Taxation in the United States of America Explained
The United States has a progressive tax system, which means that tax rates will definitely increase as income increases. If you’re planning a longer trip to the US, you should be familiar with the fundamental US taxes. We’ll guide you through the types of US taxes, tax returns, and other related queries. You might even save money.
TYPES OF TAXES IN USA
In the USA, taxes are required on all income, including wages, inheritances, gifts, dividends, and earnings from investments, sales, and imports. There are four main types of taxes in the United States: federal income tax, state income tax, sales tax, and property tax.
- FEDERAL INCOME TAX
This type of US tax is levied by the federal government on all taxable income. The rate of tax depends on the taxpayer’s marginal tax bracket. Marginal tax brackets are determined by the taxpayer’s filing status and income level.
The main source of government revenue, which goes directly to the Internal Revenue Service, is the portion of your American income tax known as the “Federal Tax” (IRS). The nation’s infrastructure, public transit, education, and disaster relief are all funded by the federal tax.
- STATE INCOME TAX
These are levied by individual states on all taxable income. The rates of state income taxes vary from state to state. Kindly note that not all US states require residents to pay state income taxes. For instance, there is no state income tax in Alaska, Florida, Nevada, Texas, Wyoming, Washington, Tennessee, or South Dakota. A flat rate or a progressive scale may be used to pay taxes, which as we noted before may vary from state to state.
The majority of state income tax money is spent on healthcare and education. However, the tax also pays for the police, parks, state housing, environmental initiatives, assistance for the poor, and health and pension benefits for public employees.
- SALES TAX
Sales taxes are imposed by both federal and state governments on the sale of goods and services. The rate of sales tax also varies from state to state. Roads, police, and fire departments are funded by state and municipal governments using the sales tax.
Additionally, the tax rate varies according to the purchased product, making the system virtually unbreakable. Because it is not indicated on price tags and only becomes apparent when paying at the register, the sales tax might present unpleasant shocks when shopping in the USA.
In some states, there is no federal sales tax (e.g., Montana, Delaware, New Hampshire, and Oregon). However, there are a few states that have high tax rates, such as Tennessee (9.55%), Louisiana (9.52%), and Arkansas (9.51%). California, a well-known US state, is likewise among the top third (8.68%).
- PROPERTY TAX
Property taxes are imposed by local governments on the value of real and personal property. The rate of property tax varies from one locality to another. The majority of American homeowners pay the highest local tax at the local level, which is the property tax, which is a local tax. It is owed on land, homes, and occasionally even vehicles.
You pay the least property tax in Hawaii (0.31%), Alabama (0.37%), and Louisiana (0.51%), all of which are US states. The states with the highest property taxes, however, are Illinois (1.97%) and New Jersey (2.13%). Local services are funded by the collection of property taxes.
- SOCIAL SECURITY TAX
Employers (12.4%) and employees (6.2%) both contribute to the Social Security Tax, which is used to fund social security programs in the United States. It is used to pay for American pensions, disability payments, and survivor benefits.
Almost all occupational groups are required to pay this tax. Only temporary employees, foreign government personnel, and those with specific (like religious) opinions are granted exceptions.
Your payments are directly re-spent on the current generation of retirees, invalids, and survivors on a pay-as-you-go basis rather than going into a personal trust fund that ensures one’s livelihood in old age.
- SELF EMPLOYMENT TAX
In the USA, a slightly modified version of the Social Security and Medicare taxes paid by workers and employers are also charged on independent contractors.
Those who are self-employed in the US, pay the combined employer and employee tax rate in addition to the income tax rates established for their state in the US.
- MEDICARE TAX
The levy used to pay for the Medicare program in the USA is comparable to the Social Security Tax. The IRS determines the tax rate, which is now 1.45%, but it is subject to periodic adjustment. The current percentage of salary must be contributed for this purpose by both employers and employees.
For most Americans over 65, Medicare contributions cover their medical expenses. For the most part, in order to qualify for Medicare, you must have worked in the US for more than a decade, or 40 quarters, over the course of your lifetime.
The 10-year time restriction does not apply to claims for disability or survivor payments. But it frequently has to be supported by a medical opinion.
- FEDERAL EXCISE TAX
Just like the US Sales Tax, some products are subject to excise taxes. For instance, these include tobacco, alcohol, and fuel.
Excise tax serves as a revenue stream and a deterrent against bad behavior among Americans in the US. The percentages in this case also differ from state to state.4
Note: All taxpayers in the United States are required to pay federal income tax, state income tax, and property tax. Sales tax is not imposed on all transactions. There are some states that do not have a sales tax, and there are some states that exempt certain items from sales tax. Social Security and Medicare taxes make up the so-called FICA tax rate.
WHO IS ELIGIBLE TO PAY TAX IN THE US?
All citizens of the United States are required to pay federal income tax. Residents of the United States who earn income from sources outside of the country may also be required to pay federal income tax. In addition, all residents of the United States who own property or who have income from investments are required to pay property tax. Sales tax is imposed on all transactions, regardless of the residency of the taxpayer.
A person is considered a taxpayer in the US if they have lived in the country for at least 183 days, have a Green Card, or are a citizen of the country. Non-citizens without a Green Card who have lived in the US for more than 183 days in the current calendar year or more than 183 days in the previous three calendar years combined are obliged to file a US tax return.
You must pay taxes in the USA on your “global income.” Therefore, you must include that income on your American tax return if you have it in the United States as well as your home country or other nations. Luckily, a double taxation agreement that shields you against duplicate payments is probably something you can rely on. Later, we’ll go into greater detail about this.
