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Income Tax and Tax Calculation
In America you may have to pay more than one form of income tax. Everyone is liable for federal income tax, while Florida is one of the few states that levies no state personal income tax (the others are Alaska, Nevada, South Dakota, Texas, Washington and Wyoming, while in New Hampshire and Tennessee, state income tax applies only to dividends and interest income), which is prohibited under the state constitution. However, it compensates in a large part by imposing a variety of state and local taxes (many targeted at visitors, who don’t get to vote in tax referendums, etc.).
Liability: If you earn income in America, you may need to file a US income tax return even if you’re only visiting the country. If you’re a non-resident foreigner (alien) and you work or are engaged in a trade or business in America, you must file a tax return (form 1 O4ONR) irrespective of the amount of income or whether it’s exempt from US tax. Some tax laws that apply to non-residents are different from those applying to resident foreigners. Generally non-residents are taxed only on income from sources in America. You’re classified as a non-resident foreigner if you aren’t a US citizen and you don’t meet either the ‘alien registration card (green card) test’ or the ‘substantial presence test’.
Green Card & Substantial Presence Tests: Under the ‘green card’ test you’re a lawful permanent resident of America for tax purposes if you had a green card at any time during the previous tax year (January to December). Under the substantial presence test, you’re eligible for US income tax if you spend more than 3 1 days there during the current year and a total of 183 ‘qualifying’ days (six months) during the current year and the two previous years. Note that all days spent in the current year qualify towards the 183-day total, but only a third of the number of days spent in the first previous year and a sixth of the number of days in the year before that qualify. For example, if you spent 90 days in the current year, e.g. 2002, these are counted in full. In the previous year, i.e. 2001, you spent 120 days in the country, a third of which is 40; in the preceding year of 2000, you spent 60 days in America, a sixth of which is 10. The sum for 2000 to 2002 would therefore be 10+40+90, a total of 140 days, or 43 days less than the necessary 183 days. A presence of 122 days in each of three consecutive years will satisfy the substantial presence test.
During the year you arrive in or depart from America, you may have dual status and be both a non-resident alien and a resident foreigner, when special rules apply. This subject is described at length in the IRS publication 519, US Tax Guide for Aliens, available free from any IRS office or via the IRS website (www.irs.ustreas.gov).
If there’s any doubt, the Internal Revenue Service (IRS) may use ‘intention’ as a yardstick for establishing your country of domicile and therefore who gets your taxes.
America has tax treaties with many countries to prevent people paying double taxes. Under tax treaties, certain categories of people are exempt from paying US tax or qualify for benefits, including short-stay visitors, teachers and professors, employees of foreign governments, trainees, students and apprentices. Treaties also cover the payment of capital gains tax. If part of your income is taxed abroad in a country with a treaty with America, you won’t usually need to pay US tax on that income. Contact your nearest IRS district office for information about your US tax obligations. Even if you aren’t liable for US taxes, you may need to complete a tax return, e.g. a ‘nonresident alien’ return (form 1040NR).
Reducing your tax burden is both a national sport and an obsession in America, where a wealth of tax books, magazines and free advice in financial magazines and newspapers is published, particularly during the few months leading up to April 15th (tax filing day). The best selling tax guides include Consumer Reports Books’ Guide to Income Tax Presentation, Ernst and Young Tax Guide, H and R Block Income Tax Guide and J. K. Lasser’s Your Income Tax (John Wiley and Sons). Cheaper magazine-style guides include the World Almanac’s Cut Your Own Taxes and Save. All tax guides (and computer programs) are updated annually and are tax deductible.
In addition to US taxes, you may also be liable for taxes in your home country, although citizens of most countries are exempt from paying taxes in their home country when they spend a minimum period abroad, e.g. one year. If you’re in doubt about your tax liability in your home country or country of domicile, check with your country’s embassy in America. Find More information about income tax >>
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