United States – Taxation

How does the tax system in the United States work?

The United States has a multi-layered tax system. At the top level, the federal government collects taxes administered by the IRS. Below that, 43 states impose their own income taxes, while others — such as Texas and Florida — levy no personal income tax whatsoever. Some states, including California, apply a progressive rate structure broadly similar to the federal model, whereas states like Texas and Florida forgo personal income tax entirely. Taxes at the city or county level may also be relevant depending on exactly where you settle.

The US federal income tax follows a progressive structure, which means income is not all taxed at the same rate. Instead, earnings are divided into bands, each subject to a different percentage. You pay the lowest rate on the first segment of income, with progressively higher rates applied to each successive layer of additional earnings. This overall approach is broadly comparable to systems used in countries such as Germany, France, and the UK, though the particular rates and thresholds differ significantly.

There are seven federal individual income tax brackets. Expats living in the US are subject to the same progressive federal income tax rates as any other resident — ranging from 10% to 37%. The bracket applicable to any portion of income depends on your filing status (for example, single or married filing jointly) and your total taxable income after deductions are applied. Because these brackets are adjusted each year for inflation, you should always confirm the current figures directly on the IRS official website.

One of the most critical concepts to grasp before moving to the US is how tax residency is established. Foreign nationals who are not US citizens are treated as nonresidents for tax purposes unless they satisfy one of two tests: the green card test or the Substantial Presence Test for the calendar year (January 1 to December 31).

You qualify as a resident alien if you are not a US citizen and you satisfy either the green card test or the Substantial Presence Test during the year. You meet the green card test if at any point during the calendar year you hold lawful permanent resident status — a classification issued through Form I-551 (the green card) by US Citizenship and Immigration Services.

The Substantial Presence Test is an IRS formula used to determine whether foreign nationals attain US tax residency based on how many days they are physically present in the country. According to the IRS, you satisfy the test if you are present in the US for a minimum of 31 days during the current year and for 183 days over a three-year window using a weighted calculation: 100% of the current year’s days, plus one-third of the preceding year’s days, plus one-sixth of the days from the year before that.

Satisfying this test means you must file Form 1040 and disclose your worldwide income — not merely income with a US source. In certain situations, elections are available that can override the standard tests. It is also possible to be treated as both a nonresident and a resident for US tax purposes within the same tax year, which typically occurs in the year you arrive in or depart from the United States — in such cases, you are required to file a dual-status income tax return.

For comprehensive guidance on residency rules, refer to IRS Publication 519, US Tax Guide for Aliens, which serves as the authoritative official reference on this topic.

Does the United States have double taxation agreements, and how do they affect expats?

The United States maintains an extensive network of income tax treaties — commonly referred to as double taxation agreements (DTAs) — covering more than 60 countries. These arrangements are designed to prevent the same income from being taxed twice: once by the US and again by the country where the income is generated or where you also hold residency. Treaty partners include most of Western Europe, Canada, Australia, Japan, India, China, and numerous other nations.

Several mechanisms — among them the Foreign Earned Income Exclusion, the Foreign Tax Credit, and bilateral tax treaties — exist to shield taxpayers from double taxation. Expats receive automatic filing extensions, with further time available upon request. Tax treaties may reduce or entirely eliminate withholding rates on dividends, interest, royalties, and pensions, and they frequently include “tie-breaker” clauses to resolve situations in which an individual might otherwise be considered a resident of both countries at the same time.

In practice, treaty benefits do not take effect automatically — you must actively claim them on your US tax return. Most income tax treaties contain special provisions for determining residency specifically for treaty purposes. If your home country has concluded a treaty with the US, this could meaningfully reduce your overall tax burden, so it is well worth reviewing the provisions that apply to your individual circumstances.

The complete and up-to-date list of US income tax treaties, including the full text of each treaty, is published by the IRS at IRS Income Tax Treaties A–Z. Always consult this resource along with a qualified tax adviser to understand how a particular treaty bears on your situation, since the provisions vary considerably from one country to another.

The US also has Totalization Agreements (broadly analogous to social security treaties) with more than 30 countries. These agreements prevent workers who split their careers between the US and a partner country from being required to pay social security taxes to both systems. Further information is available from the US Social Security Administration.

What taxes do expats need to pay in the United States?

