes, I mean, then you are subject to US taxes, federal and state taxes( if your state imposes tax on its residents; there are 9 state that actually do not impose income taxes on their residents in US.) ON your Worldwide, your earned and unearned income in Australia, and US source income; as long as you paid taxes on your income earned in Australia to the foreign taxing authorities, you can claim your foreign taxes paid to Australia on your US federal return, NOT on your state return; you may claim a tax credit or an itemized deduction for taxes paid to Australia. Your tax credit reduces your US tax liability on a dollar-for-dollar basis, and so is generally more valuable than a deduction which reduces your taxable income. You need to file Form 1116. However, you may not claim a tax credit for taxes paid on any income which has been excluded from US taxation using the foreign earned income exclusion.
Please visit the IRS Website here;
http://www.irs.gov/pub/irs-pdf/f1116.pdf