Digital Nomads' tax payments in USA: how do you pay taxes in the USA?
The USA maintains its position as one of the most sought-after countries in the world for immigration or temporary residence. Whether it's because of the security or the quality of life on offer, interest in living in the USA is worldwide.
It's no different for digital nomads. However, when choosing the United States, digital nomads face two setbacks: the lack of a specific visa for digital nomads and tax concerns.
Although there is no specific visa for digital nomads, there are other options they can use, such as a tourist visa.
Therefore, it's worth going into the subject of US taxation itself.
How taxes work in the USA
The United States has four main taxes:
1- Federal Income Tax: where rates can vary from 10% to 37%.
2- Income Tax: Rates vary depending on the state and region, with some having a 0% rate.
3- Sales Tax: state tax on consumption. Sales Tax rates vary according to state and region.
4- Property Tax: a tax on all types of property levied annually.
The tax I'm going to focus on in this article is the Federal Income Tax, since it's the tax that generates the most concern among American taxpayers, including immigrant taxpayers.
Federal Income Tax
This is the annual income tax levied by the US government. As it is a federal tax, it covers all residents of American soil, regardless of which state they are in.
The tax rates vary between 10% and 37%, depending on the resident's income and also their status for tax purposes, which can be Single, Married Filing Jointly, Married Filing Separately, or Head of Household.
Let's take a look at the Federal Income Tax table, updated to 2023:
Tax Rate | Single | Married Filing Jointly | Married Filing Separately | Head of Household |
10% | $0 – $11,000 | $0 – $22,000 | $0 – $11,000 | $0 – $15,700 |
12% | $11,001 – $44,725 | $22,001 – $89,450 | $11,001 – $44,725 | $15,701– $59,850 |
22% | $44,726 – $95,375 | $89,451– $190,750 | $44,726 – $95,375 | $59,851 – $95,350 |
24% | $95,376– $182,100 | $190,751– $364,200 | $95,376 – $182,100 | $95,351 – $182,100 |
32% | $182,101 – $231,250 | $364,201 – $462,500 | $182,101 – $231,250 | $182,101– $231,250 |
35% | $231,251 – $578,125 | $462,501– $693,750 | $231,251 – $346,875 | $231,251– $578,100 |
37% | $578,126+ | $693,751+ | $346,876+ | $578,101+ |
Furthermore, the way these rates are applied is different from other countries. They use the ceiling of each rate to tax the taxpayer's total income, regardless of whether it exceeds this ceiling or not.
Example: if a single taxpayer has an annual income of $32,000.00, $11,000.00 of that $32,000.00 will be taxed at a rate of 10%, while the rest will be taxed at a rate of 12%.
Simply put:
10% of $11,000.00 = $1,100.00
+
12% of $21,000.00 = $2,520.00
Total tax payable: $3,620.00
There is either no income tax exemption band. Any and all income is taxed in the United States, even at the minimum rate of 10%.
In addition to knowing about US taxation, there are other points that digital nomads need to take into account if they choose the United States as their habitual residence.
1- Risk of double taxation
When you become a US resident, it's important to note the risk of double taxation.
Unfortunately, the United States does not have a Double Taxation Avoidance Agreement with several countries. Therefore, the risk of paying taxes twice is greater.
Double Taxation Agreements provide deductions or even exemptions from paying tax in one of the two contracting countries, depending on the type of income.
To avoid double taxation as much as possible, it is necessary and prudent to carry out thorough tax planning, with an in-depth analysis of both the individual's economic and social situation, as well as the tax laws.
If you are interested in hiring professional legal services related to tax planning in USA, we are a law firm specializing in the subject. To do so, please contact us via WhatsApp or by e-mail: thyanipuppio@gmail.com.
2- Tax Residency:
Similar to other countries, you are considered a Tax Resident in the US if you stay within the territory for more than 183 days - the equivalent of three months.
However, the way these 183 days are counted in the United States is quite different from many countries around the world.
In the USA, these 183 days are counted over a period of three years, counting the current one. You count the days of the current year + 1/3 of the days of the previous year + 1/6 of the days of the second previous year. This count is called the "Substantial Presence Test".
Example: Someone made regular trips to the USA over a three-year period - in 2021 he stayed for 80 days, in 2022 he stayed for 240 days, and in 2023 he stayed for 180 days.
Applying the equation we get the following:
2023: 180 days
+
2022: 1/3 of 240 = 79 days
+
2021: 1/6 of 80 = 13 days
Total: 272 days.
As you have exceeded 183 days, you are already considered a US tax resident.
3- Warning about dual tax residency
USA apply the principle of universality of income. Consequently, taxpayers are obliged to declare all their income, regardless of where it comes from.
The mistake that many people make is to think that they should declare income earned in their country, only in their country, and income earned in the USA, only in the USA. However, this practice is a crime of tax evasion.
If you are convicted of tax evasion, you will have a criminal record. If you have a criminal record, your passport will become invalid. As a result, you won't be able to travel or renew your visa, since the US - like other countries - requires you to present a valid passport in order to be granted a residence permit.
If you are interested in hiring professional legal services to carry out tax planning to avoid double taxation and tax evasion, we are a law firm specializing in the subject. To do so, please contact us via WhatsApp or email: thyanipuppio@gmail.com.
