How does the tax system work in the USA? The US tax system is organized as follows: 1. In the USA there are both federal and state taxes. Federal taxes are levied by the US government, and state taxes are levied by individual state governments. Some states also have local taxes. 2. Federal income taxes are progressive, meaning the higher your income, the higher your tax rate. 3. US citizens and tax residents must file an annual tax return with the IRS reporting their income, tax deductions and credits. 4. The main types of taxes in the US include: income tax (individual and corporate), capital gains tax, Social Security and Medicare taxes, inheritance tax, gift tax, estate tax, and consumption taxes (sales tax and excise taxes). 5. There are various tax deductions and credits that can reduce your tax burden. Deductions reduce taxable income, and credits reduce the tax itself. 6. Most employers in the United States withhold income taxes from their employees' salaries and remit them to the IRS. 7. Self-employed persons must independently calculate and pay taxes, including self-employment tax, which includes social contributions and health insurance. 8. The IRS (Internal Revenue Service) is the main tax agency in the United States, responsible for collecting taxes and enforcing tax laws. How do I know if I am a tax resident or not? You can determine whether you are a US tax resident using the following criteria: 1. Green Card Test: If you are a Green Card holder (permanent resident of the United States), you are considered a tax resident, regardless of where you actually live. 2. Substantial Presence Test: Days of presence in the United States are counted to determine your status under this test. You are considered a tax resident if you are present in the United States: • At least 31 days in the current year, and • At least 183 days for the last three years, including the current year and two previous years, according to the formula: all days of stay in the current year + 1/3 days of stay in the previous year + 1/6 days of stay in the year before last. 3. Exceptions: Certain categories of people, such as diplomats, students and some business visitors, may qualify for exceptions to these rules. How to calculate income tax? Calculating US income taxes involves the following steps: 1. Determination of taxable income: • Summation of all sources of income: salary, self-employment income, interest, dividends, rental income and others. • Deduction of eligible expenses such as contributions to retirement accounts, professional expenses (self-employed only) and others. • Standard deduction (flat amount) or itemized deductions (item specific expenses). 2. Applying tax rates to different income ranges. 3. Using tax credits for children, education, investments in renewable energy sources and others. 4. Subtraction of withholdings and taxes paid in advance. 5. Calculation of the final tax amount. • This calculation can be quite complex. • Specialized tax calculators can help you a little bit. • The best solution is to use the services of a professional tax preparer (calculation of your income tax is carried out during the preparation of the tax return). Do I need to file a tax return this year? To determine whether you need to file a US tax return, there are several factors to consider: 1. Income Level: If your income exceeds a certain minimum threshold, which depends on your age, marital status and type of income, you must file a return. 2. Taxpayer Status: Different rules apply to different tax statuses, such as single, married filing jointly, married filing separately, head of household and widower/widow with child. 3. Age and Dependents: If you are over 65 or have dependents, this may affect your filing requirements. 4. In some cases, you need to file a return even if your income is below the threshold. For example, if you are self-employed, received income from foreign sources, are entitled to a refund of taxes paid, or are eligible for certain tax credits. Do I need to file a tax return if I am a W-2 employee? If you're a W-2 employee, that means you're an employee and in most cases you'll need to file a tax return. Here are the main aspects: 1. Form W-2 reports your wages from employment and information about tax withholdings, including federal, state, Social Security, and Medicare taxes. 2. Filing Threshold: If your total income for the year exceeds a certain minimum threshold, which depends on your tax status, age and other factors, you must file a tax return. 3. Tax Refund: Even if your income is below the minimum threshold, it makes sense to file a return if you had payroll withholdings. You may be eligible for a refund of your taxes. 4. Tax Deductions and Credits: Your return will allow you to take into account various tax deductions and credits that can reduce your tax burden or increase your tax refund. Do I need to file a tax return if I am self-employed/employed on a 1099 form? If you are self-employed or employed on a 1099 form, in most cases you will need to file a tax return. Here are the main points: 1. Forms 1099-NEC and 1099-MISC are used to report income earned as an independent contractor or freelancer. 