Paying Tax in the United States

Like most countries in the world the United States practices a progressive tax system, so the more the earn, the more tax you pay.  Every little bit of income is taxed is the US, job earnings, lottery wins and even that $20 note you found on the street corner.

Income Tax
Everyone living in the US pays federal income tax, collected by the IRS.  Most states also levy a state income tax on its residents.  The only states that don’t are Alaska, South Dekota, Washington, Wyoming, Florida, Texas and Nevada.  Remember, that even though these states don’t tax their residents directly, they will indirectly collect taxes through such things as property transfers and higher sales tax.

The tax year in the United States begins on January 1st and ends on December 31st.  Federal income tax returns must be filed by 15th April each year.  State tax returns often have different deadlines states to federal income tax returns.

If you are a company employee, your employer will deduct tax, social security and Medicare and employee portions of private medical scheme payments each month, and pay these over to the relevant authorities. There are various deductions which can be claimed, thus reducing your tax bill.  These include things like interest on your mortgage and students loans, any US resident minor children you might have and high medical expenses.

Non-US residents who live and work in the US for more than 183 days in a given year must file a tax return.    Note that deductions are allowed for non residents and tax is levied at a flat rate, which means that you will probably be paying more tax than if you were a resident.

As of 2017, every person in the US gets an exemption on the first $9,275 they earn, plus various deductions. The lowest rate of tax is 10% and the highest is 39.6%, which will be deducted progressively from your income.  You need to earn a taxable income of over $418,401 before the highest rate of tax is applied and that is only applied to any amount over $418,401. State tax, where it exists, varies from state to state but averages out at 5%.

Capital Gains Tax
Capital gains tax is levied on profit made from short and long-term investments.  For profits made on short term investments, those under one year, the tax rate is the same as federal tax but for profits made on long term investments, the tax rate is substantially less.  If you are in the 10% or 15% tax bracket, there is no tax to pay.  The highest rate of tax on investment profit is for those earning over $418,401, but even that is only 20%.

Sales Tax
Most items you buy in the States are subject to sales tax which is applied at state level not government level.  The amount varies from state to state, with some states, Alaska, Montana, Delaware, New Hampshire and Oregon, not levying sales tax at all.  California has the highest rate of sales tax, at 7.5%.

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