Taxes in the USA

They say there are two things in life that can’t be avoided and taxes is one of them. At a certain point of time, everyone must deal with taxes. Becoming a Green Card holder is exciting, but it also comes with responsibilities like filing a US tax return. You may be asking yourself how you file a US tax return or what the distinct types of American taxes are? American tax law is divided among many levels and very complicated. That is why we want to concentrate on a few essential points. We recommend seeking the professional help of a US tax advisor for more detailed questions. 

Double taxation agreement with the USA

A select few countries have a double taxation agreement with the USA like, for example, Germany, the United Kingdom, France and New Zealand. A double taxation agreement protects individuals and businesses from having to pay taxes twice. Principally, employers pay taxes in the country where their income is earned. So-called resident aliens (Green Card holders with permanent resident status) are treated the same as US citizens which means that their foreign-earned income is subject to taxation. For the most part, citizens from countries with a double taxation agreement with the USA pay little to no US taxes on foreign-income earned. This does not mean, however, that you can get out of filing a US tax return. So-called non-resident aliens (temporary resident status) must only file tax returns for the years that they were in or traded with the USA. It is important to always check what the tax agreements are between your country and the USA.

American citizens living abroad are still required to file a US tax return, but can deduct already paid income tax from their American tax return (Foreign Tax Credit). The IRS Center (Internal Revenue Service Center) in Austin, Texas is responsible for handling all tax returns from American citizens living abroad.  

Tax liability in the USA

It really is so in the United States that you must calculate your own taxes while you fill out your tax return. In some countries taxes are calculated by tax offices, but in American taxes are subject to self-assessment. Tax law in the USA is divided into several levels like, for example, federal, state, local and city. Therefore, it can happen that a tax return must be filed on all levels to avoid double taxation. Especially in the beginning, you should seriously consider seeking help from a professional tax advisor.

You are required to file a tax return when:

  • Income earned exceeds the basic taxable amount
  • You are a U.S. citizen or Green Card holder and live in the USA
  • You are a U.S. citizen or Green Card holder and do not live in the USA
  • If you meet the Substantial Presence Test

What is the Substantial Presence Test?

You will be required to file a US tax return if you have a permanent resident card (Green Card) for the USA as well as if you meet the criteria under the so-called Substantial Presence Test. This test calculates the days you are actually present in the USA. Under some circumstances, foreigners with temporary US visas are tax liable for income earned in the USA. To meet these criteria, you must be physically present in the USA for 31 days during the current year and add the total number of 1/3 of the days you were present the year before and 1/6 of the days you were present two years before. If the number of days adds up to more than 183 days, then you can start planning to file a US tax return.

Which forms do I need for a US tax declaration?

The tax authority responsible for processing tax returns is the IRS (Internal Revenue Service). The IRS provides all necessary forms, like the Form 1040, needed to complete your tax returns as well as information about the American tax system (see: How to file your federal income tax return). There is also a glossary of important terms and answers to frequently asked questions. The IRS also provides a platform for completing and submitting your tax returns online. If you are interested visit: www.irs.gov

The Federation of Tax Administrators provides direct links to all state financial administration websites. Here you will find more information about current tax law in all 50 states, like property. More at: www.taxadmin.org.    

Deadlines for submitting a tax return in the USA

The deadline for submitting a tax return for all US citizens and Green Card holders is April 15th every year. Returns can be submitted electronically or per post. Those who are not in the United States, but required to file a tax return get an additional two months, until June 15th, to submit their returns. It is possible to apply for an extension of 4-6 months if you file the Form 4868. This form must be submitted in time and there is no guarantee that the extension will be granted. Make sure to check in advance if you qualify for an extension.

What tax allowances are there in the USA?

Principally, almost every person is required to file a tax return in the USA. Income earned, however, must exceed the basic taxable amount to be liable for tax. If this is not the case, there are some tax allowances that you can include in your return. These tax allowances are based every year on inflation, age, and family status.

Tax liability after giving up US permanent resident status

US citizens are required to continue filing tax returns for income earned in the USA for 10 years after giving up their citizenship. Even Green Card holders who have returned their Permanent Resident Card are potentially liable to continue filing taxes. 

Types of taxes in the USA

The many types of tax categories are as diverse as the USA itself. Below is an overview of the most important tax categories divided into federal, state and local governments. 

Federation

States

Local governments

Federal Income Tax

State Income Tax

Local Income Tax

Federal Corporate Income Tax

State Corporate Tax

Local Property Tax

Federal Estate and Gift tax

State Property Tax

Local Excise tax

Social Security and Medicare Tax

Sale and Use Tax

Local Sales Tax

Federal Excise Tax

State Excise tax

 

US tax withheld by employer

The federal income tax is the tax the federal government requires private persons and bodies to pay. As soon as you are employed in the USA, taxes (Federal Income Tax and State Income Tax) are withheld by the employer. These deductions are called the Withholding Tax and are directly paid to the IRS and the tax office in the state in which you are living. At the end of the year, you will receive a Form W2 Wage and Tax Statement from your employer. This form details your income and the taxes you have already paid and is needed to complete your tax returns. Income tax, compared to other countries, is low, but state tax can vary from 0 to 10%.

Additionally, Social Security Tax and a contribution for Medicare will be deducted from your income and paid to the appropriate authorities.

Local tax

Local tax can affect the amount of taxes you must pay on assets, like property, consumer goods and inheritance and includes community or city taxes. These taxes differ from state to state, so it is prudent to inform yourself of each state’s tax laws.

Income and sales tax

Consumers in the USA pay sales and use taxes on goods and services. The federal government does not receive these funds and the money goes directly to the state. This is why there is no standard tax on goods across the USA. Also, some states may have no sales tax and other states taxes vary from 3-10%.

The American tax system seems very complicated at first. There are, however, many places to look for help, like books or guides online as well as people to turn to like US tax advisors who are familiar with the system. Sometimes all it takes is to ask a neighbor or colleague. One thing though is for sure: Make sure you file your American tax return. 

Sources:

https://de.usembassy.gov/u-s-citizen-services/internal-revenue-service-u-s-taxes/

https://www.irs.gov/pub/irs-pdf/i1040gi.pdf

 

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