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U.S. Individual Taxes Overview

Individual Taxation of a Foreign National in the US

All you need to know about essential taxes for international entrepreneurs with significant ties to the USA.

In the US, residents are typically taxed on their worldwide compensation – regardless of exactly for whom or where these taxable services are being performed. Such compensation can include cash remuneration, and the accurate market value of services or property received.

However, the foreign income earned by a resident or citizen for services given in a country outside of the US may be eligible for special exclusions.

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Non-residents

Non-residents will be subjected to US tax on all income obtained from US sources. US-sourced income that’s not connected with a US business or trade (typically investment-related income) will be taxed on a gross basis at a rate of 30%. This rate could differ if a treaty is able to provide a lower rate.

During the tax year, a non-resident engaged in a business or trading activity within the US will be taxed on the income connected with said business or trading. The same rates of the income of US residents and citizens will be applied, and there may be less allowable deductions.

Typically, income that’s connected with a US business or trade will include compensation for personal services performed within the United States.

If a foreign national makes the change from US-resident status to non-resident status (or vice versa), they will be subject to US tax as if the taxable year was split into two separate periods – one of residence and one of non-residence. This dual-status of a foreign national will be liable to tax on their worldwide income for the residence period, and will only be taxed on income from a US source during the non-residence period.

Under current domestic law, if a non-resident remains in the US for 90 days or less and provides services for a foreign employer not associated with a US business or trade, and earns $3000 USD or less for these services, the compensation will be treated as coming from a foreign source – and won’t be subjected to US tax.

The majority of today’s treaties provide a wider array of exemptions from US tax for income, and may allow a higher or even zero limit if the non-resident remains in the US for no longer than 183 days during a period of 12 months. However, this will only be applicable if specific requirements are met by the individual in question.

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Important facts & figures

The official currency of the United States is the United States Dollar (USD).

As of 2017, the federal income tax rates were found to range from as high as 39.6% down to 10%. And in 2018, the income tax range was slightly less, ranging from 37% to 10%.

For this publication’s purposes, the ‘host country’ will refer to the country of which the employee is legally assigned. And the ‘home country’ refers to the country in which the assigned employee lives when he/she is NOT on current assignment.

This overall publication reflects United States law as of January 1, 2018. Therefore, it’s important to be aware that certain benefits and thresholds are often adjusted to account for inflation – with recent legislation having changed the way inflation adjustments must be calculation.

All 2018 amounts reported in this publication were calculated by the IRS (Internal Revenue Service) under the old laws, as revised amounts hadn’t been released at the time of this publication.

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Tax returns & compliance

When is the tax return due date?

The day your tax returns are due is April 15 Or, if April 15 falls on a holiday or a weekend, they will be due on the following business day.

What is the tax year-end?

December 31.

What are all the important compliance requirements for US tax returns?

Tax returns for a resident’s individual income will be due on or before the 15th day of the 4th month following the end of the tax year. In this case, the due date is April 15 for a calendar-year tax payer.

If you need more time to file your return, it can be automatically extended for 6 months if you file the IRS Form 4868 (Application for Automatic Extension of Time to File US Individual Income Tax Return). However, the time for actually paying the required tax can’t be extended.

A non-resident with compensation subject to withholding is obliged to file his/her income tax return on or before April 15 too. But a non-resident who doesn’t have compensation subject to withholding will have a different due date of June 15.

In order to claim tax deductions, non-residents must file their income tax returns on time – as well as non-residents who are claiming treaty provisions benefits or with other US international revenue law modifications. These positions must be disclosed on their tax return for the relevant tax year. If undisclosed, this could lead to significant consequences including a potential retraction of all treaty benefit being claimed.

Typically, the tax displayed on an individual income tax return needs to be paid at the fixed time for filing the return – without any possible time extensions. And as the tax is considered self-assessed, it will be due without government notice & demand or assessment.

Withholding for US residents

Individual residents will pay tax either via withholding or making estimated tax payments. Residents are liable to withhold income tax on employer-paid wages – these wages include both cash and non-cash payments for services performed unless a special exemption is relevant.

Estimated tax payments for US residents 

If it’s suspected that withholding won’t be sufficient enough to satisfy overall tax liability, a taxpayer needs to pay a certain amount of tax during the taxable year. This should be paid in estimated instalments to avoid under-payment penalties.

However, a resident may be exempt from making estimated tax payments if their total tax for the relevant year (after credit for withholding tax), is under $1000 USD.

For more information with regard to calculating estimates and pre-payments, see below for further clarification.

Withholding for US non-residents

Non-residents are obliged to withholding of income tax on all wages paid by their employer for any services they provided within the US. Essentially, this is income with substantial connections to a US business or trade.

A non-resident could also be subjected to withholding on US-sourced income that’s not considered connected to a US business or trade. An example of this could be investment income.

The general withholding rate is 30% on gross income, but this could be lowered by treaty.

Estimated tax payments for US non-residents

If a non-resident is earning income connected to a US business or trade, they will be subject to the same estimated tax payment specifications as US residents – in addition to the same payment schedule.

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Tax rates

What are the current personal income tax rates in the US?

For residents, there are 4 tax status types that may apply. These are:

  • Filing separately when married
  • Filing jointly when married
  • Single
  • Head of household

Each form of filing status is subjected to a varying tax rate scale. The current tax rates for 2018 are displayed in the tables below.

For US federal tax purposes, a couple will be categorized as married if they were legally married in a jurisdiction that recognizes their union – and their marriage is recognized as legal by at least one state, territory or possession regardless of their current permanent home.

