In the United States, federal income tax is collected by the Internal Revenue Service (IRS), a branch of the United States Treasury. You must pay federal income tax regardless of where you live in the United States.
As well, most states also have an additional state income tax. However, states like Texas, Florida, Nevada, Washington, Wyoming, South Dakota, and Alaska have no state income tax. Tennessee and New Hampshire only apply state income tax to interest and dividend income. Of course, each state will collect taxes from you in one way or another. Generally, states that don’t charge income tax impose higher rates on things like property tax or sales tax.
There may be a city income tax or municipality income tax in some places.
Even though taxes are applicable for individuals (salaried or self-employed), corporations (small, mid-size, or large businesses), trusts, descendants’ estates, and certain bankruptcy estates, this article primarily explains the individual taxes, as that will be a concern for most newcomers.
A tax year is counted from January 1 to December 31, and you are required to file federal income tax returns by April 15. There may be different deadlines for filing state income tax returns, such as May 1 in Virginia. If your state doesn’t have a state income tax, you don’t have to file a state income tax return.
If you have a valid reason, you can file for an extension by sending Form 4868 to the IRS. If you are allowed an extension, you will then have until October 15 to file your taxes. Filing an extension to file the return does NOT give you an extension for paying your tax liability. Of course, you will have to pay interest on any taxes that were due. Therefore, don’t file for an extension unless you really have to.
Tax withholding
If you are working for someone, your employer is required to deduct federal income tax and state income tax (if any) from your paycheck. Your employer is also required to deduct social security plus Medicare contributions, which are collectively called F.I.C.A. and are generally 7.65% of your gross income. (Social security tax caps at around $132,900 in 2019, and that amount increases every year.) Your employer is also required to contribute the same amount of F.I.C.A. deducted from your paycheck. Your employer is required to deposit all tax deductions on a periodic basis to the appropriate government authorities. Your employer is required to send you Form W-2 (Wage and Tax Statement) by January 31 for all wages paid the previous year. Form W-2 describes your wages and your tax deductions.
There may be other non-tax related deductions in your paycheck, such as the employee portion of health insurance premiums, 401(k) deferrals (for retirement savings), etc. The remainder of your money is called “take home pay”.
If you work for yourself (self-employed, contracting, etc.), you will have to make quarterly payments of your estimated tax to the federal and state governments. If you don’t, you will have to pay a large penalty and interest in addition to the income tax that you owe. Estimated federal taxes are filed using Form 1040-ES.
Form W-4
When you join a company, your employer will ask you to fill Form W-4. That form gives information to the employer regarding how many deductions an employee can make. For every deduction claimed, the employee is able to deduct a certain amount of income from the income tax. Even though the Form W-4 is very confusing, you will claim one deduction for yourself, one deduction for your non-working spouse, and one deduction each for your minor children. If your spouse is employed somewhere else, let him/her get one deduction through their job, and don’t claim a deduction at your job.
The number of deductions claimed in the W-4 form is just an estimate regarding how much tax you may owe. You will have to pay tax according to your tax liability. If you claim too many deductions, too little tax will be deducted and you will have to pay the balance at the end. If the difference is too much, the IRS may charge you a penalty and interest. If you claim too few deductions, too much tax will be deducted and you will receive a refund. Even though you may feel happy that you got a refund, you are essentially giving a tax-free loan to the government until they give you your money back. Therefore, it is important to claim the right number of deductions.
Every person that you claim as a deduction must have a social security number (SSN). If the dependent is not eligible for a SSN, he/she must have an ITIN, which is a number used just for tax purposes. If your relatives are visiting the United States on a tourist visa, they are not eligible for an ITIN and not eligible to be claimed as dependents, even if they stay in the U.S. for 6 months or more.
1099
If you are self-employed or working as a contractor (even if you have a side business outside your regular full-time job), the payer will send you a 1099-MISC showing the amount of money they paid you. You need to include this income in your tax return.
There are several other types of 1099 forms:
1099-INT: For interest paid by a bank.
1099-DIV: For dividends and distributions paid by financial institutions.
1099-R: Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
If you receive rental income or royalties, they will be reported on Form 1099 as well.
You have to pay income tax on all other incomes.
If you paid interest on a mortgage or real estate taxes, you will receive 1098 with that information.
Filing Taxes
Basic tax forms are available for free at post offices, banks, libraries, etc. You can also download them from the IRS web site. Forms also have detailed instructions and worksheets with them. You can file the taxes yourself or you can get professional help. You can also file them with software like Turbo Tax or you can eFile the taxes on the IRS web site. However, before you can eFile your taxes, you will require a PIN number that you can obtain from the IRS website by providing your date of birth, social security number, and information from your previous year’s tax return. If you file online, make sure to print a hard copy of the return for your records and preserve it for at least 7 years.
