tax...

[jm83]

can someone explain the process of income tax in the US? does this just get deducted from your monthly wage - like income tax and national insurance in the uk? what are all the tax return forms for?

any help would be great!

[Bevdeforges]

Hi and welcome to the forum.

Well, the answer to the meaning of life, the universe and everything is 42. After that, your question is a little harder... <g>

In the US, you are taxable on just about all forms of income from all sources worldwide. When you work, you have money withheld from your pay to cover your estimated taxes (somewhat like the PAYE system in the UK) - but it is only an advance against what you ultimately owe at the end of the year.

To settle your tax obligation you must file an income tax return, where you list all your income (salary, investments, savings accounts, etc.) and all your various exemptions, deductions and other tax breaks. The US system is one of self-assessment - you work out all the numbers, including what you owe, and then compare that to what your employer has withheld during the year. If it isn't enough, you write a check to the government and if they have withheld too much, you get back a refund of the excess amount.

The trick is that if you are underwithheld by a certain amount (I think it's 10%) of what you ultimately owe, there are penalties to be paid. Those who don't earn a salary or who are self-employed must file quarterly tax estimates, and these are expected to be within the same limits to avoid penalties.

The good news is that there is a "safe harbour" rule - if you have an amount withheld that is at least equal to what your actual tax was last year (may be 90% of this amount, I think) they won't ask for penalties should you be underwithheld.

Unless your financial situation is terribly complicated, you should be able to do your own taxes, with the help of a tax filing program (there are several of them) - most of which have a "dialog" question and answer thing that will help you get the right numbers in the right places and should prompt you for most of the common deductions.

Oh yes, in most states, there is a separate state income tax, too. The forms are similar to the federal forms, and often rely on numbers you determine for the federal forms (like AGI, adjusted gross income or various deductible items). Again, there should be tax filing programs available for preparing these. Though if all else fails, there are the store front tax preparation offices (the best known of which is H&R Block). Or look for posters around town for "VISTA" tax services - a volunteer based tax assistance for those with fairly simple returns.
Cheers,
Bev

PS - Tax forms are available online at Internal Revenue Service - Publication 17 is probably the best overall reference to how to do your taxes and it's free to download (or you can ask the IRS to send you a copy). The expensive tax guides on the market quote liberally from Pub 17.

[synthia]

If you are not a US citizen, I don't think you can be taxed on your world-wide income, but just what you earn in the US, in wages, business income, interest, and dividends.

If you have substantial US income that is not subject to withholding, such as interest income, or if you change jobs often, you may end up not having enough money withheld to cover the taxes you owe. In that case, you should be filing quarterly returns to cover what hasn't been withheld. In any case you must pay it all when you file your taxes.

[Bevdeforges]

Originally Posted by synthia

If you are not a US citizen, I don't think you can be taxed on your world-wide income, but just what you earn in the US, in wages, business income, interest, and dividends.

If you are resident in the US (from a tax standpoint), you must declare your worldwide income. There are tax treaties that attempt to reduce or eliminate the risk of double-taxation, but they are not perfect.

It's only the non-residents who can get away with only declaring and paying tax on US-source income these days.
Cheers,
Bev

[synthia]

Wow, how do they get away with telling someone who is transferred to the US and has substantial investment income in another country that they now owe US taxes on it? They really have no jurisdiction over that money.

[synthia]

I got curious and looked this up. If you have a green card, you are taxed as a US citizen. If not, you must meet a residency requirement before you can be classified for tax purposes as a resident alien. So, if you are in the US on a work permit, you aren't taxed the same until you have spent substantial time in the US over a three year period. Unless of course you are covered by a tax treaty.


From the IRS web site:

Substantial Presence Test
You will be considered a U.S. resident for tax purposes if you meet the substantial presence test for the calendar year. To meet this test, you must be physically present in the United States on at least:

31 days during the current year, and

183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:

All the days you were present in the current year, and

⅓ of the days you were present in the first year before the current year, and

⅙ of the days you were present in the second year before the current year.

[Bevdeforges]

Synthia, don't you just LOVE that elaborate formula for determining tax residence in the US!!?? Then again, in most other countries it's 183 days of the tax year spent in country (plus a bunch of other factors) BUT most other countries exempt you from paying income tax once you are tax resident elsewhere. The US is one of the few Western countries that insists on taxing its own citizens (and Green Card holders) wherever they live in the world.

And just for clarification, if someone has investment income from outside the US, they don't declare it under the Overseas Earned Income Exclusion - that is for earned income (i.e. salary) only. (And you have to be physically present in a foreign country while earning the income.)

Investment income is usually taxed in the source country, subject to whatever tax treaty provisions there are between the source country and the US, and the US resident takes a foreign tax credit for the taxes paid on that income. (If the tax rate in the foreign country is lower than the US rate for that same income, you can wind up paying the difference to the IRS - but it depends on the tax treaty, if any.)

But many countries require their residents to declare their worldwide income. I have to do so on our French tax forms, too. What's weird is having to file US tax returns even when I am no longer resident there.
Cheers,
Bev

[synthia]

I once decided that I didn't want to fuss with it, and was going to hire someone to do the last of my tax returns with foreign income. The person I talked to refused. She just didn't want to deal with it!