 

2018 income tax rate tables

 

Income Tax Tables for 2018

Taxable Income Bracket

Filing Status

Tax Rate

From USD

To USD

 

Percent

Married filing jointly

0

19,050

 

10

19,051

77,400

 

12

77,401

165,000

 

22

165,001

315,000

 

24

315,001

400,000

 

32

400,001

600,000

 

35

600,001

No limit

 

37

Married filing separately

0

9,525

 

10

9,526

38,700

 

12

38,701

82,500

 

22

82,501

157,500

 

24

157,501

200,000

 

32

200,001

300,000

 

35

300,001

No limit

 

37

Head of household

0

13,600

 

10

13,601

51,800

 

12

51,801

82,500

 

22

82,501

157,500

 

24

157,501

200,000

 

32

200,001

500,000

 

35

500,001

No limit

 

37

Single

0

9,325

 

10

9,526

37,950

 

12

38,701

91,900

 

22

82,501

191,650

 

24

157,501

416,700

 

32

200,001

418,400

 

35

500,001

No limit

 

37

 

Filing Status

Single

Married Filing Jointly

Married Filing Separately

Head of Household

0% if taxable income is less than

$38,600

$77,200

$38,600

$51,700

15% if taxable income is less than

$425,800

$479,000

$239,500

$452,400

20% if taxable income is over the above amount

 

Typically, it’s considered more advantageous if married taxpayers filed under the ‘married filing jointly’ status as opposed to ‘married filing separately’.

But parried individuals seeking to file a joint tax return may not be permitted to if either partner was considered a non-resident at any point during the tax year. However, dependent on certain elections and terms, a married couple may be eligible to file jointly if one or both have been non-residents.

Alternative minimum tax may also be something subjected to a taxpayer. Alternative minimum is payable to the extent that it’s greater than the individual’s typical tax requirements. Alternative minimum tax is calculated using lower rates, but fewer deductions will be issued.

With regard to non-residents, they will be subjected to tax for income that has substantial connections to a US business or trade. This includes compensation for services provided within the US. Typically, a 30% flat tax rate is applied to US-sourced income that isn’t associated with a US trade or business – examples include royalties and dividends.

In the majority of circumstances, non-residents need to file their US income tax return under ‘married filing separately’ or ‘single’ status.

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Residence terms

For tax purposes, how is an individual defined as a resident or non-resident of the US?

Generally, a foreign citizen will automatically be considered a non-resident when it comes to tax – unless they legally qualify as a resident.

Under current US domestic law, a ‘resident’ is categorized as an individual who passes the ‘substantial presence’ test or who has been officially given the right to permanent residence in the use i.e. has been granted a green card.

Substantial presence test

In order to meet the substantial presence test, an individual must have been present in the US for at least 31 days in the current calendar – and a combined 183 days during the two preceding and current years. This will include all days of physical presence in the current year, a third of the days in the 1st preceding year and a sixth of the days in 2nd preceding year.

Typically, a partial day of presence in the US will be counted as a full day of presence for the purposes of this test.

Residence as part of the substantial presence test will usually begin on the 1st day of the year in which the individual is physically present within the US – and will cease to be valid following their last day of physical presence as long as required conditions are met.

Both resident and non-resident

Contrary to popular opinion, an individual can be classed as both a resident and non-resident at different points during the same taxable year. This could happen in the year a foreign citizen either arrives or departs from the US.

And if an individual solely meets the green card test, their residence will officially begin on the 1st day of the calendar year they’ve been physically present within the US as a lawful permanent resident – and will become invalid on the exact day their permanent resident status comes to an end.

Is there a minimum day rule with regard to US residency start and end dates?

A time period of up to 10 present days within the US will NOT be included for the purpose of determining the residency start and end dates for an individual. However, these 10 days will be counted if determining whether the 183-day condition of the substantial presence test has been met.

What happens if an individual enters the US before their residency start date?

If the taxpayer in question has had multiple short visit to the US prior to their official residency, their start date is likely to be the first day of the visit in which their total presence for the year is greater than 10 days.

An individual may be located in the United States for 10 total days (on a short business trip or property hunting as an example), and NOT end up triggering residency as part of the substantial presence test. This lack of residency trigger will occur if they have a taxable home in a country other than the US, and a proven greater connection to the country in question during the days of their visit.

Under the terms of the substantial presence test, residency is defined as a function of mere presence as opposed to intent. Due to this, the actual purpose of a US visit isn’t considered relevant when determining whether a person is a US resident or establishing their residency start date.

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Residence termination

Are there any specific tax compliance requirements when leaving the US?

If departing from the US as a foreign national, the individual will be required to first obtain full tax clearance from the IRS by either completing Form 1040-C (US Departing Alien Income Tax Return) or Form 2063 (US Departing Alien Income Tax Statement) – this form of clearance is otherwise known as a ‘sailing permit’.  In most cases, any due tax must be paid or a bond posted.

If there is no taxable income for the departing year and the year preceding it or, for a resident, if the IRS is satisfied the departure in question won’t impede the collection of tax, Form 2063 should be submitted.

If seeking to depart, a foreign national needs to apply for their sailing permit with the IRS at least 2 weeks before their agreed departure date. However, this application shouldn’t be any more than 30 days before they wish to depart. Then, as long as the IRS confirms all required specifications have been met, the individual in question will be granted their sailing permit for departure.

Particular categories of individuals including trainees, student, exchange visitors and some other types of foreign nationals temporarily residing in the US may be exempt from sailing permit terms. However, this is only possible if certain requirements are met.

What happens if an individual returns to the US for a trip after their residency has ended?

If someone who successfully qualified as a US resident under the substantial pretence test comes back to the US for visits that accumulate to longer than 10 days in the same year, their US residency could be granted an extension until the final day of US presence.

