The US Tax system is exceedingly complex . New York City has the highest combined tax rates in the entire country though 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.
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/publications/show/151.html).
State Tax Rates
As a resident in New York City, you are expected to pay federal, New York State as well as a New York City personal income tax. New York State income tax along with federal tax is usually deducted from your paycheck as you receive it each pay cycle. While the federal income tax rates are set for each income bracket, NY state income tax rates are not the same as federal tax rates. The variable income tax rate for New York is determined by NY State tax legislation (http://www.tax.state.ny.us/). How much income tax is withheld from your paycheck depends the tax bracket under which you fall qualify.
The New York State taxes are structured according to income tax brackets and there are five income tax brackets for New York. According to the most recent estimates (March 2009) these are as follows:
- If your income range is between $0 and $8,000, your tax rate on every dollar of income earned is 4%.
- If your income range is between $8,001 and $11,000, your tax rate on every dollar of income earned is 4.5%.
- If your income range is between $11,001 and $13,000, your tax rate on every dollar of income earned is 5.25%.
- If your income range is between $13,001 and $20,000, your tax rate on every dollar of income earned is 5.9%.
- If your income range is $20,001 and over, your tax rate on every dollar of income earned is 6.85%.
Basically the rule is that the more you earn the more you pay.
NY City additionally imposes an income tax on residents only. This personal income tax is administered and collected for the City by the New York State Department of Taxation and Finance. A resident uses the same filing status and taxable income as for State purposes, but applies different tax rates and credits. This tax is applicable to every income earning individual, estate and trust which resides in the city. This tax rate is a graduated tax that ranges from 2.907% to 3.648% and is again dependent on your filing status and income.
If you are married and filing jointly and earn more than $90,000 year then you can expect to be taxed at the highest rate but if you are filing as a single person the highest tax rate applies if you earn more than $50,000 a year. This tax applies at the same rate to all kinds of income that is earned including wages, dividends, capital gains etc. However this New York City tax qualifies as an itemized deduction and if you itemize the deductions on your federal tax return this tax can somewhat reduce your federal tax liability.
The New York City personal income tax form is filled with the New York State personal income tax form and then sent to
STATE PROCESSING CENTER
PO BOX 61000
ALBANY NY 12261-0001
Federal Taxes have to be sent at a different address depending on whether the tax payment is included with the form or not (http://www.irs.gov/file/article/0,,id=104561,00.html). However, you can electronically file these tax returns on the websites of the Internal Revenue Service (http://www.irs.gov/index.html) and the Department of Taxation and Finance (http://www.tax.state.ny.us/).
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.
An expatriate in New York City is usually responsible for paying his/her taxes and generally all taxes including federal, state and city taxes are expected to be filed by April 15th. For example, your 2009 taxes will be due by 15th April 2010 and if you need to file for an extension this request also has to be filed by 15th April 2010.
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/businesses/international/article/0,,id=96739,00.html). 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.