The United States presents numerous opportunities for those seeking to emigrate, be it through business ventures, study, or career advancement. However, one crucial aspect for newcomers is getting acquainted with the country's laws, including its famously complicated tax system. With both federal and state-level obligations, additional taxes for the self-employed, and specific rules for non-residents and expats, understanding how the system works and knowing your own tax status is essential to staying compliant and avoiding nasty surprises. This article provides essential information on the complexities of the US taxation system, aiming to assist those who are unfamiliar with its nuances.
Overview of the US tax system
Navigating the US tax system can be complex, often requiring professional advice for proper understanding. We've all seen scenes in movies with people scratching their heads over piles of paper as they struggle to do their taxes. The truth is, taxes are complicated in the US compared to many other countries, partly because of a dual system where taxes are levied at both federal and state levels, with potential additional obligations for city and district taxes depending on your location. Foreign nationals employed in the US are also subject to taxation, and it can take a while to get your head around all of your obligations.
The government agency that manages and regulates taxes in the country is the Internal Revenue Service 鈥� or IRS. When it comes to state taxes, they are managed individually by each state.
Types of US taxes
There are several types of taxes in the US:
- Federal income tax is a progressive federal tax imposed on income;
- Personal income tax is a progressive/fixed state tax imposed on income;
- Capital Gains Tax is a federal tax on income from stock and bond-related transactions;
- Payroll tax is taken from an employee's salary and is usually withheld directly by the employer. This is used as a contribution to the employee's Social Security and Medicare 鈥� and is paid by both the employer and the employee in equal parts. Currently, the tax rate for Social Security stands at 6.2% for the employer and 6.2% for the employee (12.4% in total); the current tax rate for Medicare is 1.45% for the employer and 1.45% for the employee (2.9% in total);
- Property tax is primarily imposed on real estate: land, buildings, industrial space, etc. However, some states also impose it on valuables: cars, technical equipment, furniture, etc. Tax rates vary by state and range from 0.27% to 2.35% of the total appraised value of the property;
- Sales tax is a state tax on goods and services that is added to the cost of retail items. Statewide sales tax ranges from 2.9% (Colorado) to 7.25% (California). Cities can then add additional sales tax at a local level, bringing the total tax to 11% in some cases. These taxes are automatically added to items and paid at the time of purchase.
Alaska, Delaware, Montana, New Hampshire, and Oregon currently do not have a sales tax. These can be referred to as the NOMAD states (鈥淣鈥� for New Hampshire, 鈥淥鈥� for Oregon, etc.).
Important:
is something to be mindful of in a number of states in the US when doing your shopping. The price you see on the price tag may not be the full price of the product, and you will need to pay more at the counter. Check your receipt for 鈥渢ax鈥� to see how much it was on a particular item.
What is the income tax rate in the US?
In order to pay your annual income tax, you need to identify your taxable income. For this, you will need to subtract standard or alternative deductions from your total income; a deduction is money that is not subject to government tax. A standard deduction is a fixed amount that is reviewed and adjusted every year. An alternative deduction is meant to identify all of your expenses that are not subject to tax (these typically include medical expenses, state and local income tax, contributions to charity, and more).
Note that the income tax in the US is calculated at a progressive rate, and tax brackets are adjusted annually based on the inflation rate.
In 2025, tax rates remain from 10% to 37%, with the following brackets for single filers:
- 10% (USD 0鈥揢SD 11,925)
- 12% (USD 11,926鈥揢SD 48,475)
- 22% (USD 48,476鈥揢SD 103,350),
- 24% (USD 103,351鈥揢SD 197,300)
- 32% (USD 197,301鈥揢SD 250,525),
- 35% (USD 250,526鈥揢SD 626,350)
- 37% (>USD 626,350)
Standard deduction: USD 15,000 (single), USD 30,000 (married)
This breakdown is based on the tax brackets provided for the 2023 tax year and is subject to change in subsequent tax years.
In order to file tax returns in the US, you will need a Social Security Number or a Taxpayer Identification Number. Your taxes will also depend on how long you've been in the country and your fiscal status (if you are a resident, non-resident, dual-status taxpayer, etc.).
The fiscal year in the United States is typically the same as the calendar year. However, if you want to, you can choose a different period. If you do, keep in mind that the deadline set by the IRS will remain to be 15 April.
Expats receive an automatic 2-month extension to June 15. You can also apply for an extension until October 15 using聽
Paying local and state taxes in the US
In addition to federal tax, most residents and non-residents of the US need to pay taxes to the state they reside in. The contributions depend on the state you live in, how long you are staying there, as well as your income.
A state income tax is a tax on income earned in that state. It is similar to a federal income tax, but state income tax funds assert budgets rather than the federal government. State income tax is lower than federal income tax and can range from 0 to over 13%.
Some states have a progressive tax, while others have a flat tax. Nine states do not levy a state income tax at all. These are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.
In 2025, several states reduced their rates. Notably, Iowa introduced a 3.8% flat tax, and Louisiana introduced a 3% flat tax. California continues to have the highest top rate at 13.3%.
What is the Alternative Minimum Tax in the US?
If you earn what is considered to be a high income in the United States, you may also be subject to (AMT). You are generally required to pay AMT if your adjusted gross income is over the established threshold. This threshold is adjusted every year based on the current inflation rate. For the 2025 tax year, the AMT exemption is USD 88,100 for individuals and USD 137,000 for married couples filing jointly.