HOW TAXES ARE PAID IN THE UNITED STATES
In the USA, not all taxes are paid at once. Most taxpayers in the United States have taxes withheld from their paychecks by their employers. This is called withholding tax. Withholding tax is an advance payment of tax that is due. The amount of tax withheld is based on the taxpayer’s filing status and income level.
Some taxpayers are required to make estimated tax payments. Estimated tax is an advance payment of tax that is due for taxpayers who do not have taxes withheld from their paychecks. This includes self-employed individuals, retirees, and investors.
All taxpayers are required to file a tax return every year. The tax return is used to calculate the taxpayer’s total tax liability for the year. This includes any taxes that were withheld from the taxpayer’s paychecks, as well as any estimated tax payments that were made.
The taxpayer’s total tax liability is then compared to the amount of taxes that were actually paid during the year. If the taxpayer owes additional tax, the balance is due by November 15th of the following year. If the taxpayer has overpaid their taxes, a refund will be issued.
HOW HIGH ARE US TAXES
You might also want to know how high are the taxes in the United States?
Following your relocation to the USA, a number of criteria will determine how much tax you must pay. Therefore, it would be helpful if you clarified the query based on your unique situation. Consider the following inquiries for yourself:
- What state will I reside in?
- Which town or city will I reside in?
- Will I have a green card and be a permanent resident, or will I just visit the USA? (Taxes are not due until you stay 183 or more days per year.)
- Do I have a student visa (F, J, or M) to enter the US? (In this instance, you are exempt from paying taxes.)
- How much money will I make?
- Will I have a job or work for myself?
- Do I own any property or real estate in the USA?
- Is there a double taxation agreement with my home country, and would I still be subject to taxes there?
Once you have responded to all of these inquiries, you can go to the IRS website and your state’s website (for example, cdtfa.ca.gov for California) to learn the tax rates and regulations that apply to you (United States Internal Revenue Service, irs.gov).
The United States has a progressive tax system, which means that tax rates increase as income increases. The highest marginal tax bracket is 39.6%. This marginal tax rate applies to taxpayers with taxable income of $415,050 or more for single filers, $466,950 or more for married filing jointly or qualifying widow(er), and $441,000 or more for head of household.
The next highest marginal tax bracket is 35%, which applies to taxpayers with taxable income of $190,150 or more for single filers, $233,350 or more for married filing jointly or qualifying widow(er), and $216,700 or more for head of household.
Tax brackets are not the only factor that determines how high taxes are in the United States. The standard deduction, personal exemption, and tax credits all play a role in determining the amount of tax that a taxpayer owes.
The standard deduction is a fixed amount that is deducted from a taxpayer’s taxable income. The amount of the standard deduction varies depending on the taxpayer’s filing status. For example, the standard deduction for single filers is $6,350, while the standard deduction for married filing jointly is $12,700.
Personal exemptions are an additional deduction that can be taken for each person in the taxpayer’s household. The personal exemption amount for 2016 is $4,050. This means that a taxpayer can deduct $4,050 for themselves, as well as $4,050 for each dependent.
Tax credits are deductions that are taken directly from the amount of tax that a taxpayer owes. There are two types of tax credits: nonrefundable and refundable. Nonrefundable tax credits can reduce the amount of tax owed to zero, but no refund will be issued if the credit exceeds the amount of tax owed. Refundable tax credits can actually result in a refund, even if the taxpayer doesn’t owe any taxes.
The Earned Income Tax Credit is a refundable tax credit that is available to taxpayers with low incomes. The maximum credit is $6,269 for taxpayers with three or more qualifying children. The credit amount decreases as income increases, and it is completely phased out for taxpayers with incomes above $53,505 for single filers and $83,791 for married filing jointly.
The Child Tax Credit is a nonrefundable tax credit that is available to taxpayers with dependent children. The maximum credit is $1,000 per child. The credit amount decreases as income increases, and it is completely phased out for taxpayers with incomes above $75,000 for single filers and $110,000 for married filing jointly.
DO ALL AMERICANS PAY TAXES?
No, not all Americans pay taxes. In fact, about 45% of Americans do not pay federal income tax. This is largely due to the fact that many Americans do not have enough taxable income to owe tax. It is also due to the standard deduction, personal exemption, and tax credits that are available.
There are also some Americans who are exempt from paying taxes altogether. This includes taxpayers who are considered to be below the poverty line, as well as those who are 65 years of age or older. Additionally, those who serve in the military or are considered to be disabled may also be exempt from paying taxes.
AMERICAN TAX RETURN
Because “Form 1040” is the name of the American tax return, also known as the Individual Income Tax Return, almost every American is familiar with the term. Once you start paying taxes in the USA, you are required to submit this tax return to the IRS by November 15th of the subsequent year.
You can disclose how much money you made from January through December of the prior year and how much tax has already been taken out of your paycheck using the 1040 tax form. Following that, you can anticipate a refund or, in less desirable circumstances, an additional payment.
We advise seeking the assistance of a tax consultant for your first tax return in the USA because the American tax system is not first simple to understand. However, it’s not that tough to file your own taxes once you study the structure and regulations.
As a US taxpayer, there are several resources and documentation available from the IRS that can help. This can be gotten from their website.
USA AGREEMENT ON DOUBLE TAXATION WITH OTHER COUNTRIES
There are “double taxation treaties” between the United States and other nations that aim to shield persons from double taxation (“United States Income Tax Treaties”).
The resultant decreased tax rates change based on the nation and your income level. Therefore, before you are required to pay taxes in the US, you should fully educate yourself on any potential tax reductions or payment responsibilities.
On the IRS website, you can check to see if your nation is one of the more than 60 nations with which the US has double taxation agreements. There are also the documentation for every country’s specific tax treaties available.