How To: Income Tax

Today, we continue our How To section with the second and last part about income tax in the US. Find the author's (Ines Voigt) complete text on her website www.cpa-berlin.com/home.htm, in the Links section. Find contact information on the website.

Deductions for adjusted gross income Included are, for example, alimony payments to a divorced or permanently separated spouse, training costs for relatives, i.e. certain qualified university/college fees that, however, may not exceed a certain limit. Furthermore moving costs, provided they arise due to employment in a new place that is at least 50 miles further away from your old place of residence than your old employment was from your old place of residence. In addition, you can deduct certain old-age provisions for self-employed people, old-age provisions of up to $3,000 for certain pension plans (IRA) and half of the so-called Self Employment Tax that self-employed people have to pay for their Social Security.

Adjusted gross income This is the sum from the gross earnings and their adjustment. It is an important reference value for certain individual regulations of the tax law.

Standard and Itemized deductions - for the calculation of taxable income, individuals get a standard deduction. For people older than 65 or blind people, there is an additional standard deduction of $950 for jointly assessed spouses, qualifying widowed people and separately assessed people, and $1,150 for heads of households and unmarried people.

The standard deduction is not available to non-resident aliens, but they may deduct the expenditures listed below. In case they exceed the previously mentioned standard deductions, they can be deducted as so-called itemized deductions.
They include costs for medical treatment, provided they exceed the adjusted gross income by 7.5% and property tax as well as the respective state's income taxes, parts of estate taxes, accessions tax and property taxes of the individual states.

Furthermore mortgage interests for houses and apartments you are using yourself and also for a second house or a second apartment,
Donations of up to 50% of the adjusted gross income for qualifying US organizations. Included are also loss of capital through an act of God or theft in case it is not being replaced by insurance, provided each case exceeds the limit $100 and is at least 10% of adjusted gross income. And similar to many EU countries also other selected costs e.g. for tax counseling, union fees, under certain conditions fees for advanced training provided they exceed the adjusted gross income by at least 2% and further selected costs that may not exceed the adjusted gross income by more than 2%. One example is gaming losses provided they do not exceed gaming profits.

For tax payers with high income the additional expense-like expenditures are being reduced according to special regulations that are too complex to be mentioned here.

Personal exemptions In order to determine the taxable income, a personal exemption is granted to the tax payer for the spouse and every person the tax payer is supporting, especially children under 19 or children under 24 who are full-time students. This was $3,000 in 2002 and $3,050 in 2003. Nonresident aliens who have to do their taxes in the US can only be granted one personal exemption and, provided they are married, have to be assessed separately.

Tax rates The tax rates of the federal income tax are progressive and, depending on the type of assessment, are between 10% and 35% of taxable income in 2003. There are five assessment categories: Married Filing Jointly, Married Filing Separately, Single Filing Status, Head of Household and Qualifying Widower (they have the same tax rate as the Married Filing Jointly category).

Alternative Minimum Tax Better earning individuals may be confronted with the Alternative Minimum Tax. The Alternative Minimum Tax is a parallel tax system that does not grant tax allowances as those of the regular tax system. It has to be paid in case it exceeds regular taxes. An AMT income will be determined separately. In case the AMT income for 2003 exceeds $40,250 for unmarried persons, $58,000 for jointly filing couples and $29,000 for separately filing couples, the tax rate is 26% or 28% in case the AMT income exceeds $175,000.

Credits There are several credits that reduce taxes. Among them the Foreign Tax Credit, especially interesting for people who live abroad but have to pay taxes in the US. They are credits for taxes paid abroad that have to be determined depending on the category. Taxes on wages and salaries and other earnings paid abroad as well as on passive income such as interest and dividends have to be determined separately and will only partly be allocated to the respective category. It must be pointed out that only related foreign income taxes will be deducted from the US income tax burden.

