Paying taxes in the United States II: how do you pay income tax in the United States?
In this article, I discussed the Federal Income Tax.
However, income tax is not only paid to the federal government: there is also the possibility of paying income tax to state governments, the so-called "Income Tax".
Each state has the autonomy to demand or not demand Income Tax, as well as to define how it will be collected. For this reason, the Income Tax deserves a thorough analysis.
Main taxes levied in the Confederate States
In addition to other taxes that each state may levy due to its autonomy, such as the inheritance tax, there are three main taxes, at least two of which are usually levied by the states:
a) Sales Tax: a tax on consumption. This tax is levied by all states;
b) Property Tax: a tax on real estate. This tax is levied by all states;
c) Income Tax: it's an addition to income tax. In other words, in addition to the obligation to pay the Federal Income Tax, some states may require their taxpayers to pay the Income Tax. Not all states levy this tax.
Income Tax
The Income Tax is the state tax on income, which is a kind of "addition" to the Federal Income Tax. In other words, when the Income Tax is levied, the income will be taxed twice (2x), according to the rate established in the table of the Federal Income Tax and the Income Tax of the taxpayer's state.
There are some states that do not charge Income Tax, which are:
a) Alaska;
b) Florida;
c) Nevada;
d) New Hampshire;
e) South Dakota;
f) Tennessee;
g) Texas;
h) Washington;
i) Wyoming;
The other states charge Income Tax, which may have progressive rates or fixed rates. However, the rates can never exceed the rates of the Federal Income Tax, and there must be a minimum income to be charged. Because of this, Income Tax rates are lower than Federal Income Tax rates.
For example, the State of New York charges Income Tax at progressive rates, which can vary from 4% to 10.9%. In order to be charged the 4% minimum, the taxpayer must earn at least $8,500 in income.
In this case, the tax due, adding together the Income Tax and the Federal Income Tax, would be:
Income Tax: 4% of $8,500 = $340
+
Federal Income Tax: 10% of $8,500 = $850
Total = $1,190
Note: the example shown is for taxpayers who file their taxes as "Single". In the case of a "Married Filled Jointly" tax return, the income brackets may be doubled for collection purposes.
For information purposes, below are the rates and income brackets charged by some states:
State | Tax Rate | Income bracket |
Alabama | 2%-5%. | $500-$3,001. |
California | 1%-12.3%. | $10,099-$677,276. |
New York | 4%-10.9%. | $8,500-$25,000,000. |
Hawaii | 1.4%-11%. | $2,400-$200,000. |
Therefore, when choosing the United States as your habitual or permanent residence, it is extremely important to consider tax planning in order to avoid double taxation and tax evasion.
If you are interested in hiring professional legal services related to tax planning for the United States, we are a specialist law firm. Just get in touch via Whatsapp, or by e-mail: thyanipuppio@gmail.com
Points to consider when becoming a US tax resident
When opting for the United States as a permanent or habitual residence, in addition to paying taxes within American territory, there are other things that the individual needs to be aware of with regard to taxation in his country of origin.
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 taxes 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 tax legislation.
If you are interested in hiring professional legal services related to tax planning, 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 in the USA
You are considered a US Tax Resident if you stay in the US 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.
In the US, these 183 days are counted over a three-year period, counting from the current year. 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 100 days, in 2022 he stayed for 120 days, and in 2023 he stayed for 180 days.
Applying the equation we get the following:
2023: 180 days
+
2022: 1/3 of 120 = 40 days
+
2021: 1/6 of 100 = 16 days
Total = 236 days.
As you have exceeded 183 days, you are already considered a US tax resident.
3- Double Tax Residency Alert
The USA applies the principle of universality of income. Consequently, taxpayers are obliged to declare all their income, regardless of where it comes from.
The mistake many people make is thinking that they should declare income earned in their home country only in their home country, and income earned in the US only in the US.
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 regularize your situation or 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 e-mail: thyanipuppio@gmail.com
