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Taxes in the USA

Are you planning to immigrate to the United States or stay there for a while? Then you should know the tax system of the USA. Learn about US taxes and double taxation treaties with several other countries.

Am I taxable in the USA?

If you are in the USA for 183 days or more per year, you are considered a tax resident. The same applies to Green Card holders and US citizens, even if they live abroad.

In addition to the 183-day rule, part-time residents of the USA are also subject to the so-called "Substantial Presence Test," which determines physical presence in the States within a period of three years and thus also tax liability.

Substantial Presence Test: Do I have to pay US taxes?

You must file a US tax return if you have been in the US for a total of 183 days or more within the last three calendar years. The "Substantial Presence Test" determines your tax liability based on a three-part calculation. The count is:

  • 100 % of your presence in the United States in the current year.
  • One-third of your presence days in the US in the past year
  • One-sixth of your days of presence in the US in the year before the last

If adding these three values together results in a period of 183 days or more, then you are taxable in the US.

Tax return USA: worldwide income counts

Note that in the USA you pay taxes on your global income. This means that all income you had within the fiscal year counts - irrespective of the country.

Double taxation treaties with the USA

The good news in terms of tax liability on a worldwide income is the double tax treaties the United States has with over 60 countries, whose residents (not citizens) are protected from double taxation if they become subject to tax in the United States.

Countries with a USA double taxation treaty include:

Double taxation agreement with the USA
Armenia Australia Austria Azerbaijan
Bangladesh Barbados Belarus Belgium
Bulgaria Canada China Cyprus
Czech Republic Denmark Egypt Estonia
Finland France Georgia Germany
Greece Hungary Iceland India
Indonesia Ireland Israel Italy
Jamaica Japan Kazakhstan Kyrgyzstan
Latvia Lithuania Luxembourg Malta
Mexico Moldova Morocco Netherlands
New Zealand Norway Pakistan Philippines
Poland Portugal Romania Russia
Slovakia Slovenia South Africa South Korea
Spain Sri Lanka Sweden Switzerland
Tajikistan Thailand Trinidad and Tobago Tunisia
Turkey Turkmenistan Ukraine United Kingdom
Uzbekistan Venezuela Vietnam  

Residents of these countries either pay only a reduced tax rate (this varies by country) or are fully exempt from paying US taxes on certain incomes.

Note

If, as a Green Card holder, you still reside in your home country, which has a double taxation treaty with the United States, you will not have to pay any (or only a few) double taxes, but you still have to file a US tax return.

How to pay taxes in the USA?

In the USA, you pay taxes at the federal level (federal tax), state-level (state tax), and local level (local tax). Most taxes are paid as a total amount - either actively if you own a company in the USA or passively if your American employer withholds income tax and your share of the Social Security and Medicare tax.

Some taxes, such as sales tax or excise tax, are paid when you shop or use services. Some other taxes are not due until the end of the tax year with your US tax return.

The responsible tax authority in the United States is the Internal Revenue Service or IRS. There, you must file your US tax return by April 15th of the following year and pay any outstanding taxes.

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Types of taxes in the USA

The 50 states of the USA have different tax systems, some of which deviate greatly from one another. There are the following types of taxes:

  • federal income tax
  • state income tax
  • local income tax
  • state corporate tax
  • federal corporate Income tax
  • local property tax
  • state property tax
  • federal estate and gift tax
  • federal excise tax
  • local excise tax
  • state excise tax
  • Social Security and Medicare tax
  • sale and use tax (state-level)
  • local sales tax

Income tax

Once you are employed in the USA, you pay income tax to the country (federal income tax) as well as to your state (state income tax) and your municipality (local income tax). The total amount of all three tax rates is remitted to the IRS.

Because income tax is withheld and remitted directly by your US employer, these taxes are also called withholding taxes. At the end of a tax year, your employer is required to issue you a statement (Form W-2, Wage and Tax Statement).

US states without state income tax

Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Wyoming, and Washington do not have a state income tax. New Hampshire currently still taxes dividends and capital gains but has decided to phase out this practice by 2027.

Social Security tax and Medicare tax

In addition to the income tax, Social Security and Medicare contributions are also withheld from salaries in the USA. The Social Security tax in 2022 is 12.4 % for employers and 6.2 % for employees. The Medicare tax is currently 1.45 % for both parties.

The Social Security and Medicare taxes in the United States are also referred to as the "FICA" tax. The abbreviation "FICA" stands for "Federal Insurance Contributions Act."

Sales tax

The sales tax is levied on the sale or rental of goods in the United States at both the state and local levels, but it does not exist in all US states.

Different tax rates separate taxes for different types of goods, and a link between the sales tax and the use tax at the state level make it difficult to keep track of buying, renting, and consuming in the USA.

