Simpler than back home in Europe. At least until you start counting the states.
America taxes differently. Mostly in your favor.
Part of the guide US Business Taxes: Federal, State and Home Country
This page gives you an overview of the US tax system and US tax law. Many of the elements and types of tax will be familiar from home. On the whole, the US tax system tends to be simpler and less complex than the tax systems in many European countries. If you have to pay tax on income from the USA, international tax law, tax treaties and other details naturally make things a bit more complex. So for taxes in America and at home, the basic structure will usually feel familiar; the real work lies in coordinating both countries under the tax treaty.
Even so, this page gives you a thorough overview of tax liability in the USA.
Of course, this page only covers the most important taxes. There are many other levies and taxes we can't go into here. For a summary overview of taxes in America, see our article: US Tax Guide for Beginners.
Tax reform: the One Big Beautiful Bill Act (OBBBA) of July 4, 2025 made the core elements of the 2017 US tax reform permanent.
The figures on this page reflect the law for tax year 2026; the IRS adjusts deductions and brackets for inflation every year.
1Income tax
Every American with income has to file a tax return by April 15 each year. For an overview of US income tax, see our guide to US income tax.
Lower earners in particular are keen to file as early as possible, because 51% of all taxpayers actually pay no income tax at all. Instead, once a year the IRS refunds the taxes their employer withheld during the year. The Child Tax Credit, America's version of child benefit, is offset against the tax; only its refundable part (the Additional Child Tax Credit) is paid out with the refund.
Federal taxes are administered centrally by the IRS (Internal Revenue Service). As is usual in Europe, federal taxes are deducted from employees' wages.
The states (e.g. New Jersey) also levy income taxes. State income taxes are likewise withheld and paid over by the employer.
Federal income tax is graduated as follows (for single filers):
- Income up to $12,400: 10%
- $12,401 to $50,400: 12%
- $50,401 to $105,700: 22%
- $105,701 to $201,775: 24%
- $201,776 to $256,225: 32%
- $256,226 to $640,600: 35%
- $640,600 and above: 37%
1.1Standard deduction
The standard deduction is $16,100 for single filers and $32,200 for married couples (tax year 2026).
1.2Worked example
Single man under 65, no children, earning $40,000 a year from employment:
- $40,000 income minus $16,100 standard deduction = $23,900 taxable income.
- Income in bracket 1 = $12,400 x 10% tax = $1240
- Income in bracket 2 = $11,500 x 12% tax = $1380
- Total tax burden = $2620 = 6.55% (plus $3060 in payroll taxes)
1.3State income tax
On top of the federal taxes above comes state income tax. It is not credited against federal tax; it can only be deducted as an itemized deduction, subject to caps.
These states levy no income tax (if you live there, you only pay federal taxes):
- Alaska
- Florida
- Nevada
- New Hampshire (its former tax on interest and dividends was abolished as of January 1, 2025)
- Texas
- South Dakota
- Tennessee
- Washington
- Wyoming
Income tax in the other states ranges from 3% to 13%.
2Payroll taxes
The following payroll taxes apply. As is usual in Europe, they are withheld directly by the employer and paid over to the IRS:
- Pension insurance (Social Security): 12.4% on income up to $184,500 (2026). Split equally between employee and employer.
- Health care in old age (Medicare): 2.9% of total wages, split equally between employer and employee. (Learn more about health insurance in the USA here.)
- Unemployment insurance (Unemployment Tax): this is levied at both federal and state level. At federal level the tax is 6% on the first $7,000 of wages per employee; credits for state contributions usually bring it down to 0.6%, so a maximum of $42 per year per employee. At state level the rate varies widely. It depends on the industry and on how many of a business's employees claim benefits. In plain terms: cut jobs and your contributions go up. Rates for new employers range from 1% to 3% in every state. In some states they can rise to as much as 10%, but they only apply up to annual wages of around $40,000.
