The US Tax system is exceedingly complex. As an expatriate, you will most likely be guided by your HR department in matters such as US taxation and directed towards a reputed tax preparer who is experienced in filing taxes for foreign nationals. This tax preparer will then help you fill out and file your return.
However, in spite of this, it is always beneficial to have knowledge about the intricacies of the U.S tax system so that you know how your income is taxed in the United States.
For taxation purposes, an individual who is not a U.S. citizen is classified as an ‘alien’. Aliens are further classified as ‘resident’ aliens and non-resident aliens. The term resident alien is given to those foreign nationals who have permanent resident status in the USA. These resident aliens are taxed on their worldwide incomes just like U.S. citizens. Non-resident aliens are, however, taxed only on their income from sources that are located in the U.S. as well as incomes connected with the conduct of a trade or business in the US.
Apart from your residential status, your filing status is also important for the tax authorities. This status is important for the standard deductions that you qualify for as well as itemized deductions, exemptions and tax credit. This status also determines the tax rate under which you qualify.
The main filing statuses are:
- Married filing jointly
- Married filing separately
- Head of Household
Broadly speaking US taxes are calculated as follows:
Gross Income – Adjustments from Gross Income = Adjusted Gross Income
According to the US tax authorities Gross Income is the total of all income from whatever source it is derived. Losses are also generally included in the gross income category, but the amount of losses that are allowed to be taken into account may be limited.
Adjusted Gross Income – Standardized and Itemized deductions + Exemptions = Taxable Income
Standardized deductions are determined by your filing status. Itemized deductions include items like medical and dental expenses, mortgage interest, state and local income taxes, property taxes etc while exemptions are usually determined by your dependents.
Base Taxes calculated on your Taxable Income less Tax Credits equals your Net Tax liability.
Tax credits refer to items like foreign tax credits. Foreign tax credits help to prevent double taxation of the same income by the U.S. and a foreign country.
Everybody who earns an income that is greater than $950 and has unearned income that is more than $300 has to file a return and is subject to tax in the United States.
Federal Tax Rates
Federal tax rates in the United States range from 10% to 35% depending on your income bracket and filing status. A chart showing current tax rates and amounts according to incomes can be found at (http://www.taxfoundation.org/).
You can electronically file your federal tax return on the website of the Internal Revenue Service (http://www.irs.gov/).
As a first time filer, you have to file first your federal tax return and then your Illinois Income Tax. If you wish to mail your federal tax return, note that the address is not the same if you mail your return with payments or without payments (Calendar Year 2010). The following link http://www.irs.gov/ indicates you where you have to mail your federal tax return according to the form you send and if send your payments along with or not.
The Illinois Income Tax
There are no state income brackets in Illinois. Instead, the state income tax is calculated by multiplying net income by a flat rate. The rate is 3 percent of net income. The Illinois Income Tax is based on the federal Internal Revenue Code (IRC).
The Illinois Income Tax is imposed on every individual, corporation, trust, and estate earning or receiving income in Illinois. It is a state-wide fixed rate (non location-driven).
The requirements for filing and payments are similar to federal income tax procedures, including withholding and payment of estimated tax.
The form you have to fulfill is Form IL 1040 that you can find on the Illinois Department of Revenue (IDOR): http://www.revenue.state.il.us. The Illinois Income Tax Return is due annually by the 15th day of the 4th month following the close of the taxable year. For most individuals, this is April 15th.
About payments, individuals are required to make estimated tax payments if they expect to owe more than $500 tax after subtracting Illinois Income Tax withheld, and the credits for Illinois Property Tax paid, Education Expense credit, Earned Income credit, credit for income tax paid to other states, and tax credits from Schedule 1299-C, Income Tax Subtraction and Credits (for individuals).
Estimated payments are due April 15th, June 15th, September 15th, and January 15th of the following year. For individuals using fiscal year reporting, payments are due on the 15th day of the fourth, sixth, and ninth months of the fiscal year, and of the first month after the end of the fiscal year. Individuals must complete Form IL-1040-ES, Estimated Income Tax Payments for Individuals, and mail it with their estimated tax payments.
Individuals can file electronically their Illinois tax return: http://www.revenue.state.il.us/
If you wish to mail your return, note that the address is not the same if you mail your return with payments or without payments:
|Form IL-1040 without a payment||Illinois Department of Revenue|
PO Box 1040
Galesburg, IL 61402-1040
|Form IL-1040 with a payment|
Form IL-1040-ES, Estimated Income Tax Payments for Individuals (payment)
Form IL-1040-V, Payment Voucher for Individual Income Tax (payment)
|Illinois Department of Revenue|
Springfield, Illinois 62726-0001
For more information about taxes in Illinois, please check the Illinois Department of Revenue (IDOR): http://www.revenue.state.il.us/
The United States has tax treaties with various foreign countries. Under these tax treaties, residents of foreign countries are taxed at a reduced rate, or are exempt from U.S. taxes on certain items of income they receive from sources within the United States. These reduced rates and exemptions vary among countries and specific items of income. This list of tax treaties can be found at (http://www.irs.gov/). These tax treaties help to avoid double taxation though if the treaty doesn’t cover a certain kind of income or if your country is not covered by a tax treaty you are expected to pay taxes as required.