Once you become a US tax resident, you will encounter several categories of taxation. Below is an overview of the principal taxes relevant to people relocating to the US from abroad.

Federal Income Tax

US tax residents are subject to progressive federal income tax at rates between 10% and 37%. Income is taxed in stages — for example, a single filer earning $50,000 would have the first $11,925 taxed at 10%, and the portion between $11,926 and $48,750 taxed at 12%. (These figures are as of 2025; rates and thresholds are revised annually — always confirm the latest numbers at irs.gov.)

State Income Tax

States that impose no income tax include Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. States where you may remain liable to file even after moving abroad include California (if you retain ties there), Virginia (unless you establish domicile elsewhere), South Carolina (which applies complex domicile rules), and New York (if you maintain a residence in the state). Your choice of where to live in the US can therefore have a substantial impact on your overall tax position.

Capital Gains Tax

Capital losses are fully deductible against capital gains. Where net capital losses exceed capital gains, however, only up to $3,000 (as of 2025) may be deducted against other types of income in a single year. Any remaining unused losses can be carried forward indefinitely. Long-term capital gains — on assets held for more than one year — benefit from preferential rates of 0%, 15%, or 20%, depending on your income level; short-term gains are taxed at the same rates as ordinary income. To qualify for the preferential rate on eligible dividends, the shareholder must have held the stock for more than 60 days during the applicable 120-day period surrounding the dividend date.

Net Wealth Tax

There is no federal tax on an individual’s accumulated net worth. In contrast to certain European countries — such as Spain or Norway, which levy annual wealth taxes — the US imposes no equivalent charge at the federal level.

Estate and Gift Tax

The federal estate tax applies to the transfer of assets upon death. The One Big Beautiful Bill Act, signed on July 4, 2025, established the estate tax exemption at $15 million per individual. Estates valued below this threshold owe no federal estate tax. Gift tax provisions govern large transfers made during a person’s lifetime. In 2025, you may give up to $19,000 — or $38,000 for married couples filing jointly — without incurring gift tax liability. For gifts made to a spouse who is not a US citizen, the annual exclusion is substantially higher at $190,000. These thresholds are indexed for inflation, so always verify the current figures on the IRS website.

Property Tax

Property taxes in the US are collected exclusively at the state and local level; no federal property tax exists. Rates vary widely across the country: states such as New Jersey and Illinois carry some of the highest effective rates, while Hawaii and Alabama are among those with the lowest. Property tax is typically expressed as a percentage of the property’s assessed value and is payable annually or semi-annually to the relevant local authority.

Social Security and Medicare (FICA)

Workers in the US contribute to federal social insurance programmes via payroll taxes. The combined Social Security and Medicare rate — known collectively as FICA — is 15.3%, shared equally between employer and employee (7.65% each). Self-employed individuals bear the full 15.3% themselves. It is important to note that the Foreign Earned Income Exclusion does not exempt foreign earned income from Social Security taxation. As a result, self-employed expats who earn below the FEIE threshold may still owe 15.3% in self-employment taxes. Totalization Agreements can eliminate the risk of paying into both systems; check whether your home country has signed such an agreement with the US.

Foreign Account Reporting: FBAR and FATCA

Tax residents who move to the US while retaining bank accounts or investments in their home country face additional reporting requirements. If the total balance across your foreign accounts surpassed $10,000 at any point during the year, you must file an FBAR (FinCEN Form 114) with the Treasury Department. FATCA obligations under Form 8938 are triggered when total foreign assets cross IRS thresholds — for instance, $200,000 or more at year-end for a single filer living abroad (as of 2025). These are disclosure requirements rather than additional taxes, but the penalties for failing to comply are severe. Non-willful FBAR violations can attract penalties of up to $16,536 per violation (2025 figure), while willful violations may result in a penalty equal to the greater of $165,353 or 50% of the relevant account balance per account.

Are there any tax breaks or special regimes for expats in the United States?

The US does not offer a broad preferential flat-tax or non-domicile regime for newly arrived residents in the way that some other countries do — for example, Portugal’s former NHR scheme, Italy’s €100,000 flat-tax arrangement for high-net-worth new residents, or the UK’s historical non-domicile rules. That said, several meaningful tax reliefs are available to US persons living abroad, and foreign nationals moving to the US can benefit from specific deductions and credits.

