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United States – Taxation

The United States has a complex taxation system that generates revenue to fund public services and social programs. This article will provide an overview of how taxation works in the United States, including double taxation agreements, the main taxes expats need to be aware of, tax breaks, how and when to file a tax return as an expat, and tax exit procedures.

The Taxation System in the United States

The taxation system in the United States is administered by the Internal Revenue Service (IRS). The tax system is divided into two types of taxes: federal and state. Federal taxes are levied by the federal government, while state taxes are imposed by individual states.

Individuals are taxed based on their income, with a progressive tax system based on income brackets. The tax rates range from 10% to 37%, with the highest tax rate applicable to those earning more than USD 523,600 per year.

Businesses are taxed based on their profits, with a corporate tax rate of 21%. However, some industries are subject to higher or lower tax rates, depending on the sector.

Double Taxation Agreements

The United States has entered into double taxation agreements (DTAs) with over 60 countries, including major trading partners such as Canada, Japan, and the United Kingdom. DTAs are agreements between two countries that aim to eliminate double taxation of income earned in both countries. These agreements help to promote cross-border trade and investment and ensure that individuals and businesses are not taxed twice on the same income.

Under DTAs, residents of one country may be eligible for tax benefits, such as reduced withholding tax rates, when receiving income from the other country. Expatriates who are residents of a country that has a DTA with the United States may be able to take advantage of these benefits.


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Main Taxes for Expats in the United States

As an expat working or doing business in the United States, there are several taxes that you need to be aware of. These include federal income tax, state income tax, and payroll taxes.

Federal Income Tax

Expats are subject to federal income tax on their worldwide income, regardless of where they are living. The tax rates range from 10% to 37%, with the highest tax rate applicable to those earning more than USD 523,600 per year.

Expats may be eligible for certain tax deductions and credits, such as the foreign earned income exclusion and the foreign tax credit, to reduce their federal tax liability.

State Income Tax

In addition to federal income tax, expats may also be subject to state income tax if they are living and working in a state that imposes a state income tax. The tax rates and rules vary by state.

Payroll Taxes

Expats who are employed in the United States are subject to payroll taxes, which include Social Security and Medicare taxes. The combined tax rate is 15.3%, with half paid by the employer and half paid by the employee.

Special Tax Breaks for Expats

Expats who are working or doing business in the United States may be eligible for certain tax breaks. These include:

Foreign Earned Income Exclusion

Expats who meet certain requirements may be able to exclude up to USD 108,700 of their foreign earned income from federal income tax.

Foreign Tax Credit

Expats may be able to claim a credit for foreign taxes paid on their foreign earned income, which can help reduce their federal income tax liability.

State Tax Deduction

Expats who pay state income tax may be able to deduct these taxes on their federal income tax return.

Filing Tax Returns

Expats in the United States are required to file a federal income tax return annually, regardless of whether they are liable for tax. The deadline for filing the tax return is April 15th of the following year. However, expats who are living outside of the United States on the tax filing deadline may be eligible for an automatic extension until June 15th.

Expats can file their tax return online or by mail. They will need to provide their personal information, income earned in the United States and abroad, and any applicable tax deductions or credits.

Employers are responsible for withholding taxes from their employees’ salaries and remitting them to the IRS. Expats who are self-employed or running a business in the United States are responsible for paying their own taxes.

Tax Exit Procedures

Expats who are leaving the United States to move abroad are required to complete tax exit procedures. This involves filing a final tax return and reporting any income earned up to the date of departure.

If an expat has assets or investments in the United States, they may also be subject to exit taxes. This is a tax on unrealized capital gains on assets or investments, such as stocks or real estate, that are sold or transferred before leaving the United States.

Expats should consult with a tax professional to ensure that they are in compliance with all tax requirements before leaving the United States.

In conclusion, the taxation system in the United States is complex, with federal and state taxes levied on individuals and businesses based on their income and profits. Expats who are working or doing business in the United States should be aware of their tax obligations and take advantage of any tax breaks or incentives that they may be eligible for. Filing tax returns and completing tax exit procedures are important steps to ensure compliance with the law and avoid any potential legal issues. Expats should consult with a tax professional to ensure that they are meeting all tax requirements and taking advantage of any available tax benefits.


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