The self-employed and partners in partnerships also pay social security contributions on their profits ("Self Employment Tax", see below). However, foreigners who don't live in the USA and hold a stake in a US partnership only pay US social security contributions if the USA has a corresponding agreement with the partner's country of residence, which is the case for most European countries.
Form 1040 or 1040-NR, handled in English.
3Property tax
Property tax is only payable by people who own land or real estate within a municipality's area. It is levied every year by all municipalities and counties and is their most important source of revenue.
The amount of property tax depends on the value of the property, as assessed by a local government appraiser.
Rates vary, and in most states they range from 1% to 2%.
4Taxation of investment income
Unlike in some European countries, the USA has no single flat tax on investment income. Instead, different types of investment income are subject to different tax rules.
4.1Interest income
Interest income is taxable in the USA and is taxed at ordinary income tax rates (see above). Some interest, for example from municipal or county bonds, may be tax-exempt.
4.2Dividends
In principle, dividends on long-term holdings are treated differently from other dividends. If you hold a share for more than 60 or 90 days and then receive dividends from it, the "qualified dividend" rate applies. Otherwise, the ordinary income tax rates above apply.
The qualified dividend rate is 0%, 15% or at most 20%, depending on your total income.
4.3Capital gains
With capital gains, too, the holding period matters. As a rule, assets held for more than 12 months qualify for a lower capital gains rate, while short-term sales are taxed at ordinary income tax rates.
Sales of collectibles and the taxable part of gains on qualified small business stock (Section 1202) are taxed at a maximum rate of 28%. For all other investments the maximum rate is 20%.
5Income from cryptocurrencies
According to the IRS, virtual currencies such as Bitcoin are taxed as property, not as currency. So purchases and sales of crypto must not only be documented; tax must also be paid on any related gains.
Individuals must report gains and losses on their income tax return using IRS Form 1040 and IRS Form 8949. If you make lots of small purchases of goods or services, keeping records on IRS Form 8949 can be very time-consuming.
Realized gains on virtual currencies held for more than a year are subject to capital gains tax; if held for a year or less, they are taxed at ordinary income tax rates.
6Estate tax & gift tax
Before estate or gift tax applies, there is an exemption of $15 million (2026), and assets can pass tax-free to a spouse who is a US citizen. As a result, only 0.2% of the US population is affected by estate tax.
The tax is then due on the part of the estate above the exemption and can be as high as 40%.
Important for foreigners who don't live in the US but are taxable there because they own US assets (for example, if you buy US property): the exemption on US assets is only $60,000! The so-called blocker structure may help here. You set up a foreign holding company, which in turn will form a US corporation, and that corporation buys the property. A UK holding company, or possibly forming a UK PLC, makes particular sense because the UK charges no withholding tax on dividends.
Lifetime gifts of more than $19,000 per recipient per year (2026) must be reported on a gift tax return (Form 709) and reduce your estate tax exemption.
7Customs duties / import VAT
As a rule, duties on goods imported into the US are much lower than in many other countries.
Since the US has no VAT, there is no import VAT at all.
The US also has numerous free trade agreements, so imports from those countries are not subject to duties either.
Even imports from countries without a free trade agreement with the US are often duty-free, including many electronics products.
Duties are quite often imposed for political reasons. Since 2025 the US has raised its tariffs across the board; since June 2025, for example, steel and aluminum imports carry an additional 50% tariff (Section 232).
8Taxation of the self-employed
On top of the standard income tax rates (see above) that apply to self-employment income, the self-employed also pay social security contributions at the combined employer and employee rate. This is called the "Self Employment Tax".
Social Security accounts for 12.4%, but only on income up to $184,500 (2026).
Medicare (health coverage in retirement) is taxed at 2.9%, with no income cap.
However, the self-employed can deduct half of the Self Employment Tax from their income.
Foreigners who don't live in the US also have to pay Self Employment Tax on partnership income if the US has a corresponding agreement with their country of residence. Many European countries have such an agreement (Malta does not).
