US Taxes: A Beginner's Guide

First things first: as a rule, anyone who spends 183 days or more per year in the USA is subject to US tax, whether they are a US citizen or a foreigner with a green card. Without a green card, but with a work visa or a corresponding residence permit, you are taxable if you have spent a total of at least 183 days in the USA over the last three years.

What is subject to US tax?

Under American tax law, anyone who earns income in the States (salaries, wages, bonuses, commissions, dividends, self-employment income and the like) has to pay taxes in the USA.

Basics of tax returns and filing status

Taxpayers who are liable for tax must file their US tax returns by April 15 each year (or request an extension) and pay the taxes due.

The amount depends on a number of factors, such as your US filing status (e.g. single or married) and your taxable income from all sources, including investments.

In the USA, taxes are paid on your entire worldwide income. So if you earn income both in the States and in your home country or anywhere else, it is all taxable and, under US tax law, must be reported on your American tax return.

US tax treaties

Depending on your home country, a tax treaty with reduced tax rates usually protects individuals and their worldwide income from being taxed twice.

The USA has tax treaties with a large number of countries (more than 60). The reduced rates vary by country and type of income, so it pays to look into the rates in advance.

The American tax authority, the IRS (Internal Revenue Service), for example, provides information on the exact rules, rates and articles of the US tax treaties.

The United States has two main levels of taxation: income tax (Federal Income Tax) and other taxes at the federal level, and taxes at the level of the individual states, such as state income tax (State Income Tax).

On top of that come local taxes. Each type of tax has its own rate. Here is a summary of the individual taxes in the USA:

Federal taxes in the USA (Federal Tax)

Federal Tax covers all taxes owed at the federal level. Federal taxes are administered by the IRS. Many of them, just as in most European countries, are automatically withheld from employees' pay and passed on to the tax authority by the employer.

Besides income tax, federal taxes also include social contributions such as Social Security tax and Medicare tax. Here are the main federal taxes in the USA at a glance:

1. Income tax (Federal Income Tax)

2. Social contributions (Social Security Tax and Medicare Tax)

3. Corporate tax (Federal Corporate Income Tax)

4. Estate & gift tax (Federal Estate and Gift Tax)

5. Excise tax (Federal Excise Tax)

Here you'll find detailed information on estate tax and other taxes.

State taxes in the USA (State Tax)

Depending on the state, there are further taxes on top of federal income tax. First, there is State Income Tax, the state-level counterpart to income tax, which is counted under State Tax. Some states levy no additional income tax at all.

Because the tax systems differ, the other taxes can also vary considerably from state to state. Here is a quick overview:

1. Income tax (State Income Tax)

2. Corporate tax (State Corporate Income Tax)

3. Property tax (State Property Tax)

4. Excise tax (State Excise Tax)

5. Sales and use tax (Sales Tax or Sales and Use Tax)

You'll find detailed information on taxes and on sales tax here.

Local taxes in the USA (Local Tax)

Cities and municipalities also levy their own taxes through Local Tax. A city or municipality can set the following taxes itself, so they differ depending on where you live in the USA:

1. Income tax (Local Income Tax)

2. Property tax (Local Property Tax)

3. Excise tax (Local Excise Tax)

4. Sales tax (Local Sales Tax)

Detailed information on the individual US taxes, from sales tax to income tax by state, is available here.

US taxes on capital gains & cryptocurrencies

Some of this income and these gains are taxed as ordinary income, while others are subject to a special rate. Under US tax law, the tax on selling a business is capped.

Tax on cryptocurrencies

According to the IRS, cryptocurrencies such as Bitcoin are not currency but property, and they are taxed accordingly. Gains and losses are reported on your personal tax return.

Depending on the holding period, either capital gains tax or income tax applies. Related gains are also taxable in the USA.

We've covered the topic of cryptocurrencies in the USA in detail here.

US taxes on business profits

As a non-US entrepreneur (Non Resident Alien, NRA), keep in mind that even US companies don't automatically have to pay taxes in the USA; with the right tax structure, that even applies to US profits.