2. Minimum Income Threshold: If your net self-employment/1099 income is $400 or more, you must file a return. 3. In addition to income taxes, you are also required to pay self-employment taxes, which includes Social Security and Medicare contributions. 4. Quarterly tax payments must be made throughout the year to avoid penalties. 5. You can exclude expenses directly related to the business, such as transportation, home office, equipment, business travel, etc., which can significantly reduce your tax base. Does a dependent child need to file his or her own tax return? A dependent child must file their own tax return if any of the following apply for 2023: 1. Earned income exceeded $13,850 (wages, tips, self-employment). 2. Unearned income exceeded $1,250 (interest, dividends, capital income). 3. Gross income (earned and unearned income) was more than the larger of: a. $1,250 or b. earned income (up to $13,450) plus $400. 4. Net income from self-employment was $400 or more. Even if a dependent child is not required to file a tax return, it can be filed to receive a refund of taxes withheld or to receive certain tax credits. What if I have foreign financial accounts? If you have foreign financial accounts, it is important to be aware of the following key aspects related to US reporting: 1. If the total balance of all your foreign accounts at any time during the calendar year does not exceed $10,000, then you must simply declare them when filing your return. 2. If the total balance of all your foreign financial accounts at any time during a calendar year exceeds $10,000, you must file a FBAR - FinCEN Report 114. 3. If your foreign account balances exceed the FATCA Statement of International Assets thresholds, you must also file Form 8938. The thresholds depend on your marital status and whether you live in the United States or abroad. 4. Both of these reports are required to combat tax evasion and ensure transparency of financial accounts. Failure to comply with reporting requirements can result in severe penalties and other tax consequences. 5. It is recommended that you consult with a tax professional, especially if you have complex or significant foreign assets, to ensure that all reporting and tax requirements are properly met. What if I have cryptocurrency? If you own cryptocurrency (BTC, ETH, USDT, XRP, DOGE, BNB, LTC, ETC, SOL, USDC, etc.), it is important to know about tax liabilities and reporting rules in the United States: 1. Cryptocurrency is considered as property for tax purposes in the United States, not currency. This means that profits from selling, exchanging or using cryptocurrency to purchase goods and services are taxable. 2. Keep a record of all your cryptocurrency transactions, including purchases, sales, exchanges and any use of cryptocurrency to pay for goods and services. You will need information about the date of the transaction, the value of the cryptocurrency at the time of the transaction, and the profit or loss from each transaction. 3. Profit or loss is calculated as the difference between the purchase price (base value) and the sale or exchange price of the cryptocurrency. 4. All income from cryptocurrency transactions must be reported on your tax return. 6. Maintain all documentation related to your cryptocurrency transactions to confirm tax calculations in case of an audit. Do I need to pay taxes quarterly? You should make estimated tax payments quarterly if you do not want to pay a penalty and you are: 1. Self-Employed: Run a business as a freelancer, independent contractor, or own a small business and do not have payroll taxes withheld. 2. Person with other sources of income: You have significant income that is not subject to tax withholding, such as investment income, rental income, gains from the sale of stocks or real estate. 3. Estimated tax payments are calculated based on your expected income, deductions and credits for the current tax year. You will need to estimate the amount you will have to pay for the year and divide that amount into four payments. 4. Quarterly tax payments are paid on four dates: April 15, June 15, September 15 and January 15 of the following year. Who doesn't need to pay taxes quarterly? You will not need to pay taxes quarterly if: 1. You are an employee with taxes withheld from your salary and the salary is your only source of income. 2. Withholdings from your salary or tax credits cover almost all of your tax liability for the year. 3. You are a retiree or a Social Security recipient whose taxes are withheld from your pension or Social Security benefits. 4. Your tax liability for the year is less than $1,000. 5. You had no tax liability in the previous tax year. 6. You are filing a return for the first time. Are social benefits taxable? In the US, most government benefits are tax-free. But: 1. If a person's total income exceeds certain thresholds, a portion of Social Security Benefits may be taxable. 2. Unemployment Insurance is subject to federal income taxes. Some states may also tax this benefit. Do I qualify for a Child Tax Credit? The Child Tax Credit is available to taxpayers who have dependent children who meet certain criteria: 1. The child must be under age 17 at the end of the tax year. 2. The child must have a SSN with a work permit. 