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Overview of Tax Issues for Expats in the United States Of America

Submitted: October 2013

The US tax year runs from the 1 January to the 31 December.

Tax Residence

When coming from abroad to the USA for employment it is important to understand the difference in terms of tax between being resident and non-resident. There are two basic tests for this in the USA, the lawful permanent resident test (which basically means you are a US citizen or hold a US green card) and the substantial presence test which is more complex. Any person physically present in USA for more than 183 days in any tax year will generally be considered a US resident for the rest of that tax year, unless they can show that their usual place of abode is a country outside the USA, and that they have closer connections in that country than in the USA. Generally an expat with ‘dependent services income’ can work in the USA for up to a year, without incurring a tax liability.

As a resident you will have to pay US tax on any income and gains which arise in the USA and abroad. As a non-resident you are only taxed on income and gains arising in the USA.

Whatever your residence status it is important to be aware if a tax treaty exists between your country of origin, or other country that is a source of overseas income, as these may effect the tax you pay on any money you receive from abroad. For more details see: Taxation - Tax Treaty Considerations for Expats in the USA.

Taxes

The main taxes on residents in the USA are federal income taxes and state/city taxes. In addition there is a Social Security tax of 6.2% which is capped and a Medicare levy of 1.45% of income. To ensure you pay the correct amount of tax on your income, you should apply for a Tax Identification Number (TIN) upon arrival. Your actual overall tax rate depends on how much you earn. Non-residents are not required to pay the Social Security tax and Medicare tax; they are also limited in their choice of status grouping when filing their tax returns. For more details see: Taxation - Employment Taxation for Expats in the USA.

If you are working in the USA for a US resident employer, they will deduct income tax and other taxes directly from your wages or salary each time you are paid. You may still be required to fill in a tax return at the end of the year.

If you come to the USA to set up in business, you have the choice of being self-employed, or starting your own company. Which path suits you best will depend on your circumstances. If you form a company, it will be liable for corporate tax on its US and worldwide income and gains. Income and long term capital gains are taxed at different rates, short term capital gains are taxed as ordinary income. For more details see: Taxation - Business Taxation for Expats in the USA.

Investment tax

Investment tax mainly applies mainly to interest on savings, bonds and dividends. Interest from US banks and building societies is paid without any tax deducted at source as long as you have provided them with your TIN. Dividends from US companies are paid without deductions to residents and must be reported on your tax return. Dividends paid to non-residents will have a 30% withholding tax deducted at source. For more details on investment tax generally see: Taxation - Investment Taxation for Expats in the USA. The tax treatment of investment income from a country outside the US can depend on whether there is a tax treaty between the two countries. For more details see: Taxation - Tax Treaty Considerations for Expats in the USA.

 

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