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Immigration & taxation communication between authorities      

Do immigration authorities within the US give information to local taxation authorities when an individual enters or leaves?

Yes – sharing of important formal information between US authorities can happen.

 

Filing Requirements

Will an individual have any filing requirements in the host country after they leave the US and return to their country of origin?

If an individual receives income from the US after their residency has ended and they’ve departed, they are obliged to file a non-resident income tax return to legally report the income, pay any tax due and claim any eligible refunds.

And, as a US tax return is due April 15 after the tax year ends, the individual must file their tax return for their departure year in the year after departing.

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Economic employer approach

Do the US taxation authorities use the economic employer approach to interpreting article 15 (the Income from Employment article) of the OECD treaty? And if not, are US taxation authorities considering using this interpretation approach at any point in the future?

Currently, the United States does not adopt the economic employer approach. Instead, the US uses a substance-over-form, multi-factorial test that places emphasis on both financial and behavioral control – as well as contractual terms between all parties involved.

Under the US Model Income Tax Convention of 2016, the US is not permitted to tax the employment income of non-residents providing services in the US if three specific conditions are met. These are:

  1. The individual has been present in the US for a time not greater than 183 days in any 12-month period that either begins or ends during the tax year in question.
  2. The income is paid by, or on behalf of, an employer who isn’t considered a resident of the US.
  3. The income is not regarded as a deductible expense by a permanent establishment the employer has in the US.

If a foreign individual is responsible for paying the salary of an employee who’s employed in the US, but a US permanent establishment pays the payer with an amount that could be classed as reimbursement, neither condition 2 or 3 can be met.

Is there a minimum number of days before local taxation authorities will adopt the economic employer approach?

No – as earlier discussed, the US doesn’t currently use the economic employer approach.

But under current US tax law, a non-resident providing personal services for a foreign employer within the US – and has been present in the US for 90 days or less and with compensation that’s no greater than $3000 USD – will not be subjected to US tax on their earned income.

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Taxable compensation types    

What specific categories are subjected to income tax?

The list below features an array of general items in an international assignment compensation package that are considered fully taxable for both residents and non-residents. They are only non-taxable if otherwise indicated.

Whilst this list contains many taxable items, it’s not fully comprehensive.

  • Basic salary
  • Reimbursements of children’s tuition
  • Reimbursement of home or host country taxes
  • Foreign location premium
  • Home leave reimbursements
  • Any employer contributions to rent
  • Below-market-value or free use of accommodation furnished by an employer
    • But if such furnished accommodation is provided on the premises of the employer’s business solely for employer convenience, the value of using this accommodation may be excluded – especially if the employee is required to accept it as a term of their employment.
    • Typically, camp housing is usually covered by this exception.
  • Moving allowances & moving expense reimbursements including expenses via searching for a new home, meal expenses, temporary living costs and the total cost of acquiring a new residence and selling the old one.
  • Personal use of a company car – including travel to work from home (and vice versa).
    • Using a company car for business use is generally NOT taxable, provided accurate records and made with proper accounting procedures in the employee’s tax return.
  • Particular cases of employer stock
    • The taxable amount of employer stock and other properties is defined as the excess of the accurate market value of the property/stock over the amount the employee is required to pay for the property/stock.
    • Elections may be made to reduce this tax charge, as well as specialist rules in which such property is impeded by restrictions.
  • Stock options
    • The taxable factors of certain stock options strongly depend on the nature of the options themselves. For more information, see below for the taxation of investment income and capital gains.

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Income exempt from tax

Are there any income areas that are exempt from taxation in the US?

All common areas exempt from income tax are discussed below – but this isn’t a fully comprehensive list.

Accident & health insurance premiums and medical expense reimbursements

Both medical expense reimbursements and accident & health insurance premiums paid by the employer are exempt when part of a US qualified plan.

Contributions to pension plans and profit sharing

Typically, both contributions to profit sharing and pension plans by the employer on sole behalf of the employee aren’t taxable – so long as part of a US qualified plan. In addition, particular tax treaties may offer beneficial treatment for foreign plans regarded as similar.

Fringe benefits

Certain employee advantages of nominal value aren’t taxable.

Lodging & meals

50% of meals and lodging provided by the employer for their convenience aren’t typically taxable – provided on business premises and as a specific term of employment.

Travel expenses for being temporarily away from home

This area typically involves multiple terms. For more information, see special considerations for short-term assignments.

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Expatriate concessions

Are there any concessions specifically made for assignees in the US?

Typically, there are no expatriate concessions offered to foreign citizens working within the US. However, those holding an F, J or Q visa could be exempt from income tax on compensation terms under specific circumstances.

 

Salary earned from working abroad                                 

Is a salary earned solely from working abroad taxed in the US?

If a US resident or citizen has a taxable home in a foreign country – and has been physically present in foreign territories for at least 330 days during a consecutive 12-month period – may choose to exclude a proportion of their foreign income from their overall gross income.

As of 2018, the amount eligible for exclusion of $103,00 USD. However, this amount is subject to yearly adjustment for inflation purposes. In addition, a further deduction for specific housing costs may also be given dependent on certain limitations.

In order to successfully exclude a portion of foreign income from gross income, a US citizen must have proven residency in a foreign country for an uninterrupted period of time – including an entire calendar year. However, as mentioned above, this will be subjected to certain limitations.

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Taxation of investment income and capital gains  

Are capital gains and investment income taxable in the US?

Any United States resident or citizen in subject to US tax on worldwide income. Therefore, a resident will be required to pay tax on investment income. This includes dividend and interest income, capital gains, and income (minus expenses) from rental properties and partnerships.

