Taxes in the US

Income Tax:

The US and Germany have a double taxation agreement to protect individuals or companies from double taxation. In general, you will pay taxes in the country in which you are working. That way, all Germans who are living, working and investing in the US are also subject to their taxation on a federal, state and community level.

In general, income tax in the US is significantly lower than it is in Germany. However, usually there are two kinds of income taxes in the US, the federal tax and the state income tax, and in some states also the community or local tax. Federal taxes will be paid to the Internal Revenue Service (IRS). This authority is part of the Department of Treasury. As already mentioned, the states and communities may raise taxes as well. They may be quite high at times, but usually no higher than the federal taxes. The state income tax may be up to 30% of federal tax, the latter is currently 15% for an income of up to $25,750 for singles, and 39.6% (top tax rate) for an income $280,150 and more.

Attention: There are seven states that do not have a state income tax: Alaska, Florida, Nevada, South Dakota, Texas and Wyoming. In all other states, you will have to pay up to 10% income tax to the state. In Florida, however, the community tax is so high that it's not cheaper for you anyway. There, the property tax (tax on capital and real estate) is part of the community tax, the communities use the money to build public facilities such as schools and streets. Here, you can be prepared to pay between $2,500 and $4,000 a year for a large single family house.

American citizens who have already paid income tax abroad may have this deducted from their US income tax under certain circumstances. For all US citizens who are living abroad, the IRS Center in Philadelphia is responsible.

Internal Revenue Service Center

Philadelphia, PA 19255-0208

Besides the necessary forms for your tax return, the IRS can also provide you with all necessary information about the US tax system. There's a branch of the IRS in the American embassy in Berlin. There, you can get the official IRS publications:

U.S. Internal Revenue Service

American Embassy

Clayallee 170

14195 Berlin

Tel.: 030-8305 1140

Fax: 030-8305 1145

Furthermore, the IRS has informative websites about special tax issues and you can even file your tax return online there. If you are interested, find more information on www.irs.ustreas.gov. The IRS has special information brochures that may answer some of your questions, e.g. resident alien or non-resident alien? (Publication 519), How do tax credits work? (Publication 514), How to get tax exemption for US income? (Publication 54).

Taxes are generally paid in Dollars. The exemption limit was $2,750 for singles in 1999. For the tax return you need form 1050NO. The single states have different forms for income tax. You can get these from your state's tax authority or at a common post office.

The federal tax is not directly deducted from your income. It is rather paid as a withholding tax, which your employer will keep as part of your income. At the end of each year, the employer will give you a document stating the taxes that have been withheld from your income, and you as an employee will then file your own tax return for federal and state income tax. You need form W2 for federal withholding and a similar form for state and municipal withholding. You always have to file a tax return, irrespective of the taxes to be paid and irrespective of whether or not you are below the exemption limit. Some states require a third tax return for the local taxes.

Green card holders with a substantial presence in the US pay the same taxes as US citizens. However, the double taxation agreement applies here as well, so that even if they file a tax return they don't necessarily have to pay taxes in the US. Substantial presence means - with some exceptions - that you are in the US for more than 183 days a year. Be careful, the rules for this are rather complicated. It may be that you have only spent a total of 150 days in the US over the past two years and have to pay taxes anyway. Since it is impossible to give you all the details here, we recommend you as an expert for help.

Foreigners who are working in the US for a limited time due a company transfer, or foreigners who are working in the US for a limited time for multinational companies, can deduct their costs of living (food, accommodation, transport, telephone bills, cleaning bills etc.) from their taxes.

The income of J-1 Visa holders who are working for foreign employer are exempt from US taxation. The condition is that these people are in the US for no more than 90 days and not earn more than $3,000. Some tax agreements allow for rather free interpretation of this, in the case of doubt you should ask an expert.

Value-added tax

There is no value-added tax in the US. Instead, most states (with the exception of Alaska, Delaware, Montana, New Hampshire and Oregon) raise a sales tax, which is between 2% and 7.5%.

Social Security Tax

This is a combination of Old Age Survivors and Disability Insurance (OASDI) and a program for Health Insurance (HI) and the already mentioned Medicare program. The Social Security Tax is raised by the Social Security Administration. Almost all kinds of employment and self-employment are liable to taxes. Some non-resident aliens are exempt from this tax, depending on their visa status. There is an exception for temporary workers on an H-Visa as well as people working for foreign governments. The Social Security Tax is being withheld by the employer. For the OASDI, the employer and the employee are both taxed 6.2%, with a minimum wage of $55,000. Self-employed people are taxed 12.4% with the same minimum wage. For HI, both employer and employees are taxed 1.45% with a minimum wage of $130,200 and self-employed people 2.9% with the same minimum wage.

State and community taxes

These differ in the individual states, in some regions, such as New York, they can be quite high. The state of Nevada, on the other hand, does not raise any state taxes. Some states have different residence status regulations and rules of exemption. The local tax authorities and post offices will have more information on this. State taxes can be, for example, property tax, retail sales tax, payroll tax, minimum tax utility user tax, commercial off-street parking tax, hotel room tax etc.