If you plan a longer visit to the USA, you should know the essential American taxes. We'll help you find your way around US tax liability, tax returns, and the like. You may even get away cheaper.
Anyone who resides in the United States for at least 183 days, has a Green Card, or is a US citizen is classified as a taxpayer in the United States.
Non-Americans without a Green Card are required to file a US tax return after 183 days of residence in the current calendar year or 183 days of residence in the last three calendar years combined.
Important: In the USA, you pay taxes on your "world income." So if you have income both in the United States and in your home country or additional countries, you must also report that income on your American tax return.
Fortunately, you can most likely rely on a double taxation treaty that protects you from double payments. We will explain this in more detail later.
Not all taxes are paid at the same time in the USA. The different income taxes, the Social Security Tax and the so-called Medicare Tax, are deducted from your salary. Other taxes are paid when you make purchases at the checkout or use services and rental property.
There are separate taxes at the federal, state, and local levels in the USA, each of which is added together and paid or withheld as a total amount. However, not all US states have the same taxes. The differences can be enormous from state to state.
Taxes are due in the USA on all income, such as salaries, estates, gifts, dividends, and profits from sales, capital, and imports.
Taxable income includes income from your wages, self-employment income, capital gains, tips, and income from the sale of real estate.
The amount of tax you pay depends on your income, your state, and the region in which you live. The income tax you pay can range from a low 2.9% (North Dakota) to a hefty 13.3% (California).
The total amount you pay (which is usually automatically deducted from your paycheck if you're an employee) is generally made up of three parts: federal tax, state income tax, and community tax (or local tax).
The part of your American income tax called the "Federal Tax" is the largest source of government revenue and goes directly to the Internal Revenue Service (IRS).
The Federal Tax is used for building and repairing the nation's infrastructure, education, public transportation, and providing disaster relief.
The State Income Tax is not due in every US state. For example, Alaska, Florida, Nevada, Texas, Wyoming, Washington, Tennessee, and South Dakota do not have a State Income Tax. Otherwise, the tax rate varies from state to state and is paid either as a flat rate or on a progressive scale.
Most of the State Income Tax goes to education and health care. However, the tax also funds pension and health benefits for public servants, assistance for the needy, environmental projects, parks, recreational facilities, state housing, and the police.
The so-called Community Tax or Local Tax can be collected by any community. Therefore, it does not exist in all cities and communities.
The use of the Local Tax can include everything from road maintenance and libraries to garbage collection and sewer maintenance.
Most Americans have multiple tax brackets at the same time. The reason for this is the progressive scale system. This applies in any case to the Federal Income Tax, but in some cases also to the State Income Tax.
Your earnings are automatically divided into different marginal amounts, which are then taxed at different rates. There are seven different brackets, ranging from 10% for meager incomes to 37% for very high incomes.
Example: If you earn $80,000 a year in the US, your calculation would look something like this:
| Limits | Tax rate | Effect on your net salary in the USA | Payable |
|---|---|---|---|
| 0,000 - 9,875 $ | 10 % | The first $9,875 of your salary is taxed at 10%. | 987.50 $ |
| 9,875 - 40,125 $ | 22 % | The next $30,250 is taxed at 22% | 6,655 $ |
| 40,126 - 85,525 $ | 24 % | The next $39,875 is taxed at 24%. | 9,579 $ |
| 85,526 - 163,300 $ | 32 % | Does not concern you. | 0 $ |
| 163,301 - 207,350 $ | 35 % | Does not concern you. | 0 $ |
| 207,351 - 518,400 $ | 37 % | Does not concern you. | 0 $ |
Your tax total of $17,221.5 gives you an effective tax rate of 21.5% in this example year. The marginal amounts are regularly adjusted for inflation. It is, therefore, best to find out how much income tax you will have to pay before you start working in the USA.
The Property Tax is a local tax and, for most American homeowners, also the highest tax they pay at the local level. It is due on houses and land - sometimes even on cars.
In the US states of Hawaii (0.31%), Alabama (0.37%), and Louisiana (0.51%), you pay the least Property Tax. The highest Property Tax, on the other hand, is paid in Illinois (1.97%) and New Jersey (2.13%). Property Tax is collected to fund local services.
The so-called FICA tax rate consists of the Social Security Tax and the Medicare Tax.
The Social Security Tax is levied to finance social security programs in the USA and is paid by both employers (12.4%) and employees (6.2%). It is used to fund the pensions as well as disability and survivor benefits of Americans.
This tax must be paid by almost every occupational group. Exceptions are made only for temporary workers, employees of foreign governments, and people of particular (e.g., religious) beliefs.
Your payments do not end up in a personal trust fund that secures one's livelihood in old age but are directly re-spent on the current generation of retirees, invalids, and survivors on a pay-as-you-go basis.
A similar tax to the Social Security Tax is the levy to fund the Medicare program in the USA. The tax rate (currently 1.45%) is set by the IRS and may change periodically. Both employees and employers must contribute the current percentage of salary for this purpose.
Medicare contributions pay for medical treatment for the majority of Americans over the age of 65. Generally, you must have worked a total of more than ten years, or 40 quarters, during your lifetime in the United States to be eligible for Medicare.
A claim for disability or survivor benefits, on the other hand, is not subject to this 10-year time limit. However, it often must be substantiated by a medical opinion.
The Social Security and Medicare taxes borne by employees and employers are also levied on the self-employed in the USA in a slightly modified form.
In addition to the income tax rates set for their US state, self-employed people pay the combined tax rate for employers and employees together here.