Tax liability only arises if the income has a direct connection to the United States. However, this only applies to NRAs outside the USA, not to US citizens and green card holders. Find out more here.

How the profits of taxable companies are taxed in the USA depends on their legal form:

Partnerships

These include the US LLC and the LP. If you are a non-US citizen holding a stake in a trading partnership such as a Limited Partnership, the tax treaty means the profits are taxable in the USA, not in your home country.

As a foreigner, you are also treated as a nonresident taxpayer in the States and must file a tax return on your income.

With the Exempt LLC, the so-called zero-tax LLC, profits may, depending on your country of residence, be subject to no tax at all, neither in the USA nor at home. You'll find more details on the Exempt LLC here, and our sister site zerotax.llc has a page dedicated entirely to the zero-tax LLC.

We've covered the taxation of business profits in detail on this page.

Corporations

US entities such as the Corporation pay corporate income tax on their profits. At the federal level the rate is 21%, and it varies widely from state to state (Texas, Ohio & Wyoming, for example, have none; Texas does levy a franchise tax on business margin instead, and Ohio a Commercial Activity Tax on revenue, so only Wyoming goes without entirely).

Structured correctly, profits of US corporations with foreign customers are taxed at just 13%. Get in touch for the details, or read more about how US corporations are taxed.

Find out more about the US tax system & tax law here.

To keep things manageable, here is just a short overview. You'll find more on the US tax system & tax law here.

Income tax

Your rate of income tax and other US taxes depends not only on your personal income but also on the state you live in. The graduated income tax comes with an allowance that differs depending on your filing status.

Sales Tax

Sales tax varies widely between states, and some have none at all. It applies to certain goods or rented goods and can be set by both the states and local governments. Read more here.

Excise tax

The same goes for excise tax. In the US it applies to things like gasoline, alcohol and tobacco, and the rates differ.

Property tax

Real estate and other property can also be taxed in the US through property tax. How much you pay again depends on the rules and decisions of local authorities or the state.

Some examples of US tax rates

Where a state has an income tax, it ranges from 3 to 13%, depending on the state.

Local taxes levied by US cities and towns are usually between 1 and 2%.

Social Security tax has stood unchanged since 1990 at 6.2% each for employees and employers; the self-employed pay the full 12.4% themselves.

Medicare tax is 1.45% for each party.

Just as in most European countries, if you are employed in the US, your employer withholds income tax from your pay according to your bracket and pays it to the IRS.

This withholding covers federal, state and local income tax. Your employer gives you the forms showing the tax already paid, which you need for your personal tax return.

Other taxes, such as social security contributions and Medicare tax, are split between employer and employee and are also paid over by the company for its staff. Together they are known as FICA (Federal Insurance Contributions Act).

Finally, there are taxes like sales tax and excise tax, which only arise when you buy something or pay for a service, plus other amounts settled through your US tax return at the end of the year.

The US tax return also offers credits and deductions. Deductions lower your taxable income, while credits cut your tax bill directly. Either way, you pay less.

There are various deductions, such as mortgage interest or charitable donations, that can reduce your tax.

Credits such as the Earned Income Tax Credit (EITC) are available to certain people. If you meet the criteria, you may owe less tax or none at all, depending on your situation.

So do your homework before filing your US return, and consider bringing in a tax advisor. That's the way to make the most of any deductions and credits and keep your tax bill as low as possible.

If you are taxable in the US, there's a lot to keep in mind, and not just on your personal return. Different taxes apply nationwide, by state, or locally depending on where you live. Rates also vary from state to state, so there is no one-size-fits-all answer.

If you're planning a move from Europe to the US, choosing a lower-tax state can save you a good deal. We're happy to advise you, help you keep track of your tax return and everything around it, and find the right structure for your plans. Our US tax return page shows exactly how filing works; you'll find more articles under News.

Consultation & implementation

If you'd like to find out what this means for your own situation, the best step is to book a consultation.