For a US non-resident, investment income from a US source that’s not significantly connected with a US business or trade will be taxed at 30% – or a lower rate if a certain treaty is applicable. Tax will be applied to gross income without deductions, and items of investment income subjected to this tax may include certain capital gains, royalties, dividends, rent and particular interest (including original issue discount).

However, certain capital gains and investment-interest income are excluded from US taxation, but this strongly depends on specific circumstances.

Typically, US non-residents won’t be taxed on net capital gains – except for any asset sales used within a US business or trade, or any dispositions of a US real property interest.

Dividends, rental income and interest

Usually, all US residents will be liable to pay taxes on dividends, rental income and interest.

Tax will be placed upon income from a US source – but the definition of this significantly differs. Dividend income is considered from a US sourced id paid by a US-based corporation, and interest income is US-sourced when also paid by a US corporation or any other entity considered to be a US resident. However, US bank deposit interests received by non-residents is an exception, and isn’t subjected to tax.

With regard to gross rental income from US property held for investment, non-residents will be taxed on their gross rental income at the usual flat rate of 40%. Or, if relevant, a lower rate if a treaty is involved. And as such rental income won’t be significantly connected with a US business or trade, zero deductions will be permitted. These include depreciation, taxes and interest.

In order to specify certain rental income as being associated with a US business or trade, an election can be taken. The election will permit a reduction of expenses allowed with relation to the rental income in question – and can also cause the net income from said property to be taxable at graduated rates. To successfully make this election, a specific income tax return must be filed to receive maximum benefit.

Any recognized gains by a non-resident from the disposal or sale of US property will typically be subjected to regular tax rates – including applicable capital gains tax rates.

Gains from stock option exercises

Defined as a right given to an independent contractor of employee, a stock option allows for the purchase of shares in his/her corporate employer or a related organization/company. Usually, this option agreement will specify the exact time period and purchase price in which this option may be exercised – and the taxation of such stock options to an individual will strongly depend on whether they’re non-qualified options or incentive stock options.

An ISO (incentive stock option) is an option that must meet particular statutory requirements. If all relevant terms are met and the option in question is considered to be an ISO, no income will be recognized upon exercise or grant of the option. Instead, capital gain is recognized when the stock is eventually sold.

A NQSO (non-qualified stock option) is typically any other form of option other than an ISO that’s been granted to acquire employer stock. So, unless the option in question has a certain fair market value, an individual won’t be taxed when granted a NSQO.

Upon exercising the relevant NQSO, the individual will be treated as if they’re receiving taxable compensation as measured by the excess of the confirmed fair market value of the received stock over its original purchase price. The eventual sale of the stock will therefore result in either a capital gain or loss. When establishing whether a gain or loss has been made, the basis of the option stock is calculated by combining the compensation recognized during exercise and the price it was purchased for.

Whilst this isn’t typically the case with compensatory options, if an option in question has a readily confirmed fair market value at the time the grant was given, the individual will recognize income at the granting time or during later vesting – instead of the actual time of exercising the option.

With regard to US residents, they will be taxed on their total compensation income, whereas US non-residents are only taxed on the portion of the income that’s from a direct US source. This is generally determined by applying the ratio of all US workdays between both the grant and vesting days, to all workdays over the same time period, to the total stock option income confirmed when exercising the option.

 

Residency status

Taxable at:

 

Grant

Vest

Exercise

Resident

N*

N

Y

Non-resident

N*

N

Y

* Assumes a NQSO with no readily ascertainable fair market value on the grant date.

 

Foreign exchange gains & losses

Generally, any gain via foreign exchange is taxable. Establishing whether the gain in question is considered capital and taxed at a lower rate, or ordinary and taxed at graduated tax rates, solely depends on whether the gain is related to a business or trade. In this case, it will be considered ordinary gain. But if the gain is related to a personal transaction or some kind of investment activity, it’s considered capital gain.

If the foreign exchange in question results in a loss as opposed to a gain, it will be deductible against all other forms of income if defined as ordinary – but can only be deducted against other capital gains if established as capital loss.

Principal residence gains & losses

If all specified conditions are met, up to $250,000 USD realized from the sale of a principle residence may be excluded from income. This amount is raised to $500,000 USD for a married couple filing a joint tax return.

In order to qualify for this exclusion, the individual in question must have proof they’ve owned and used the relevant property as their principal residence for a time totalling at least 2 years within a 5-year period that ends on the exact date of sale. Both the use and ownership requirements may be met during non-concurrent periods, as long as both terms are met during the 5-year period ending on the sale date.

And once claimed, this specific exclusion is not permitted to be claimed again for at least 2 years. However, if both requirements aren’t met as a result of unexpected circumstances such as a divorce, health problems or a change in employment location, a pro rata exclusion may be given.

Finally, if a property is confirmed used for a reason other than a principal residence after 31 December 2008 – such as being used as a vacation home or rental property – the gain for the period of time the property was NOT used as a principal residence is not eligible for the exclusion upon sale. However, there are certain exceptions to this term that can be applied dependent on individual circumstances.

Capital losses

Typically, capital losses are only considered deductible against capital gains – but US residents may be able to deduct up to $1,500 USD of net capital loss against other forms of income. This amount is increased to $3000 USD for married couples filing a joint return.

Unused capital losses have the potential to be carried indefinitely for use in future years if the individual in question wishes to do so.

With regard to US non-residents, capital losses incurred from the exchange or sale of capital assets with significant connections to a US business or trade are taxed with the same terms applicable to residents.

Gifts

Those who receive gifts won’t be subjected to tax upon receipt of the gift in question. However, the sender of a gift might be liable to pay gift tax – this is solely based on the original value of the gift given. In addition, lifetime and annual gift tax exemptions will apply to the sender too.

