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:
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.