Sales Tax is levied on the sale or rental of goods in the USA. It is decided on a state level, but other additional taxes are also possible depending on the county and city.
In addition, the amount of the tax also differs from product to product, which makes the system almost impenetrable. When shopping in the USA, the Sales Tax can cause unpleasant surprises because it is not shown on the price tags but only becomes visible when paying at the checkout.
There is no federal sales tax in some states (e.g., Montana, Delaware, New Hampshire, and Oregon). States with high tax rates, however, include Tennessee (9.55%), Louisiana (9.52%), and Arkansas (9.51%). The famous US state of California (8.68%) is also in the top third.
State and local governments use the Sales Tax to fund roads, police, and fire departments.
The so-called Restaurant Sales Tax is also linked to the higher-level Sales Tax set by the state - however, this is not the case everywhere in the USA. In California, for example, the restaurant tax varies from district to district and can be between 7% and 10%.
Again, the nasty surprise comes at the end, as there is no warning on the menu. Therefore, we recommend that you find out about local Sales Tax before traveling to a new US state and include it in your planning.
With an ESTA, you can stay 90 days visa-free in the USA. Apply online now!
In addition to the US Sales Tax, excise taxes are also levied on certain goods. These include, for example, gasoline, alcohol, and tobacco.
In the USA, Excise Tax is not only a source of revenue but is also intended to discourage US citizens from unhealthy behavior. Here, too, the percentages vary from state to state.
The transfer of property from one person to another is taxed in the USA. This tax liability applies - just as it does for the regular Income Tax - to property values worldwide.
An exemption amount of $60,000 applies to heirs who are not US citizens at the state level. For inheritances between US citizens, this limit is in the tens of millions.
Gift tax in the USA is very similar to the American Inheritance Tax but is due when a property is transferred between two living persons.
Gifts of more than $16,000 must be reported on the tax return and - if the donor later also bequeaths something to the donee - reduce the exemption amount on the Inheritance Tax.
How much tax you will have to pay after moving to the USA depends on many factors. It would help if you, therefore, clarified the question based on your specific case. Ask yourself the following questions:
Once you have answered all of these questions, you can find out the tax rates and rules that apply to you by visiting your state's website (e.g., cdtfa.ca.gov for California) and the IRS (United States Internal Revenue Service, irs.gov).
Almost every American knows the term "Form 1040" because it is the name for the American tax return or Individual Income Tax Return. Once you become a taxpayer in the USA, you must file this tax return with the IRS once a year by April 15th of the following year.
With the help of the 1040 tax return, you declare how much you earned from January to December of the previous year and how much tax has already been deducted from your salary. Afterward, you can expect a refund or, in more unpleasant cases, an additional payment.
The American tax system is not easy to understand at the beginning, so we recommend the support of a tax advisor for your first tax return in the USA. However, once you understand the structure and rules, it's not that difficult to file your taxes yourself.
The IRS has a number of tools and documents that can assist you as a US taxpayer. These include:
And much more. For the complete IRS tax return help guide, visit https://www.irs.gov/instructions/i1040gi.
In order to protect individuals from double taxation, there are so-called double taxation treaties between the USA and other countries ("United States Income Tax Treaties").
The resulting reduced tax rates vary depending on the country and the amount of your income. Therefore, before you become liable to pay taxes in the USA, you should thoroughly inform yourself about which reductions or payment obligations you can expect in the future.
You can find out whether your country is one of the more than 60 countries with a US double taxation agreement on the IRS website. The documents of the individual tax treaties are also available there for each country individually.
The American tax system differs greatly from that of many other countries, especially when it comes to social security. Americans pay less tax than most Europeans, but they are also used to taking on more responsibility for themselves and society.
Comparing the tax systems of other countries with those of the USA is only possible to a limited extent due to their complexity. However, an overview would look something like this:
| Type of US tax | - |
|---|---|
| Income tax | Varies from state to state and region to region |
| Value added tax, sales tax, and excise tax | Varies from state to state, region to region, and even from product to product |
| Local or municipal taxes | Flat or progressive "local tax," but not in every state or locality |
| Social security tax and health insurance for the elderly and the disabled | Employer: 12.4%, Employee: 6.2%,plus 1.45% Medicare Tax for both |
| Property tax | Property tax on houses and land, sometimes also on cars, varies between states and municipalities |
As a Green Card holder, you are a "Permanent Resident" in the USA, and therefore also liable for tax. If you have a Green Card but are not yet a Resident (e.g., because you are still in the process of moving), you are likely to benefit from a double taxation treaty and can reduce your tax rates.
Check out the Internal Revenue Service (IRS) website to find out about the options in your specific case.
Do you dream of a sunny retirement on a Florida beach? For carefree golden years, you may need a little tax trick to keep you from paying too much. Learn more about this in our article "Living in the USA as a retiree."
If, while preparing your US tax return, you discover that you are owed a (currently) unpayable additional amount, be sure to file your tax return on time anyway. If this is not possible, use Form 4868 to request a six-month extension.
While you are dealing with applicable penalties for late payments, be sure to remain accessible to the tax authorities because ignoring the problem can, as a Green Card holder, result in the worst-case scenario of losing your Green Card.
If it's a hardship, you can apply for a six-month payment deferral using Form 1127. An installment agreement with the IRS is also possible.
Like in most other countries, it is important in the USA to know your rights and responsibilities and prove yourself a reliable citizen. Learn more about living in the United States in our guides to the US healthcare system and driving in the USA.