You’ll find further information regarding gift, wealth, estate and/or inheritance tax below.

Personal use items

Any gains obtained on the sale of personal use assets will typically be taxed as capital gain. Loss with regard to such assets will not be deductible, however certain deductions may be permitted for personal losses as a result of theft or casualty.

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Further capital gains tax (CGT) exemptions and issues      

Are there any additional CGT issues in the US?

Not currently.

What are CGT exceptions in the US?

Deemed disposal and acquisition – Generally not applicable, but a deemed disposition tax could be applied to those subjected to exit tax upon expatriation. For more information, see other taxes discussed below.

Pre-CGT assets – Not applicable.

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Typical deductions from income

What general income deductions are permitted in the US?

Both essential and ordinary business expenses are generally deductible from overall gross income. Deductions may also be available for specific personal expenses too.

Typical income deductions available include:

  • IRA (individual retirement account) contributions up to the lesser of compensation within income or $5,500 USD in 2018. This is increased to $11,000 USD for a married couple filing jointly, and overall amount is increased by $1,000 USD for any taxpayer aged 50 or over.
    • For a participant of a qualified retirement plan sponsored by an employer, the maximum deduction will be phased out when gross income becomes greater than a specified amount.
  • Qualified interest on a student loan.
  • Particular away-from-home business expenses including lodging, meals and travel if related to a temporary assignment of 1 year or less.
  • Medical expenses greater than 7.5% of adjusted gross income.
  • Charitable contributions.
  • Property taxes and state & local income up to $10,000 USD.
  • Losses as a result of theft or casualty incurred as a result of a federally-confirmed disaster – in excess of 10% of adjusted gross income.
  • Home mortgage interest.
    • This is limited to interest on acquisition debt of no greater than $750,000 USD or $1.1 million USD if the acquisition debt in question was incurred before December 15, 2017).
  • Expenses relating to income with significant connections to a US business or trade can be deducted by US non-residents. Specific casualty losses, qualifying charitable contributions and state & local income tax can also be permitted as itemized deductions.

In substitute of certain itemized deductions (like the above), an individual who’s been a confirmed US resident for the entire taxable year may be able to claim standardized deduction. The standard deduction amount will be determined according to the taxpayer’s filing status.

 

Filing status

2018
USD

Married filing jointly and surviving spouse

24,000

Married filing separately

12,000

Head of household

18,000

Single

12,000

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Methods of tax reimbursement

What are the tax reimbursement methods typically used by US employers?

Most commonly, the current-year gross-up method is used.

Calculating estimates/withholdings/pre-payments                                                       

How are estimates/withholdings/pre-payments dealt with in the US?

PAYE withholding – Employers are required to withhold accurate taxes from each wage payment and other forms of compensation. Taxes withheld include Medicare tax, federal income tax and social security tax, and some states may impose additional taxes to be withheld.

PAYG instalments – If tax withholding isn’t expected for covering an individual’s tax obligations, estimated tax payments directly from the individual may be required instead.

If sufficient tax isn’t paid via withholding or estimated tax payments, a severe penalty is likely to be incurred.

When are estimates/withholdings/pre-payments of tax due in the US?

If necessary, estimated tax payments are required to be paid quarterly. For a calendar-year taxpayer, federal estimated tax payments will be due on April 15, June 15 and September 15 of the current year – and January 15 of the following year.

Whilst most localities and states typically adhere to the same payment schedule, some tax due dates may differ.

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Foreign tax relief      

Is there any relief for foreign taxes in the US?

Currently, both US residents and citizens may be eligible to claim a credit against US tax for foreign taxes paid or received from a source of foreign income.

The amount of credit will be lower than the amount of foreign tax paid, or the amount of US tax as part of the net foreign-source taxable income. Any foreign tax credits rendered unused can be carried back by 1 year, and forward by 10 years. However, it’s important to note that not all US states permit foreign tax credit of any kind.

Residents of foreign countries in which the US has income tax treaties may be able to claim certain benefits. Typically, the majority of such treaties provide lower rates of withholding tax for certain income types these include royalties, interest and dividends.

Most tax treaties provide assurance that a non-resident won’t be taxed on compensation gained for services they’ve provided in the US, so long as they’ve been present in the US for no longer than 183 days over a 12-month period. However, this will depend on the terms of the treaty in question. For more information, refer to the above section addressing the economic employer approach.

As part of some treaties, income below a certain level or specified income may also be exempt from tax in the US. A foreign citizen who has been a proven resident in two other countries (other than the US) at simultaneous times may also be able to call on the tie-breaker provisions of a treaty. This will help establish the best primary taxing jurisdiction.

However, it’s important to note that not all US states recognize any income tax treaties.

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Tax credits

What are the general tax credits available to be claimed in the US?