If your income is below the threshold, you won't have to pay AMT. If it is higher, you will either need to pay standard income tax or AMT (depending on which is higher).
Taxes for the self-employed in the US
In addition to paying the income tax, self-employed people are also subject to Self-Employed (SE) taxes.
SE taxes work for the self-employed in the same ways as payroll taxes work for employed workers: they are meant to be contributions to Social Security and Medicare. In most cases, 92.35% of your net earnings from self-employment are subject to SE taxes. The current rate for SE tax is 15.3%. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).
Good to know:
The Social Security portion of SE tax applies only to the first USD 176,100 in net earnings in 2025.
Corporate tax in the US
If you're thinking of starting a business in the US, be aware that the standard federal corporate tax rate is 21%. In addition to the federal tax, most states also have their own corporate taxes that vary widely, for example, North Carolina's corporate tax rate is 2.25% whereas New Jersey's is over 11%.
The business structure you choose, whether it be a C corporation, S corporation, or LLC, will impact how profits are taxed. Many small businesses use what is called a to avoid being double-taxed.
Non-resident owners can start US companies, but be prepared for additional compliance steps and reporting requirements. Make sure you research your tax obligations thoroughly before embarking on any business ventures.
How to determine your tax status in the US?
Foreign nationals living and working in the United States are subject to one of two different tax systems based on residency status. This tax status depends on whether you are classified as a resident alien or non-resident alien.
Your status is considered a resident alien by the IRS if:
- You hold a Green Card;
- You have lived in the United States for more than 183 days;
- You have lived in the United States for more than 30 days during the last calendar year and at least 183 days during the current year and the previous 2 years.
If you do not meet one of these criteria, you fall into the non-resident alien tax classification.
Resident aliens are liable for taxes on income from any source, regardless of their country of origin.
Non-resident aliens are taxed only on income from US sources, such as a US salary or investments. Tax rates are calculated based on income and whether you are single, married, or filing as the head of household.
Resident and non-resident aliens must file a return if their income is over USD 15,000 (this is for single people under 65), USD 17,000 (single people over 65), USD 30,000 (married couples under 65), or USD 33,200 (married couples both 65+). Self-employed individuals must file if their net earnings exceed USD 400.
Exceptions to residency status in the US
There are a number of exceptions that need to be considered when determining your tax status in the US. These exceptions exempt some legal residents in the US from having to report taxable income.
Here are some of these exceptions:
- Commuting from Canada to Mexico;
- Having a tax home elsewhere;
- Belonging to a specific resident category. Aliens who must reside in the United States temporarily for specific reasons can claim an exemption for the days spent in the country. This typically applies to teachers and students, trainees, professional athletes, and people who have diplomatic or consular status and are working for a foreign government or an international organization;
- Qualifying for a medical exception;
- Tax treaty being in place.
Income tax for non-residents in the US
As mentioned above, non-residents in the US are only required to pay income tax on what they earn in the United States or from a US source. They do not need to pay tax on the income they earn from abroad.
For instance, if you are a citizen of Spain who has a business in Spain and a business in the US, you will only be taxed on your earnings from your US company. The income from your Spanish business won't be taxed.
Investment income that is realized in the US but is not from a US source is typically taxed at the rate of 30% (unless otherwise specified).
Note that as a non-resident alien in the United States, you need to keep detailed records to show all your income sources. The Internal Revenue Service (IRS) will then see which income is tax-exempt and which isn't.
Income tax for resident aliens in the US
Unlike non-resident aliens in the US, most US residents are taxed on all forms of income 鈥� both local and foreign, including foreign payment pensions.
Resident aliens may be able to claim and/or foreign tax credit if they qualify. For 2025, the Foreign Earned Income Exclusion (FEIE) has increased to USD 130,000.
The base Foreign Housing Exclusion is USD 20,800 (up to USD 39,000 in high-cost areas).
Additionally, resident aliens who are employed by a foreign government in the US may be entitled to an exemption on their earnings if the government that employs them has a reciprocal tax treaty with the US.
Dual taxation in the US
Aliens who receive their Green Cards during the tax year may find themselves in a dual taxation situation. This happens because they were classified as non-residents before receiving their Green Cards 鈥� and as residents after. Their status change occurred on the very day they received their Green Card.
In this case, you will need to file a statement that will break down all income you have received, both as a resident and as a non-resident. This requires for the non-resident portion and for the resident portion.
US tax treaties with other countries
The United States has established with numerous countries around the world to address issues related to double taxation and tax evasion. Some of the countries with tax treaties with the US include, but are not limited to Canada, the United Kingdom, New Zealand, Germany, Japan, Australia, France, India, China, South Korea, and Mexico.
These treaties serve various purposes, including the avoidance of double taxation, the reduction of withholding taxes, the exchange of information, and the establishment of a mutual agreement procedure for dispute resolution. The specific terms and provisions of each tax treaty can vary, so individuals and businesses engaged in cross-border activities are advised to consult with tax experts or legal professionals familiar with the details of the relevant treaty to ensure compliance and optimize tax efficiency.
As of 2025, new treaty negotiations are underway with Switzerland and Taiwan, with potential changes to withholding rules.
Understanding the US tax system
We would like to conclude this article with the same observation that we started it with. Taxation in the United States can be very complex, and if you are new to the country, it may take you some time to fully understand how things work. Many US residents use professional tax preparation services and advisors. This helps make sure that all the appropriate taxes are paid and all possible credits and deductions are filed.
Useful links:
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