9Taxation of partnership profits (LP, LLC)
Want a US LLC that stays tax-free in the US? Then our sister site zerotax.llc is the right place. It covers the LLC for owners who live outside the US and whose business does not take place in the US: no permanent establishment, no US tax on the profit. This site covers the opposite: companies that genuinely operate in the US, have a permanent establishment there and pay taxes in the US. Both are run by the same firm in Austin, Mount Bonnell Advisors.
If you run a commercial partnership in the US (for example a Limited Partnership; the LLC can only be recommended with reservations), under the tax treaty the profits are taxed in the United States, not at home (subject to progression).
As you can see, international tax law is complex, and professional tax advice is wise if you want to understand and meet your obligations.
Under the 2017 US tax reform, since 2018 you can deduct up to 20% of partnership profits (the QBI deduction under IRC § 199A, made permanent by the OBBBA in 2025; 2026 thresholds: $201,750 for single filers, $403,500 for married couples filing jointly).
The formula above only applies in full to people with total US income of up to $201,750 (2026, single filers). So if your annual share of the partnership profit is higher, or you have other US income that pushes your taxable US income above this threshold, limits apply.
The deduction then depends on the total wages the business pays or on the investments it makes in the tax year.
Here's an example with a very high profit:
Further restrictions apply to certain service providers such as consultants, lawyers and doctors, who benefit from the lower rates only to a limited extent, to prevent abuse.
The bottom line: for tax purposes, a partnership can be the more attractive structure for your US expansion than a C Corporation. What matters is that your country of residence recognizes it as a commercial business.
As a foreigner holding an interest in a US partnership, you therefore have limited income tax liability in the US and must file a US tax return.
Largely the same tax rates and deductions apply as for Americans. The foreign taxpayer also has to pay US social security ("Self Employment Tax" for Medicare and Social Security), at least if they live in a country with which the US has a corresponding agreement.
Read more about how business profits are taxed in the US.
10Taxation of corporations
A US corporation pays corporate income tax on its profits. There is no separate local trade tax. Corporate income tax is levied at both federal and state level.
The federal corporate tax rate is 21%.
At state level, corporate tax varies widely. The following states levy no corporate income tax at all (so corporations there only pay federal taxes):
Nevada, Ohio, Texas and Washington have no corporate tax on profits, but they do have a kind of gross receipts tax. In Texas the franchise tax is 0.375% (retail and wholesale) or 0.75% (other industries) on the margin, and only applies above the no-tax-due threshold of $2.65 million in revenue (report years 2026/2027). In Nevada the exemption is $4 million.
In the remaining states, rates range from 4.5% to 12%. They are not always due on the full gross profit. Florida, for example, has an exemption of $50,000. In other states, federal corporate income tax can be deducted as an expense.
10.1Income from shareholdings
The US has a territorial tax system, much like the EU. As a rule, profits of foreign subsidiaries are no longer taxed again in the US when they are paid out to the US parent company.
Gains from selling shareholdings in foreign companies are also tax-free in the US parent company if the structure is set up correctly.
10.2Foreign profits
Profits a US corporation earns from foreign customers (customers not based in the US) are taxed at only around 14% if structured correctly (the FDII regime, called FDDEI since 2026).
Example: Corporation A, based in Texas, sells its apps to customers in the EU. The profits from these sales are taxed at only around 14% in the US.
10.3Profits from foreign subsidiaries in low-tax countries
If a US company has subsidiaries in low-tax countries that earn profits from customers outside the US, those profits are taxed at the US parent at around 12.6% (the GILTI regime, called NCTI since 2026), with a credit for 90% of the tax paid abroad.
Example: A US corporation has a subsidiary on the Isle of Man whose profits are completely tax-free there. In the US, these profits are then taxed at around 12.6%.
Interestingly, the calculation is based on total foreign profit. That can create welcome side effects when the corporation owns subsidiaries in both high-tax and low-tax countries.
Example: A US corporation has a subsidiary on the Isle of Man whose profits are completely tax-free there. The subsidiary generates €100.000 in profit.