One example: If a resident alien sells stocks acquired in Germany outside the speculative period, the profits are subject to taxation in the US. No credits can be asserted if no taxes have been paid in Germany. There are also no credits for other taxes paid in Germany such as taxes on salaries.

Other taxes These include the self-employment tax for self-employed people, taxes on tips that are not forwarded to the employer, taxes on pension plans etc. These will be added to the payable taxes. The Self Employment Tax must by paid by tax payers with an income out of self-employed activities, it is equivalent to the sum of the employee's and the employer's share of payroll taxes on an employee's wage. People living in Germany but liable to taxation in the US should, in order to avoid double taxation, apply for a written confirmation from the Bundesversicherungsanstalt für Angestellte (Federal Insurance Institution for Employees) stating that the person is subject to the German social security system. If the taxpayer does not have a confirmation like this, he or she will have to pay the Self Employment tax in the US.

Payments From the taxes owed determined by the taxable income, mostly taxes on wages and salaries kept by the employer, estimated taxes can be deducted. Provided the complete amount of taxes owed exceeds $1,000, this would have to be 100% of taxes from the previous year or 90% of taxes from the current year. Furthermore, this includes overpayment of social security taxes. Also the child credit tax, $600 in 2002 and 1,000 in 2003 that is counted against the taxes of tax payers with children under 17. Last but not least the earned income credit, a refundable tax credit for low-income earners with children.

The consequence is a tax refund or a tax debt. The tax refund usually means that the tax payer gets a check from the US internal revenue service. Tax debts can be paid via check or credit card.

FURTHER IMPORTANT INFORMATION

Tax number Anyone filing taxes in the US needs a tax number. For US citizens and resident aliens, this is the social security number. For nonresident aliens who do not have a social security number, this is the so-called Individual Taxpayer Identification Number (ITIN) that has to be applied for at the US internal revenue service with form W-7.

Deadlines and addresses for filing federal taxes in the US US citizens and resident aliens living in the US and nonresident aliens with US income must file their taxes until April 15 of the following year. US citizens and resident aliens living outside the US and nonresident aliens with no US income must file their taxes until June 15 of the following year. However, a remaining tax debt has to be paid by April 15. Both deadlines may shift by one or two days if they fall on a weekend or public holiday.

It is possible to apply for a 4-months extension. Under certain condition, this extension may be extended another two months. The extension application has to be submitted at the above mentioned deadlines for taxes at the latest.

The IRS Center in Philadelphia is responsible for individuals who are living abroad but have to pay taxes in the US. Internal Revenue Service Center, Philadelphia, PA 19255-0215, USA. Apart from all the necessary forms, IRS can also provide you with all additional information about the American tax system. There is an IRS office at the US Embassy in Berlin. There you can find all new IRS publications: Internal Revenue Service, U.S- Embassy Berlin, Clayallee 170, 14195 Berlin, tel.: 030-83 05 11 40 fax: 030-83 05 11 45.

You can also get all forms and publications on the IRS website. The website also offers information on taxation of resident and nonresident aliens. More and more tax returns are filed via internet. The website: www.irs.gov. You can submit any questions via email.

Tax liability Whether or not a tax return has to be filed depends on the tax assessment category and gross income. The "earned income exclusion" may not be taken into consideration for determining tax liability. Self-employed persons have to file a tax return in case their income exceeds $400. Nonresident aliens (with very few exceptions, e.g. students with a J-1 Visa who don't have any taxable income in the US) always have to file a tax return. Tax refunds are only available for those people who have filed a tax return, even if they have an income below the limit listed above.
Please note that in addition to the regular forms 1040 for residents and 1040NR for nonresident aliens a great number of additional documentation has to submitted as part of the tax return to IRS depending on the individual tax payer. The individual states have different tax forms for the income tax. These are available at the respective state's tax office. For further information and an evaluation of your personal situation, you may also contact the author, Ines A. Voigt, Certified Public Accountant. Ms Voigt is specialized on the consulting of US citizens abroad and Germans with an income from the US.