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Income Tax in the USA
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 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 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 August 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.
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 $90,000 plus income, 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.
When you join a company, your employer will ask you to fill Form W4. That forms gives information to the employer regarding how many deductions an employee can make. For every deduction claimed, the employee is able to deduct 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 you 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.
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 income.
If you paid interest on a mortgage or real estate taxes, you will receive 1098 with that information.
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 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 by a trackable method such as certified mail with a return receipt. Please note that even if you filed the tax returns with the help of 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.
For immigration purposes, as long as you don't get a green card. you are not 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. 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.