New to the United States?
Understanding the Basics of the U.S. Tax System
Moving to the United States can involve many adjustments, including learning how the U.S. tax system works. Many new residents are surprised to learn that the U.S. tax system operates differently than the systems used in many other countries.
The goal of this article is to explain some of the basic ideas behind U.S. taxes so that new residents can avoid confusion and stay compliant with the law.
The U.S. Tax System Relies on Self-Reporting
One of the biggest differences in the United States is that the tax system largely relies on self-reporting.
Taxpayers are generally responsible for reporting their income and determining their tax liability by filing a tax return. Employers and other payers may withhold taxes and report payments to the government, but taxpayers are still responsible for making sure their return is complete and accurate.
Whether an individual is required to file depends on factors such as tax residency, income, filing status, age, and the type of income received.
First Determine Your U.S. Tax Residency
For someone who is not a U.S. citizen, one of the first questions is whether the person is considered a resident or nonresident for U.S. tax purposes. Immigration status and tax residency are related, but they are not always the same.
Generally, a noncitizen is treated as a U.S. resident for federal tax purposes if the person meets either the green card test or the substantial presence test. Special rules, exceptions, tax treaties, and first-year or dual-status rules may also apply.
U.S. Tax Residents Generally Report Worldwide Income
U.S. citizens and resident aliens generally must report income from sources both inside and outside the United States. Nonresident aliens are subject to different rules and generally are taxed on certain U.S.-source income and income effectively connected with a U.S. trade or business.
For a U.S. citizen or resident alien, reportable foreign income can include:
- wages or self-employment income earned outside the United States
- rental income from property located abroad
- interest earned on foreign bank accounts
- dividends and other investment income from foreign sources
Foreign tax credits, exclusions, tax treaties, and other provisions may help prevent or reduce double taxation, but separate reporting requirements can still apply.
Foreign Accounts and Assets May Have Separate Reporting Requirements
A foreign bank account itself is not income. However, interest or other income earned through the account may have to be reported on a U.S. income tax return.
Foreign financial accounts and other foreign assets may also create separate reporting requirements. Depending on the facts, these can include the Foreign Bank Account Report (FBAR) and Form 8938, Statement of Specified Foreign Financial Assets. These reporting rules are separate from the requirement to report taxable income.
Filing a Tax Return
U.S. citizens and resident aliens generally use Form 1040 to file an individual federal income tax return. A nonresident alien who has a U.S. filing requirement generally uses Form 1040-NR.
For most calendar-year individual taxpayers filing Form 1040, the regular federal income tax return deadline is generally April 15. If the date falls on a weekend or legal holiday, the deadline may move to the next business day. Different filing deadlines and special rules can apply to nonresident aliens and taxpayers in other circumstances.
Having taxes withheld from wages does not necessarily eliminate the need to file a tax return.
Identification Numbers for Tax Filing
A taxpayer who files a U.S. tax return generally needs a valid taxpayer identification number.
Social Security Number (SSN)
An SSN is issued by the Social Security Administration and is generally available to U.S. citizens and certain noncitizens who are authorized to work in the United States.
Individual Taxpayer Identification Number (ITIN)
An ITIN is issued by the IRS to certain individuals who have a federal tax purpose but are not eligible for an SSN.
An ITIN allows an individual to comply with federal tax filing requirements, but it does not authorize employment or change a person's immigration status.
Keep Good Records
Keeping accurate records can make filing taxes much easier. Important records may include:
- wage statements, such as Form W-2
- forms reporting other income, such as Forms 1099
- records supporting deductible expenses or tax credits
- documentation of foreign income
- records relating to foreign financial accounts or assets, when applicable
Good recordkeeping can also make it easier to respond if the IRS asks questions about a tax return.
Please Share This Information
Most of the people who read this article may already understand the basics of the U.S. tax system. However, many people in our communities may still be learning how it works.
If you know someone who recently moved to the United States, or someone who may not be familiar with the U.S. tax system, please consider sharing this article with them. A little information at the right time can help someone avoid confusion, mistakes, or bad advice during tax season.
Questions? Let's Talk!
The article is meant for informational purposes only. Please contact me directly to discuss how this applies to your individual tax situation.