Tax returns essentially list your income and any allowed deductions or credits against that income, and it shows the tax liability at the end.
If your tax return is simple, you can do it yourself. You may also be able to file Form 1040-EZ if it applies to you. There are also several tax preparations services such as H&R Block or Jackson Hewitt that file simple tax returns for a small fee. However, if it is complicated, you should seek professional help, preferably from a CPA. You can also call the IRS customer service at (800) 829-1040 from 7 A.M. to 10 P.M. Eastern Time. It is absolutely recommended that a CPA file your taxes if you own a business.
Before filing the tax returns, check several times to make everything is accurate. Make sure to keep copies of everything you send. Send the tax returns through a trackable method such as a certified mail with a return receipt. Please note that even if you filed the tax returns with the help of a tax software, tax preparer, or even a CPA, you are solely liable for all information on your tax return. Therefore, it is very important to know as much as possible about taxes.
If you owe money towards federal income taxes, you need to provide either your credit card information, pay online, or write a check payable to the “United States Treasury”. If you are entitled to a refund, you can either provide your bank information so the IRS can deposit money directly into your account, or you can have them send you a check. Direct deposit into your bank account generally takes around two weeks, while it may take one month or more to receive a physical check.
If applicable, you also will have to file state income and other local tax returns.
You will receive several copies of Form W-2 and Form 1099. You will have to attach each form with each return you file.
Non-Resident
For immigration purposes, as long as you don’t get a green card, you are not a permanent resident of the United States and you are considered a nonimmigrant. However, for tax purposes, you are considered a resident of the United States, as long as you stay in the U.S. for 183 days or more in a year, and you must file a resident tax return form 1040 (or 1040-EZ, if applicable). Non-residents need to file form 1040-NR. If you file a 1040-NR, you can’t claim the standard deduction on your income. You may need to pay tax per the flat rate instead of progressive tax; therefore, you may end up paying more tax than with a resident tax return.
File Form 8843 if you are tax exempt.
Tax Treaty
The United States and permanent residents of the United States must report their worldwide income in the U.S. tax returns. However, since the U.S. has a tax treaty with many countries (including India), you will not have to pay double taxes. You can take the foreign tax credit for the taxes you paid in other country. Therefore, if you come to the U.S. in the middle of the year, you may have to file tax returns in two or more countries, including the U.S.
Individual vs. Joint Returns
If you are single, you have to file an individual tax return.
If you are married (and not legally separated, divorced, etc.), you can either file a joint return or separate return. Joint returns can be filed as long as the spouse is not a non-resident alien. If you are filing a joint return, both spouses must sign the return. It may still be possible to file a joint return even if one spouse is a nonresident alien, as long as both spouses agree to be taxed on their worldwide income and can provide the documents related to their tax liability and foreign tax credits to the IRS.
Many newcomers may be surprised to know that many U.S. couples avoid getting married (even though they stay together and live a life just like married couples) simply because of tax issues. Because of the progressive tax structure, people with lower incomes are taxed in a lower tax bracket. As your income rises, you move into a higher tax bracket. If two people get married, they would find themselves in a much higher tax bracket because their income is combined and considered a single income when filing jointly. That is called a “marriage penalty”.
However, there are several benefits to filing a joint return:
* They can claim tax credits for several things like childcare expenses, earned income credit, etc.
* They will receive credit on interest earned on savings bonds that will be used for future college expenses. This may not be useful if you don’t have kids.
* Smaller portions of social security benefits may be considered taxable income. This may not be useful until you are at retirement age.
* You may be able to shelter larger amounts of income from being taxed.
Deductions
The IRS allows taking either standard deductions or itemized deductions. If you take the standard deduction, you can deduct a flat amount per person (the exact amount depends upon your tax filing status and changes every year) from your taxable income.
If you have U.S. resident minor children, you can take a child credit for each child in addition to the per person deduction.
If you have a larger amount of deductible items, you may want to go for itemized deductions. You can deduct local and state income taxes, interest on your mortgage, interest on student loans, medical expenses in the past year as long as they are at least 10% of your annual income, business expenses (for self-employed), and charitable donations. Health insurance premiums are generally not deductible.
No matter which type of deductions you take, you can’t receive more deductions than your total tax liability. If your deduction amounts are more than your tax liability, you just pay zero taxes. You don’t expect the IRS to pay anything back to you in most cases. However, in some circumstances, you may be entitled to get a refund under the Additional Child Tax Credit.
