New Immigrant Guide to the US Tax System
For many new immigrants to the US, the US tax system is a source of confusion and anxiety. Although there is a learning curve associated with the US taxation system, this article will help to demystify the process for you.
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Overview of the US Income Tax System:
In the US, everyone who earns an income above a certain threshold or is considered to be a resident files taxes. The Internal Revenue Service, also known as the IRS, is the government agency that is in charge of collecting taxes and enforcing tax law. Every year tax season lasts from January to April. During this four month period you are required to file your taxes. Filing your taxes involves reporting to the IRS how much income you earned that past year and how much you have already paid in taxes. Already paid taxes are those that the employer has withheld from a person’s paycheck. An employer knows how much tax to withhold from your paycheck based on information that you fill out on an I-9 and W-2 form. These forms will likely be completed on your first day at a new job. Once you have filed your taxes, you will either receive a refund (because you paid more taxes over the year than you needed to) or you will pay the government (because you paid too little tax over the past year). The United States has two social insurance programs: Medicare and Social Security. Funds for these programs come out of your paycheck. Eventually, you will have the option to use these services if you meet the eligibility requirements.
Determining if you are Resident for Tax Purposes:
As mentioned above, if you are a resident you will likely be required to file taxes with the IRS. There are two tests used to determine if you will need to pay taxes. The first is the Green Card test which states that you are resident if you have been a lawful Permanent Resident in the US at any time during the previous year. The IRS also uses the Substantial Presence Test which states that you are a resident if you have been physically present in the US for 31 days of the current year, and have been present in the US for 183 days during the past three years. For the 183 days, there is a specific system used to count these days. All the days that you were present in the current year are counted, ⅓ of the days you were present are counted for the previous year and ⅙ of the days during the third year are counted. If you pass either of the two tests, the IRS considers you a resident alien and you are required to pay taxes in the same manner as a US citizen. Additionally, you will have to pay income taxes on any income directly associated with the US but not on income that is earned elsewhere.
Filing Correctly:
It is vitally important that you file your taxes under the correct residency status. You will either be filing as a resident or a non-resident. The IRS has a specific way of calculating residency and if you file as a non-resident it might make the government think that you have abandoned your Permanent Resident status. If you are unsure about which status you should file under, make sure you speak with an immigration attorney. Paying taxes in another country can also create the impression that you are no longer residing in the US. Again, speaking with an immigration attorney is the best way to ensure you file your taxes correctly as a resident.
You will use your W-4 form, completed when you begin any new job, in order to file your taxes. When you initially complete this form, it will be used to determine how much tax your employer will withhold from your paycheck. The money that your employer withholds will be paid to the IRS. The taxes that you have paid over the course of the year will be considered when you file your yearly tax return. During tax season, you will either receive a refund or owe money based on how much of your tax has been withheld all year.
What Does This All Mean for Me?
Now that we have covered the basics regarding how the income tax system functions, we will explore what it means for you specifically. Every taxpayer in the US falls into one of seven tax brackets based on their income: 10%, 12%, 22%, 32%, 35% or 37%. For the 2018-2019 tax year, the tax brackets are as follows:
Tax Rate | Single | Head of House | Married Filing Jointly or Widow | Married Filing Separately |
10% | Up to $9,525 | Up to $13,600 | Up to $19,050 | Up to $9,525 |
12% | $9,526 ro $38,700 | $13,601 to $51,800 | $19,051 to $77,400 | $8,525 to $38,700 |
22% | $38,701 to $82,500 | $51,801 to $82,500 | $77,401 to $165,000 | $38,701 to $82,500 |
24% | $82,501 to $157,000 | $82,501 to $157,000 | $165,501 to $315,000 | $82,501 to $157,000 |
32% | $157,501 to $200,000 | $157,501 to $200,000 | $315,501 to $400,000 | $157,501 to $200,000 |
35% | $200,001 to $500,000 | $200,001 to $500,000 | $400,001 to $600,000 | $200,001 to $300,000 |
37% | $500,001 or more | $500,001 or more | $600,001 or more | $300,001 or more |
To help you understand the impact of your tax bracket and the state that you live in, three example cases will be shown. The amount of tax to be paid based on salary and state will be calculated for California, Indiana and Florida. Three tax brackets, 12%, 22% and 32%, will be looked at. As you will see, some states have a state income tax which varies state to state and is separate from the federal income tax.
California
Tax Bracket | Salary | Federal Income Tax | State Income Tax | Social Security | Medicare | Total Tax | Salary After Tax |
12% | $25,000 | $1,370 | $244 | $1,550 | $363 | $3,526 or 14.1% | $21,474 |
22% | $50,000 | $4,370 | $1,605 | $3,100 | $725 | $9,800 or 19.6% | $40,200 |
32% | $160,000 | $29,810 | $11,729 | $7,886 | $2,320 | $51,744 or 32.3% | $108,256 |
Florida
Tax Bracket | Salary | Federal Income Tax | Social Security | Medicare | Total Tax | Salary After Tax |
12% | $25,000 | $1,370 | $1,550 | $363 | $3,282 or 13.1% | $21,718 |
22% | $50,000 | $4,370 | $3,100 | $725 | $8,195 or 16.4% | $41,805 |
32% | $160,000 | $29,810 | $7,886 | $2,320 | $40,016 or 25% | $119,984 |
Indiana
Tax Bracket | Salary | Federal Income Tax | Social Security | State Income Tax | Medicare | Total Tax | Salary After Tax |
12% | $25,000 | $1,370 | $1,550 | $816 | $363 | $4,092 or 16.4% | $20,908 |
22% | $50,000 | $4,379 | $3,100 | $1,666 | $725 | $9,861 or 19.7% | $40,139 |
32% | $160,000 | $29,810 | $7,886 | $5,406 | $2,320 | $45,422 or 28.4% | $114,578 |
Sales Taxes
Beyond income tax, there is sales tax in the United States. Sales tax is a tax that is paid to a governing body for the sales of goods and services. Sales tax is typically not included in the price that is listed on a product. This can be confusing to new immigrants because the actual cost of the item will be higher than expected.
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