The most common tax credits available to a US resident taxpayer include:

  • Adoption expenses – Non-refundable credit to account for adoption expenses for each eligible adopted child. As of 2018, the maximum credit amount available for claim is $13,810 USD, and will be subjected to phasing out based on confirmed income level.
  • Dependent credit – Non-refundable credit of $500 USD for each non-qualifying child dependent for a US resident. The specific amount of this credit is typically phased out for taxpayers with higher income, and to claim this credit a non-qualifying child dependent needs to have an individual taxpayer identification number or a SSN (social security number).
  • Child credit – Credit that’s partially refundable of up to $2000 USD for each qualifying US child under 17 years of age. The specific amount of this credit is typically phased out for taxpayers with higher income, and to claim this credit a qualifying child must have a SSN (social security number).
  • Post-secondary education expenses – Non-refundable credit specified for vocational school or qualified college expenses for students deemed eligible. Currently, there are two forms of this tax credit available, and both are subjected to phasing-out dependent on taxpayer income level – and only one of these two credits can be claimed within a single tax year.
    • Lifetime earning credit – 20% credit of up to $10,000 USD of expenses. This form of credit is applicable for education-related expenses for improving or acquiring new job skills.
    • American opportunity tax credit – Also known as modified hope credit, this allows a maximum credit amount of $2,500 USD for the first 4 years of post-secondary education.
  • Child or dependent care expenses – A non-refundable form of credit for a certain percentage or dependent care expenses necessary for a taxpayer to work. The exact percentage amount with regard to this tax is solely based on the taxpayer’s level of income, and the maximum expense amount to qualify is $3,000 USD for one child and $6,000 USD for 2+.

 

Example tax calculation

Below, you’ll find a calculation that assumes a married, taxpaying US resident with 2 children is undergoing a 3-year assignment that began on January 1, 2016 and is due to end on December 31, 2018.

The taxpayer in question receives a base salary of $100,000 USD, and the overall calculation covers all three years of the assignment.

 

 

2016
USD

2017
USD

2018
USD

Salary

100,000

100,000

100,000

Bonus

20,000

20,000

20,000

Cost-of-living allowance

10,000

10,000

10,000

Housing allowance

12,000

12,000

12,000

Company car

6,000

6,000

6,000

Moving expense reimbursement

20,000

0

20,000

Home leave

0

5,000

0

Education allowance

3,000

3,000

3,000

Interest income from non-local sources

6,000

6,000

6,000

 

Other related assumptions

  • Both the taxpayer’s children are under 17 years old and have SSNs.
  • The taxpayer is a proven US resident throughout the entirety of the assignment.
  • Bonuses are accurately paid at the end of each relevant tax year, and accrue evenly.
  • All earned income is received from local sources.
  • Interest income is not given to the US.
  • The company car in question is used for private (45%) and business (55%) purposes and had an original value of $50,000 USD. The taxable annual lease value comes to $13,250 USD and the only portion of this amount included in income is that connected to personal use.
  • The foreign interest income could be subjected to foreign withholding tax. If this is the case, this tax could create a US foreign tax credit that would result in lowering the US tax liability.
  • Over both 2016 and 2-17, specific moving expenses were excluded from taxable income. For the purpose of the above calculation, it’s assumed the entire reimbursement for moving expenses in 2016 fully qualified for such an exclusion. However, recent US tax law alterations have suspended excluding qualified moving expenses, meaning the moving expense reimbursement is included in taxable income.
  • Totalization agreements and tax treaties haven’t been considered with regard to this calculation.

 

Calculation of taxable income

 

Year ended

2016
USD

2017
USD

2018
USD

Days in the United States

366

365

365

Earned income subject to income tax

 

 

 

Salary

100,000

100,000

100,000

Bonus

20,000

20,000

20,000

Cost-of-living allowance

10,000

10,000

10,000

Net housing allowance

12,000

12,000

12,000

Company car

6,000

6,000

6,000

Moving expense reimbursement

0

0

20,000

Home leave

0

5,000

0

Education allowance

3,000

3,000

3,000

Total earned income

151,000

156,000

171,000

Other income

6,000

6,000

6,000

Total income

157,000

162,000

177,000

Standard deduction

(12,600)

(12,700)

(24,000)

Personal exemptions

(16,200)

(16,200)

(0)

Total taxable income

128,200

133,100

153,000

 

Calculation of tax liability

 

 

2016
USD

2017
USD

2018
USD

Taxable income as above

128,200

133,100

153,000

U.S. federal income tax

21,593

22,753

21,539

Add:

 

 

 

Alternative minimum tax*

 

 

 

Less:

 

 

 

Foreign tax credits

0

0

0

Total federal income tax

21,593

22,753

21,539

Social security tax (FICA)

9,537

10,148

10,441

Total U.S. federal taxes***

31,130

34,901

31,980

 This calculation is relevant for federal tax only – many US states also demand income taxes.

 

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Social Security Tax

Are there any social insurance taxes or social security taxes within the US? And what are the specific rates for both employees and their employers?

Employee and employer

Established by the Federal Insurance Contributions Act (FICA), social security tax is required by both the employee and employer. FICA is assessed on all wages paid for services provided by an employee in the US, no matter employee/employer residence or citizenship. In addition, the portion of this tax relevant to the employee may not be deducted when calculating US income tax.

FICA is comprised of two parts: Hospital insurance tax (Medicare) and the old-age, survivors and disability insurance tax (OASDI).

The Medicare tax rate is 1.45% for both employee and employer, and is imposed on all wages with no cap in place. An extra 0.9% of Medicare tax will be applied on wages greater than $200,000 USD, but this figure is increased to $250,000 USD of cumulative wages if two spouses are filing together, and decreased to $125,000 USD for a married person filing independently.

The OASDI rate is currently 6.2% on all wages up to $128,400 for 2018. This cap is typically adjusted each year to take into account inflation.

Both parts of this tax are only assessed to the employee.

 

On 2018 WagesPaid byTotal
 Employer percentEmployee percentPercent
Up to $128,4007.657.6515.3
$128,400 to $200,000 (Single) ($250,000 MFJ spouses combined; $125,000 MFS)1.451.452.9
Over $200,000 (Single) ($250,000 MFJ spouses combined; $125,000 MFS)1.452.353.8

 

With regard to foreign national employees, they may be exempt from FICA based on any potential totalization agreement between their home country and the US. You’ll find a comprehensive list of cooperating countries below.