The US corporation has another subsidiary in Germany that pays around 25% corporate and trade tax on its profits. It also makes €100.000 in profit and pays €25.000 in tax in Germany. Of that, 90% can be claimed in the corporation, so €22.500.
The US company therefore owes no further US tax on its total foreign profit of €200.000, because the total foreign profit has already been taxed sufficiently abroad and the credit (€22.500) covers the US tax.
Read more about how US corporations are taxed.
Form 1120 and Form 5472 for your US corporation.
11When are profits taxable in the US?
Many people wrongly assume that a US company is automatically taxable in the States. That is not always true. And non-US companies selling into the US are not necessarily subject to US tax either.
Depending on your situation, the right tax planning can avoid US tax on US profits (even with a US LLC).
As a non-US business owner (non-resident alien, or NRA), you should know two different US tax regimes: passive and active. For passive income such as interest and dividends, the flat withholding tax can be reduced under an applicable tax treaty. Active business income, on the other hand, is only taxed in the US if it comes from a US activity (ETBUS, engaged in a trade or business in the United States). A company counts as ETBUS if it has a "dependent agent" in the US. The distinction isn't always easy, and even experts often get it wrong.
In general, US income doesn't always mean US tax. The key question is whether a non-US person's income is effectively connected with a trade or business in the US. To find the best structure, work with an experienced partner. Mount Bonnell Advisors has helped NRAs set up US structures for years and then takes care of all their tax matters.
Read more on how to avoid US tax on US profits.
12Sales tax
The individual states also levy sales tax, which is only partly comparable to VAT. It applies to sales of goods, online products or services, and the rules differ from state to state.
Shipments into another state (mail order) used to be tax-free, but today economic presence in a state triggers sales tax, not just physical presence. Depending on the state, there are revenue or transaction thresholds that can create a so-called nexus in another US state. These nexus laws matter most for online store operators. There are also certain registration requirements for marketplace sellers (depending on the state).
There is no offsetting of input tax against output tax. However, resellers do not have to be charged sales tax (similar to the EU reverse charge). The sales tax collected is paid to the state monthly or quarterly.
Almost all local governments add their own sales tax on top. In California, for example, the state sales tax is 7.25%, and local governments add another 2% on average.
A European-style federal VAT has been debated for years. Experts say it could be 1-2%, but it would come on top of existing sales tax.
The following states levy no sales tax at all:
Sales tax in the other states ranges from 5% to 9% (combined state and local rate).
Read more about sales tax in the US.
Registration and returns in the states where you have nexus.
13Detailed tax information by state
We have summarized the relevant local tax rates for each US state on separate pages. You can reach the overview of the states here, and here are the 10 most popular US states for foreign direct investment.
The most popular US states among our clients, both for forming a company and for moving to the USA, are:
You'll find more on the US tax system in our beginner's guide. It also covers everything you need to know about how to file a US tax return as a non-US citizen.
You'll find the key facts on US health insurance here.
- Federal income tax rises in brackets from 10% to 37%, and in 2026 single filers get a standard deduction of $16,100. Most states levy their own income tax; nine do not.
- Social Security (12.4% up to $184,500) and Medicare (2.9%) are split between employer and employee; the self-employed pay both halves themselves.
- For estate tax, the exemption in 2026 is $15 million, but foreigners get just $60,000 on their US assets.
- The federal government levies a 21% corporate income tax. Six states have no corporate income tax, Texas and Wyoming among them.
- Sales tax is a matter for the states and local governments. Since the Wayfair ruling, an economic presence is enough to trigger it.
How we help you
- US Tax ConsultationYour US tax question, answered by people who know both sides.
- Tax structureA clean structure between parent company and US subsidiary, or between you and your US company, coordinated with your accountant.
- Your US Tax ReturnForm 1040 or 1040-NR, handled in English.
- Corporation tax returnForm 1120 and Form 5472 for your US corporation.
- LLC and LP Tax ReturnForm 1065 and K-1 for your LLC or LP.
- Sales taxRegistration and returns in the states where you have nexus.