US states without sales tax

Montana, Delaware, New Hampshire, and Oregon do not have a state sales tax.

Excise tax

In addition to the sales tax, excise taxes are levied on certain goods at the state, federal and local levels in the USA. Federal excise tax, state excise tax, and local excise tax apply, for example, to gasoline, alcohol, and tobacco. As with sales tax, rates vary from state to state and from municipality to municipality.

Property tax

If you own real estate or other valuable personal property, you may be required to pay property tax at the state level in the United States. The amount of this tax is determined by the local authority and varies from state to state.

Federal estate and gift tax

When a property is transferred to an individual, taxes are levied regardless of the country in which the transfer of property takes place.

After the death of a person, the estate tax (inheritance tax) is due for this purpose. In the case of a transfer between two living persons, there is the gift tax.

When an inheritance is made to a non-US citizen, the heir is granted an allowance of $ 60,000, while US citizens may inherit values in the tens of millions without having to declare this for tax purposes.

Gifts must be reported on the tax return if the value exceeds $ 16,000. The donor generally pays gift tax.

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The tax system in the USA: What is different?

In the USA, taxpayers pay significantly lower taxes than in most European countries, for example. However, a direct comparison between countries is difficult due to the complexity of the systems.

How much are the taxes in the USA?

The amount of taxes you pay in the USA depends on where you live, your resident status, your personal property, your income, and any double taxation treaty between your home country and the USA.

Consider the following tax facts for the United States:

  • Each US state imposes different levels of income taxes, corporate income taxes, property taxes, excise taxes, and sales taxes.
  • Each municipality levies different amounts of income taxes, property taxes, excise taxes, and sales taxes.
  • American student visa holders (F, J, or M visas) are exempt from income taxes (There is a refund after filing a tax return).
  • Residents of more than 60 countries with a double taxation treaty with the United States may be fully or partially exempt from certain US tax payments.

Tax allowances and thresholds in the USA

Thanks to a graduated income tax system, most employees in the USA have several tax brackets. The salary is divided into the respective marginal amounts, which are taxed separately.

The marginal amounts for income tax in the USA are distributed over a total of seven graduations, starting at 10 % for very low incomes up to 37 % for very high incomes.

Tip

You can use the IRS's Tax Withholding Estimator to better estimate your tax burden for the coming year.

Tax return in the USA (Form 1040 )

There is a time period from January 1st to April 15th for the preparation of your US tax return. Late filing penalties and interest will apply to tax returns filed after the end of this "tax season."

Follow these steps to file your United States tax return:

  • Obtain the necessary tax forms on IRS.gov (e.g., Form 1040) and/or easy-to-use tax software.
  • Have supporting documents (e.g., previous year's tax return, your employer's W-2 form, receipts, and invoices) ready.
  • Complete all forms and, if this is your first time filing a US tax return, have your information and calculations reviewed by a tax professional, if necessary.
  • Submit your tax return to the IRS by April 15th.

If you cannot file your income tax return by the deadline for a good reason, you may be able to request a six-month extension from the IRS using Form 4868.

Good to know

The IRS usually doesn't start accepting tax returns until mid/late January.

You can get assistance with your US tax return at various places such as the Taxpayer Advocate Service (TAS), Volunteer Income Tax Assistance (VITA), or Tax Counseling for the Elderly (TCE).

The best online help for preparing a US tax return is available directly from the IRS: use the Free File service.

Tax FAQ for the USA

Do you have further questions about the tax system in the USA? Then you'll find what you are looking for in our FAQ:

Green Card holders (so-called "Permanent Residents") are liable to pay taxes in the USA. This also applies if you already have a Green Card but have not moved to the USA yet.

However, you will most likely benefit from a double taxation treaty between your home country and the United States and be protected from paying taxes twice.

If you are a retiree who wishes to reside in the US, you will also be taxable after 183 days of residency per year (or within the past three years, based on the "Substantial Presence Test").

Since retirees receive tax benefits in some countries (e.g., in Germany) but not in the United States, it is advisable to closely look at the implementation of the respective double taxation treaty.

You can calculate your expected tax liability in the U.S. using the Tax Withholding Estimator from the Internal Revenue Services (IRS).

For-profit companies pay a corporate tax rate of 21 % in the USA.

If you fail to file your tax return and pay due taxes in the United States, you will first face late fees and penalty interest. As a Green Card holder, you will face difficulties in obtaining US citizenship and problems entering and leaving the country.

At worst, if you are in the US only with a visa instead of a Green Card, you may face deportation from the United States. Therefore, contact the IRS in time and take care of deadline extensions and, if applicable, a hardship provision.

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