Double taxation treaties

The table below displays all countries that currently have a double taxation treaty with the US.

 

·         Armenia*

·         Australia

·         Austria

·         Azerbaijan*

·         Bangladesh

·         Barbados

·         Belarus*

·         Belgium

·         Bulgaria

·         Canada

·         China, People’s Republic of

·         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

·         Slovak Republic

·         Slovenia

·         South Africa

·         South Korea

·         Spain

·         Sri Lanka

·         Sweden

·         Switzerland

·         Tajikistan*

·         Thailand

·         Trinidad and Tobago

·         Tunisia

·         Turkey

·         Turkmenistan*

·         Ukraine

·         United Kingdom

·         Uzbekistan*

·         Venezuela

*Former republic of the USSR and a member of the Commonwealth of Independent States, covered by the US USSR income tax treaty signed June 20, 1973.

Social security totalization agreements

The table below displays all countries that currently have a social security totalization agreement with the US.

 

·         Australia

·         Austria

·         Belgium

·         Canada

·         Chile

·         Czech Republic

·         Denmark

·         Finland

·         France

·         Germany

·         Greece

·         Hungary

·         Ireland

·         Italy

·         Japan

·         Luxembourg

·         Netherlands

·         Norway

·         Poland

·         Portugal

·         Slovak Republic

·         South Korea

·         Spain

·         Sweden

·         Switzerland

·         United Kingdom

 

Totalization agreements eliminate contributions and dual coverage, providing eligibility for continued benefits for foreign nationals working in the US for certain periods of time. Better still, some US non-residents holding an F, J, M or Q visa may also qualify for FICA exemption.

As part of the Self-Employment Contribution Act (SECA), social security tax is imposed on US residents who are self-employed with net earnings of at least $400 USD. As of 2018, income up to $128,400 USD as a result of self-employment is taxed at a rate of 15.3%. Any further self-employment income in excess of this will be taxed at 2.9%.

When calculating regular income tax, half of the relevant self-employment tax is considered deductible. In addition, the extra 0.9% Medicare tax as mentioned above is also applicable to self-employment income. However, it’s not deductible for the purposes of regular income tax and, when establishing the exact self-employment rate thresholds, they’re typically reduced by any wages subject to FICA.

With regard to self-employed US non-residents, they aren’t typically liable to SECA.

Gift, estate, wealth and inheritance tax

The US has a specific system for both gift and estate tax, applicable to gifts made during life and bequests after death. As of 2018, the highest possible gift and estate tax rate is 40%.

The same gift and estate taxation system will apply to both US citizens and foreign citizens who treat the US as their proven permanent home – a separate tax system applies to foreign citizens who aren’t domiciled in the US, and multiple treaties have been negotiated with regard to gift and estate taxes.

US citizens and US-domiciled foreign citizens

Regardless of whether an individual is a US citizen or a US-domiciled foreign citizen, they will be subjected to gift tax based on the verified market value of all gifts made during his/her lifetime – unless an exclusion has been identified. In fact, an individual is able to exclude gifts of up to $15,000 USD per year to each recipient. However, this is the current figure for 2018 and this is likely to change when taking into account inflation.

All direct gifts made to a spouse who’s a proven US citizen are exempt from gift tax, in addition to yearly gifts of up to $152,000 USD to a spouse who is NOT a US citizen. And if a US citizen or US-domiciled foreign citizen should pass on, his/her taxable estate will be subjected to estate tax.

A taxable estate will include the verified market value of all assets, regardless of location, minus any certain deductions. The most notable estate tax deduction is the marital deduction, which typically permits all direct transfers of property to the spouse of the deceased to be excluded from tax. However, this is only applicable if the spouse in question is a US citizen – no marital deduction is usually permitted for property passing to a spouse not considered a US citizen.

In addition, there’s a form of unified credit available that’s able to exempt up to $11,180,000 USD of property transferred during life or after death from gift and estate tax.

Non-domiciled foreign citizens (NDFC)

The majority of gifts made by a non-domiciled foreign citizen are exempt from US gift tax. But such individuals will be subjected to US gift tax on gifts of tangible personal property and real property if located within the US.

Gifts by a NDFC to their spouse will receive the same treatment as gifts given by US citizens. Therefore, gifts will qualify for marital deduction if the receiving spouse is a US citizen. And if not a US citizen, annual gifts of up to $152,000 USD will also qualify.

Gift tax rates for NDFCs are typically identical to those for gifts made by US citizens, except the earlier-mentioned unified credit amount isn’t available.

In addition, any taxable estate of a NDFC will be limited to particular tangible and intangible property located within the US. Estate tax rates applicable to the estates of NDFCs are the same as those applied to the estates of US citizens too, with a specific unified credit available to NDFCs that exempts the first $60,000 USD of the taxable estate from US estate tax.

Are there current real estate taxes in the US?

Yes – a holding real property in the US is likely to be subjected to real estate taxes specific to their locality. Each state typically has different tax rates, and no real estate tax is imposed at a federal level.

Are there sales taxes or VAT in the US?

Yes – the majority of local jurisdictions and states impose sales tax, but the actual definition of a sale or service considered taxable will vary. The tax rate will also differ from jurisdiction to jurisdiction too. No sales tax is imposed at a federal level, and there’s currently no value-added tax (VAT) in the US.

Are there unemployment taxes in the US?

Yes – unemployment taxes are calculated on the employer under the Federal Unemployment Tax Act (FUTA), in addition to under most state unemployment systems. Together, these systems are able to fund compensation-style payments to individuals who may have lost their jobs. This tax is not deducted from wages.

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Are there any additional taxes in the US that might be relevant to most people?