Foreign Earned Income Exclusion (FEIE)

The FEIE enables qualifying individuals to exclude foreign-earned income from US taxation up to an annual ceiling — $130,000 for 2025. It applies exclusively to earned income: wages, salaries, and self-employment income. Passive income streams such as dividends, capital gains, and rental income do not qualify. This exclusion is particularly valuable for US citizens and green card holders who continue earning income overseas before or after spending time living in the US.

Foreign Tax Credit (FTC)

The Foreign Tax Credit delivers a dollar-for-dollar reduction in US tax liability for foreign income taxes paid on income that has not been excluded under the FEIE. The same income cannot benefit from both mechanisms simultaneously. The FTC tends to be more advantageous for expats residing in high-tax countries. It is a powerful tool for preventing double taxation and is accessible to both resident aliens and US citizens.

Foreign Housing Exclusion

The Foreign Housing Exclusion limit is tied to the FEIE limit. In 2025, the base amount for the Foreign Housing Exclusion rose to $20,800, with the maximum deductible expense limit set at $39,000. This provision helps reduce the financial burden of overseas housing costs for eligible individuals, and the figures are updated on an annual basis.

Standard Deduction

For 2025, the standard deduction stands at $15,000 for individual filers and for married couples filing separately. This amount is subtracted from gross income before tax is calculated and is available to all resident tax filers who opt not to itemise their deductions.

Streamlined Filing Compliance Procedures

For individuals who have inadvertently failed to file US tax returns or FBAR reports in previous years, the IRS offers the Streamlined Filing Compliance Procedures — a penalty-reduction pathway specifically created for cases of non-wilful non-compliance. The Streamlined Foreign Offshore Procedures are the route most commonly used by expats who missed filings without deliberate intent, allowing them to submit three years of overdue returns and six years of FBARs with substantially reduced penalties. This programme can provide considerable relief for those who were simply unaware of their obligations.

How and when do expats file a tax return in the United States?

The US tax year runs from January 1 to December 31, with returns filed in the calendar year that follows. The primary return form for individuals is Form 1040; nonresident aliens use Form 1040-NR. The federal return requires taxpayers to declare income, deductions, and exemptions and to calculate the tax liability. Tax is generally collected through employer withholding on wages and salaries and through individual estimated tax payments on income not subject to withholding.

The steps below outline the standard filing process for a new arrival or expat in the US:

1. Obtain a Tax Identification Number. Anyone filing a US tax return must have either a Social Security Number (SSN) or an Individual Taxpayer Identification Number (ITIN). To apply for an SSN, complete Form SS-5 (Application for a Social Security Card). If you are ineligible for an SSN, you can apply for an ITIN by submitting Form W-7 accompanied by the required supporting documentation.
2. Determine your residency status. Establish whether you qualify as a resident alien (Form 1040) or a nonresident alien (Form 1040-NR) based on whether you satisfy the green card test or the Substantial Presence Test. If you arrived partway through the year, a dual-status return may be required.
3. Gather all income documentation. Assemble W-2 forms from employers, 1099 forms covering other income sources, and records of any foreign income, pensions, rental receipts, or investment returns earned anywhere in the world.
4. Identify applicable exclusions and credits. Assess whether you are eligible for the Foreign Earned Income Exclusion (Form 2555), the Foreign Tax Credit (Form 1116), or any benefits available under a tax treaty. All of these must be actively claimed on your return — none applies automatically.
5. File FBAR if required. Submit FinCEN Form 114 (FBAR) if the aggregate value of your non-US financial accounts exceeded $10,000 at any point during the year. The FBAR is filed separately from your tax return — it is not attached to Form 1040 — and must be submitted electronically through the FinCEN BSA E-Filing System.
6. Check FATCA reporting. File Form 8938 alongside your Form 1040 if your specified foreign financial assets exceed the threshold applicable to your filing status and location (for example, $200,000 or more at year-end for a single filer residing abroad, as of 2025).
7. Submit your return by the deadline. The standard filing deadline is April 15. US citizens and resident aliens who are living abroad on that date receive an automatic two-month extension, pushing the deadline to June 15 for 2025 calendar-year returns. A further extension to October 15 can be obtained by filing Form 4868. Bear in mind that any extension covers only the filing deadline — interest begins accumulating on unpaid tax from April 15 regardless.

