Tax in United States

Who is the tax authority in the United States?

The Internal Revenue Service (IRS) is the federal tax authority of the United States, operating as a bureau of the Department of the Treasury. The IRS administers the Internal Revenue Code (Title 26 of the United States Code), processes individual and business returns, issues refunds, and runs the federal compliance and enforcement function. State-level taxes are administered by separate state Departments of Revenue (or equivalent). The IRS publishes annual guidance through revenue procedures, notices, and the Internal Revenue Manual, and maintains taxpayer-facing services through Online Account, IRS2Go, and Form 1040 instructions [SC1].

What is the US tax year and the filing deadline?

The federal tax year for individuals is the calendar year (1 January – 31 December). The standard filing deadline is 15 April of the year following the tax year [SC1]. Where 15 April falls on a weekend or a District of Columbia holiday, the deadline shifts to the next business day. A six-month automatic extension to file (not to pay) is available by submitting Form 4868 by the original deadline; the extended deadline is 15 October. Estimated tax payments are due in four instalments — typically 15 April, 15 June, 15 September, and 15 January of the following year — for filers whose withholding will not cover their liability [SC1]. C corporations on a calendar year file Form 1120 by 15 April; fiscal-year corporations file by the 15th day of the fourth month after the fiscal year-end. Pass-through entities (S corporations, partnerships) file Form 1120-S or Form 1065 by 15 March on a calendar year.

How is US tax residency determined?

US federal income tax follows a citizenship-and-residency rule, not a residency-only rule. US citizens are taxed on worldwide income regardless of where they live; that obligation does not pause when a citizen moves abroad [SC5]. Non-citizens are categorised as resident aliens (taxed on worldwide income, like citizens) or non-resident aliens (taxed only on US-source income and effectively connected income). The principal residency test for non-citizens is the Substantial Presence Test (SPT) under IRC §7701(b): a person is a resident for the year if they were physically present in the United States for at least 31 days in the current year and 183 days across the current year plus one-third of the days in the prior year plus one-sixth of the days in the year before that [SC5]. The Closer Connection exception and treaty tie-breaker rules can override SPT for filers with a qualifying connection to another jurisdiction. Green-card holders are resident aliens from the first day they hold lawful permanent resident status, regardless of physical presence.

How does federal personal income tax work?

The federal individual income tax is a graduated, marginal-rate system with seven brackets. For tax year 2025 (returns filed in 2026), the rates are 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent, with bracket thresholds set annually for inflation by the IRS in Rev. Proc. 2024-40 [SC2]. The 37 percent top rate applies to taxable income above roughly USD 626,350 for single filers and USD 751,600 for married-filing-jointly filers in 2025 [SC2]. The standard deduction is the default; for tax year 2025 it is approximately USD 15,000 for single filers, USD 22,500 for heads of household, and USD 30,000 for married-filing-jointly filers [SC2]. Filers may itemise deductions (state and local taxes capped at USD 10,000 per the TCJA SALT cap, mortgage interest on up to USD 750,000 of acquisition debt, charitable contributions subject to AGI limits) instead of taking the standard deduction.

Long-term capital gains (held more than 12 months) are taxed at preferential rates of 0 percent, 15 percent, or 20 percent depending on taxable income, plus a potential 3.8 percent Net Investment Income Tax for higher-income filers. Qualified dividends are taxed at the same preferential rates [SC5]. State income taxes apply in addition in 41 of 50 states plus the District of Columbia; state top rates range from roughly 2.5 percent (e.g., Arizona) to over 13 percent (e.g., California). Nine states have no state-level individual income tax (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming).

How does federal corporate income tax work?

The federal corporate income tax under IRC §11 is a flat 21 percent on taxable income, set by the Tax Cuts and Jobs Act of 2017 and unchanged in subsequent legislation [SC3]. C corporations compute taxable income on Form 1120; pass-through entities (S corporations, partnerships, single-member LLCs treated as disregarded entities) report income on the owner's individual return rather than at entity level. Branches of foreign corporations are subject to the regular 21 percent rate plus a 30 percent branch profits tax under IRC §884, often reduced by treaty. The Inflation Reduction Act of 2022 introduced a 15 percent Corporate Alternative Minimum Tax for corporations with average annual financial-statement income above USD 1 billion across a three-year testing period [SC5], and a 1 percent excise tax on certain stock buybacks. State corporate income taxes apply in addition in most states; combined federal-plus-state rates typically land between 22 percent and 28 percent depending on the state and apportionment factors.