 

Net investment income tax                                       

Also known as NIIT, net investment income tax is imposed on unearned income (including rent) net of related expenses.

NIIT is calculated as 3.8% of the greater of net investment income, or the amount in which modified gross income is greater than a threshold amount of $200,000 USD. This is increased to $250,000 USD for a married couple filing together, and decreased to $125,000 USD for a married couple filing independently.

NIIT is paid in addition to federal income tax.

State and municipal taxes        

Each municipality and state within the US has its own bespoke arrangement of rules with regard to taxing the income of both residents and non-residents. However, many states are imposing similar rules to the federal government regarding residential status of a foreign national, and subsequent tax of income earned within the taxing jurisdiction.

In addition, personal property taxes are typically assessed by states and localities on specific inventories or other examples of personal property held within the US. Some states will also impose death taxes with regard to certain examples of property included as part of a deceased individual’s gross estate.

Exit tax                                   

If a long-term US resident or citizen decides to relinquish their citizenship or right to lawful residence in the US on a permanent basis (expatriation), they may be subjected to an exit tax.

This tax is established as if the individual in question had disposed of all their property on the day prior to leaving, and is imposed on gains greater than $711,000 USD – this figure is likely to change annually based on inflation. Specific rules apply to certain types and classes of property, and differing rules applied for expatriations before June 17, 2008.

An individual other than a US citizen will be considered a long-term resident if they’ve been a lawful permanent resident (i.e. having a green card) of the US for at least 8 taxable years during a 15-year period ending on the date they will lose their permanent residency status. The exit tax will be applied so long as the long-term resident in question (or former citizen) meets specified financial thresholds.

If someone subjected to exit tax chooses to then make a gift to a US resident or citizen, the recipient will be subject to specific transfer tax on the amount they’ve received. The tax will be assessed at the highest current gift or estate tax rate – currently 35%. The transfer tax in question is reduced by any relevant foreign gift or estate tax paid, and will not be due if the amount is reported by the giver on a US gift or estate tax return completed on time.

Foreign trusts

US residents who are grantors or beneficiaries of foreign trusts may be subject to reporting requirements with regard to those trusts. If the required information isn’t provided, substantial penalties are likely to be incurred.

Foreign gifts

US residents are legally required to report the receipt of substantial gifts from foreign sources. This must be done if the total amount of gifts received is greater than relevant thresholds.

Foreign financial assets

US taxpayers are required to report any ownership of specific foreign financial assets if the total value of such assets is greater than certain thresholds. These threshold amounts are based on the taxpayer’s tax return filing status, and whether he/she resides in the US or in a foreign country.

This report is filed on the Statement of Specific Foreign Financial Assets (Form 8938), and must be attached to the individual’s US income tax return. If Form 8939 isn’t included when it should be, substantial penalties will be incurred.

Foreign financial accounts 

Individuals within the US are required to report information with relevance to their interest in foreign financial accounts if the account balances exceed $10,000 USD on any day throughout the year.

No tax will be assessed based on the reported account balances, but severe penalties can be given if this information is withheld. This type of report is made on the Report of Foreign Bank and Financial Accounts (FinCEN Report 114) – this is commonly known as the FBAR. This report is due on April 15 of the following year, and is complete with an automatic 6-month extension if required.

This particular form isn’t included within the federal individual income tax return, and must be electronically filed with the US Treasury Department.

Passive foreign investment companies

US taxpayers with proven investment in a passive foreign investment company (PFIC), like a foreign mutual fund, are legally obliged to report their ownership interest with their tax return. This is made using the Information Return by a Shareholder of a Passive Foreign Investment Company or Qualifying Electing Fund (Form 8621).

An investment such as this is likely to result in additional interest charges and taxes due – these will be calculated on Form 8621.

Is there a requirement to declare offshore assets?

Yes – in the US, you are legally required to file FinCEN Form 114 and the Report of Foreign Bank and Financial Accounts (the FBAR) if you have a signature authority over or financial interest in a foreign bank, securities or any other financial accounts exceeding $10,000 at any time during the year. These accounts include both personal and business.

This report must be filed electronically and separately from an income tax return, and must be done via the Financial Crimes Enforcement Network’s BSA E-Filing System. Generally, this report is due on April 15 of the following year.

If necessary, an automatic extension until October 15 can be allowed, providing specific filing requirements are met. If filing is not completed, significant penalties are likely to be incurred.

If the value of your foreign assets exceeds certain varying thresholds dependent on whether you live abroad or in the US and marital status, an additional special report must be attached. This report is the Statement of Specified Foreign Financial Assets (Form 8938), and foreign financial assets may include pensions, bank accounts and investments.

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Frequently Asked Questions (FAQs) About Taxes, Company Formation, and Residency in the U.S.

We’ve compiled over 150 of the most frequent questions and answers (FAQs) on tax, company formation, and residency in the U.S. in our knowledge base. You can visit our knowledge base here.

If you find that your personal questions have not been answered, book a telephone consultation here.

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Need Advice on Taxation, Company Formation, and Residency in the United States?

Starting a business in the U.S. can be both exhilarating and exasperating. There is much to know and even more to learn, and the pace of the information coming at you can be overwhelming.

That’s where Mount Bonnell Advisors come in.

Would you like to live your very own American Dream? At Mount Bonnell, we can guide you through the labyrinth of regulation and red tape and out into the blue skies of a dream come true – the dream of living and working in America.

Whether it’s technical issues around tax or residency, or strategic ones involving business formation and growth, the experienced team at Mount Bonnell Advisors are here to help.

So make that dream a reality by booking a consultation today with Mount Bonnell Advisors. Let the adventure commence!

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