Significant penalties and interest are typically imposed when a return is not filed on time or when tax payments — including estimated payments — are not made by the applicable due dates. The IRS provides online filing options through its Free File and e-file programmes; however, only a limited number of software providers can handle foreign addresses, so those living outside the US may need to use specialist expat tax software or engage a professional tax preparer.

What are the tax implications of leaving the United States?

Departing the US does not automatically bring your tax obligations to an end. Depending on your residency status and how long you held it, leaving can carry significant tax consequences.

Final Tax Return

In the year of your departure, you will most likely need to file a dual-status tax return — one that covers the portion of the year during which you were a US resident and, where applicable, the portion during which you were a nonresident. Because you can hold both statuses within the same tax year, you will need to file a dual-status income tax return that reflects each period accordingly.

Ongoing Obligations for US Citizens and Green Card Holders

For US citizens and resident aliens, the rules governing income, estate, and gift tax returns and the payment of estimated taxes remain essentially the same whether you are inside the United States or abroad. You remain liable for tax on your worldwide income from all sources and must report all taxable income and settle obligations in accordance with the Internal Revenue Code. This means US citizens who relocate overseas continue to owe US taxes on their global income indefinitely — a citizenship-based taxation model that is highly unusual internationally (Eritrea is one of only a small number of other countries that taxes its citizens based on citizenship rather than residency).

Expatriation Tax (Exit Tax)

The expatriation tax is a one-time charge that is triggered only when you formally renounce US citizenship or relinquish a long-term green card — and only if you meet the “covered expatriate” thresholds. A person is generally classified as a covered expatriate if their average net income tax liability over the five preceding years exceeded a specified level, their net worth is $2 million or more, or they fail to certify five years of tax compliance. The exit tax operates by treating all worldwide assets as though they were sold on the day prior to expatriation, with any gains above an annual exclusion amount subject to capital gains tax. Some dual nationals ultimately decide to renounce US citizenship, but doing so requires full tax compliance in advance, payment of a $2,350 consular fee, and in high-wealth situations may trigger a separate exit tax calculation. Consult the IRS’s expatriation tax guidance and a qualified adviser well ahead of any such decision.

Terminating Green Card Residency

Long-term green card holders who abandon their permanent residency are treated in broadly the same manner as those renouncing citizenship for exit tax purposes, provided they have held the green card for at least eight of the last fifteen years. Formally relinquishing your green card by filing Form I-407 is an essential administrative step, but it does not extinguish any tax obligations that have already arisen. Form 8854 (Initial and Annual Expatriation Statement) must be filed alongside the final tax return for individuals classified as covered expatriates.

State Tax Considerations After Departure

Leaving the US does not automatically terminate your state tax liabilities. States including California, New York, Virginia, and New Mexico may continue to assert the right to tax your worldwide income even after you have physically departed. Most states also decline to recognise the FEIE, which means income excluded at the federal level may still be subject to state taxation. Taking deliberate steps to change your state of domicile before you leave can result in substantial savings.

Practical tips for managing taxes as an expat in the United States

• Keep meticulous records of your travel. Many people unintentionally become US tax residents simply by spending too many days in the country without realising the consequences. Maintain a log recording every arrival and departure date — including short visits — from the very first day you set foot in the US.
• Understand the Substantial Presence Test before you arrive. The IRS applies a weighted three-year formula — 100% of the current year’s days, plus one-third of the prior year’s days, plus one-sixth of the days from the year before that. Knowing where you stand relative to the threshold allows you to make informed decisions about your time in the US.
• Take professional advice before disposing of assets. Selling a property or investment portfolio in the same year you become a US tax resident can have major tax ramifications. Time any such disposals carefully, ideally in consultation with a cross-border tax specialist.
• Engage with treaty provisions early. If your home country has signed a tax treaty with the US, study the relevant clauses before you arrive. Treaty benefits do not apply automatically — you must claim them on your return — and they can make a meaningful difference to your final bill.
• Do not overlook FBAR and FATCA obligations. Foreign bank accounts and investment holdings must be reported through the FBAR and FATCA systems to remain compliant. Keeping accurate and thorough financial records makes it far easier to claim relevant benefits, demonstrate residency status, and stay clear of penalties.
• Choose your state of residency deliberately. Establishing domicile in a state with no income tax — such as Florida or Texas — rather than a high-tax state like California or New York can result in significant annual savings. Make this choice intentionally and ensure your domicile is properly documented before you file.
• If you have missed past filings, address the situation without delay. The Streamlined Filing Compliance Procedures provide a route to catching up with reduced or waived penalties. This programme was designed specifically for expats who were unaware of their filing obligations and can offer a manageable path back to full compliance.
• Work with a specialist. Although the Substantial Presence Test may appear straightforward at first glance, errors can carry a heavy financial cost. Dual-status years, exempt individual periods, closer connection exceptions, and treaty provisions introduce layers of complexity that are easy to underestimate. Seek out a CPA or tax attorney with demonstrable expertise in international and cross-border taxation.