How does indirect tax work in the United States?

The United States has no federal value-added tax or general sales tax. Indirect tax is administered at the state and local level: 45 states plus the District of Columbia impose a general sales tax, and roughly 13,000 local jurisdictions add additional county, municipal, and special-district sales taxes on top [SC5]. Combined state-plus-local sales-tax rates range from 0 percent (in the five no-sales-tax states — Alaska, Delaware, Montana, New Hampshire, Oregon — though Alaska localities can impose their own) to over 10 percent in some Louisiana, Tennessee, and Arkansas localities. Sales-tax nexus rules changed materially after the Supreme Court decision in South Dakota v. Wayfair (2018), which permitted states to impose collection obligations on out-of-state sellers exceeding economic-nexus thresholds (commonly USD 100,000 in sales or 200 transactions per year) without a physical presence requirement. Use tax applies to taxable purchases on which sales tax was not collected; compliance among individual filers is low but enforcement against businesses is increasing.

How is crypto taxed in the United States?

The IRS classifies virtual currency as property for federal income tax purposes under Notice 2014-21, not as currency [SC4]. Each disposal of a crypto asset — sale for fiat, exchange for another crypto asset, payment for goods or services — is a taxable event giving rise to capital gain or loss measured by the difference between fair market value at disposal and adjusted basis. Holdings of more than 12 months qualify for long-term capital-gains rates (0/15/20 percent); shorter holdings are short-term and taxed at ordinary rates. Receipt of crypto as payment for services or as mining or staking rewards is taxable as ordinary income at fair market value on receipt, with that value becoming the basis for any later disposal [SC4]. The IRS added a digital-asset question to the front page of Form 1040 in 2020; from tax year 2025 forward, brokers are required to issue Form 1099-DA reporting digital-asset proceeds. FBAR and Form 8938 reporting may apply for foreign-held crypto in some scenarios; the rules are still developing and Treasury guidance has shifted multiple times.

How does the United States handle tax treaties?

The United States maintains a network of approximately 70 bilateral income tax treaties [SC5], plus a smaller set of estate-and-gift tax treaties and totalisation agreements covering social-security coordination. US treaties are negotiated by the Treasury Department and ratified by the Senate. The standard US model treaty includes a saving clause that preserves the United States' right to tax its citizens and residents as if the treaty were not in force, with limited exceptions; the saving clause is the reason a US citizen abroad cannot generally use treaty residency to escape US tax. Treaties typically reduce withholding tax rates on cross-border dividends, interest, and royalties; provide tie-breaker rules for dual-resident individuals; coordinate pension and social security taxation; and contain Limitation on Benefits (LOB) provisions to prevent treaty shopping. The Foreign Earned Income Exclusion (FEIE, IRC §911) and the Foreign Tax Credit (FTC, IRC §901) are domestic relief mechanisms that operate in parallel with treaty relief; expat filers commonly use FEIE plus FTC rather than treaty residency to minimise double taxation.

What are the common penalties and pitfalls for foreigners?

The failure-to-file penalty is 5 percent of unpaid tax per month, capped at 25 percent; the failure-to-pay penalty is 0.5 percent per month [SC1]. The accuracy-related penalty under IRC §6662 is 20 percent of any underpayment attributable to negligence, substantial understatement, or substantial valuation misstatement; the civil fraud penalty under §6663 is 75 percent. For foreign-information reporting, the FBAR (FinCEN Form 114) is required for any US person with aggregate foreign-account balances exceeding USD 10,000 at any point during the year; non-wilful penalties run up to roughly USD 16,000 per violation and wilful penalties up to the greater of USD 161,000 or 50 percent of account balance, with figures inflation-adjusted [SC5]. Form 8938 (Statement of Specified Foreign Financial Assets) is required at higher thresholds and carries a USD 10,000 base penalty.

Common pitfalls for foreigners and recent immigrants include: failing to file because the filer assumes US-source-only income or lower thresholds exempt them; missing the FBAR even though no tax is owed; treating a US-citizen child's foreign-mutual-fund account as a non-issue when it triggers PFIC reporting; and assuming a treaty residency tie-breaker exempts a US citizen abroad from filing — it does not. Streamlined Filing Procedures, an IRS amnesty programme, can resolve non-wilful expat-tax delinquency without civil penalties for filers who qualify [SC5]. For complex cross-border situations, common approaches discussed by practitioners include consulting a credentialed tax pro with expat or international experience before filing.