3. The child must be your dependent, which means that he lives with you for more than half the year and you provide more than 50% of his financial support. 4. The entire family must be a US tax resident. 5. There is a maximum parental income limit. What is Dual-Status? Dual-Status is the tax status of a person who, during one tax year, is both a resident and a non-resident of the United States. This usually occurs during the years of moving into or leaving a country. Below are the key points: 1. Part of the year as a non-resident: At the beginning or end of the year, you do not qualify for tax residency under the Green Card Test or Substantial Presence Test. 2. Part of the year as a resident: For the other part of the year, you meet one of these criteria and are considered a US tax resident. 3. In the year you have Dual-Status, you may have to file two separate tax returns: one as a nonresident (Form 1040-NR) and one as a resident (Form 1040), each covering a qualifying period. 4. There are restrictions on deductions, credits, and marital status. What is "Choosing Resident Alien Status"? The "Choosing Resident Alien Status" option allows a person who has both resident and nonresident status in the United States during one tax year to choose resident status for the entire year. This option is available if the individual becomes a U.S. resident before the end of the year and is married to a U.S. citizen or resident. The spouses must agree to this choice together. If I have a complicated case, should I contact a CPA? • CPA (Certified Public Accountant) is a generalist who can help if you need detailed financial analysis or accounting advice. • EA - resolves tax issues, prepares tax returns of any complexity and represents clients before the IRS. Enrolled Agent is the highest step in the tax field. • An Accredited/Registered/Qualified Tax Practitioner can also resolves your issue if she or he has experience with similar tax situations. How to prepare to file a tax return? Collect documents/information for all your family members: • Social Security Cards/ITIN, Driver's License/ID. • Dates of birth, current addresses, visas, migration dates. • Forms W-2 from all employers. • All 1099 and W-2 G forms received. • Forms 1098 and 1095. • Reports on income, interest, cryptocurrency. • Business expenses by category, business miles and miles for the year if you are self-employed. • All information about foreign accounts, companies and income. • Tax return for the previous year, if you have it. • For all dependent children: school and medical records with the child's name and address. • If the children attended kindergarten, afterschool, or nanny, a letter from the service provider containing EIN/SSN, title/name, address and amount paid for each child separately. • Paid property taxes and car sales taxes. • Bank account number for possible refund. What is the cost of filling out a tax return? The cost of filling out a tax return depends on many factors, such as: income (various deductions & credits may be available to you), types of business, investments, foreign accounts and companies, children, studies, subsidies, tax status and many others. All of this affects the number of tax forms that need to be completed and filed with the IRS. We can estimate the cost of completing and submitting your return if specific information is available. We recommend sending us all the documents or filling out a questionnaire so that we can estimate the cost of preparation. The approximate price of a simple case is from $250, a medium case from $500, a complex case from $1,000. Does the price you calculate include the tax that needs to be paid? The cost of preparing and filing your tax return does not equal or include the amount of taxes you must pay to the IRS. So how much tax should I pay? In order to calculate the amount of taxes payable, you must go through the entire process of filling out a tax return. Estimating by eye won't work. How to file a tax refund? There is no special return for tax refunds. A refund may occur when you file a standard return, if you overpaid taxes during the year, or if you received a tax credit. How and why can I trust a tax professional with my personal information, financial information and SSN / ITIN? Every legitimate tax professional, before receiving permission from the IRS to practice: • undergoes identity verification with fingerprints; • undergoes specialized training, including how to confidentially and securely store and process personal data; • studies ethical standards, laws and regulations and signs appropriate agreements confirming his commitment to comply with all rules; • informed about administrative, civil and criminal liability; • passes exams. After this, the specialist receives EFIN, PTIN, CRTP numbers, which confirm his accreditation. If you can find your tax preparer on the IRS website - yes, you can trust him. In addition, only the presence of all personal and financial data allows a tax professional to prepare your tax return. |