Frequently asked questions about taxation in the United States

When do I become a US tax resident as a foreign national?

Foreign nationals who are not US citizens are treated as nonresidents for tax purposes unless they satisfy either the green card test or the Substantial Presence Test during the calendar year. The green card test takes effect as soon as you are granted lawful permanent residency; the Substantial Presence Test is determined by a weighted count of the days you have been physically present in the US over a three-year period.

Does the US tax my worldwide income once I move there?

Yes. Satisfying the Substantial Presence Test means you are required to file Form 1040 and disclose your worldwide income — not just income arising in the US. All earnings, including foreign salaries, rental receipts, pension payments, dividends, and bank interest from anywhere in the world, must be declared. The Foreign Tax Credit and applicable treaty provisions can reduce the tax owed on income that has already been taxed in another country.

What is the filing deadline for my US tax return?

The standard filing deadline is April 15 each year. US citizens and resident aliens who are abroad on that date receive an automatic two-month extension, generally pushing the deadline to June 15. A further extension to October 15 is available by submitting Form 4868. It is important to note that extensions relate to filing only — interest continues to accrue on any outstanding tax liability from April 15 onwards.

Do I need to report my foreign bank accounts to the US authorities?

If the combined balance across your foreign financial accounts exceeded $10,000 at any point during the year, you are obliged to file an FBAR (FinCEN Form 114) with the Treasury Department. FATCA obligations under Form 8938 are triggered at higher asset levels — for example, $200,000 or more in total foreign assets at year-end for a single filer living abroad (as of 2025). Both requirements are reporting obligations rather than taxes, but the consequences of non-compliance can be severe.

How is investment income taxed for US tax residents?

Long-term capital gains — on assets held for more than one year — are taxed at rates of 0%, 15%, or 20%, depending on your level of income. Short-term gains are taxed at your ordinary marginal rate. Dividends, interest, and capital gains are generally subject to ordinary income tax rates, unless they qualify as “qualified dividends,” which attract the preferential capital gains rate. There is no federal tax on accumulated net wealth.

Can I avoid being taxed on income I have already paid tax on in my home country?

The Foreign Tax Credit provides a dollar-for-dollar offset against US tax for foreign taxes already paid — a particularly effective mechanism for expats based in high-tax countries. Where your home country has concluded a double taxation treaty with the US, further relief may be available through treaty-specific provisions. The combination of the FTC and treaty benefits means that in most situations the same income is not taxed twice, though you should verify the specifics of your case with a qualified adviser.

What happens to my pension from my home country when I move to the US?

The US tax treatment of foreign pensions is a complex area that depends heavily on whether a relevant tax treaty exists. Some DTAs — including those with the UK, Canada, and Germany — contain dedicated provisions for pension income that can reduce or eliminate US tax on distributions. In the absence of a treaty, foreign pension income is generally taxed in the US in the same manner as domestic pension income. Review the applicable treaty text on the IRS website and take specialist advice before drawing any foreign pension while you are a US tax resident.

What are the tax consequences if I later leave the United States?

The expatriation tax is a one-time charge that arises only when you formally renounce US citizenship or relinquish a long-term green card — and only if you meet the “covered expatriate” thresholds. For those who fall below those thresholds, leaving is comparatively straightforward: you file a final (and potentially dual-status) return for the year of departure, formally surrender your green card if applicable, and submit Form 8854 where required. US citizens, however, continue to owe US taxes on their worldwide income indefinitely, regardless of where they choose to live.