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Taxes in America are different compared to many other countries, although some factors remain the same. For example, expats living and working in the US are required to pay US income tax. There are of course certain tax requirements if you are going to live and work in America. But what is important to know about the tax system in the USA? Below you can find the answer to this question, so read on!
The first step when living and working in the US, is determining whether you qualify for tax residency. There are three criteria for this.
Firstly, if you have a green card (or US citizenship), then you are required to file US taxes. Secondly, if you spend over 31 days in the US in a year, you are required to file US taxes. Thirdly, if you spend 183 days in the US in total over three consecutive years, calculated as all the days spent in the US in the last year, 1/3 of the days in the previous year, and 1/6 of the days in the first year, then you are required to file a US tax return. (Welcome to the complexity of US tax rules!). Most foreigners living and working in America fall into the first two categories though.
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Furthermore, there are two types of income taxes in America; federal tax and state income tax. All Americans and US tax residents have to pay federal income tax, while each state has its own rules regarding state income tax. Individuals who live in these states don’t have to pay any state income tax:
Since the recent Tax Reform, federal income tax rates in America are now between 10% and 37% (in comparison, rates in the UK range from 0% to 45%). US tax residents are taxed on their worldwide income, so including any income that they receive abroad.
Some other taxes in America include VAT, social security tax, and state and municipal taxes. VAT in the US is called sales tax. Sales tax is not included in prices the way VAT is in the UK, but is added once you get to the checkout, so be prepared for a 10% higher price.
All Americans and US tax residents must file a federal tax return (form 1040) to the IRS each year. The filing deadline is April 15th, (except for Americans living abroad, who have automatic extension until June 15th).
To avoid double taxation, expats living in America who have income abroad, and so pay foreign income tax too, can either claim US tax credits when they file their US tax return, or they may be able to claim a provision in a tax treaty, if one exists between the US and the country in question.
Expats living in America who have foreign bank or investment accounts, assets, or businesses or trusts registered abroad, or who control or benefit from any of the above, even if not registered in their name, will have to file further IRS forms when they file their US tax return to declare them when they file their US tax return.
In summary, taxes in America can be quite complex, and we recommend that if you plan on living and working in America that you seek advice from a specialist in taxes for expats.
The information on this page was provided by Bright!Tax, the leading, award-winning provider of US tax services for expats.
Need further assistance planning your move to America? Check out the articles we have linked for you below –they’d be of great help! 🙂
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