How does the tax system In the US work?
Banking Basics Taxes Tax slabs

How does the tax system In the US work?


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Taxes work differently in different countries. While India taxes its citizens on age-based slabs, the tax system in the US follows a bracketed approach depending on the individual's marital status. This is just one of the differences between the tax systems in both countries. Let us look at how the tax system in the US works!

Classification of Tax Payers in the US


Tax Payers in the US have a structured foundation that is followed. The IRS treats US persons and foreign persons separately for tax purposes. In this regard, the term US person means:

  • A citizen or a resident of the United States
  • A domestic partnership
  • A domestic corporation
  • Any estate other than a foreign estate
  • Any trust administered primarily by US persons
  • Anyone who is not a foreign person

In contrast, foreign persons are:

  • Non-resident alien individuals
  • A foreign corporation
  • A foreign partnership
  • A foreign trust
  • Any foreign estate
  • Any other person who is not a US person

Income Tax in USA for Indians  - Resident Alien Vs. Non-Resident Alien

Indians who do not meet the green card test or the substantial presence test count as non-resident alien individuals. They are taxed only on their US source of income and not under the American income tax system. These people are subject to two different tax rates, the first for effectively connected income (ECI) and the other for fixed or determinable, annual, or periodic (FDAP) income. The former is the income earned from running a business or rendering personal services in lieu of US income, while the latter is passive income in the form of interests, dividends, rent, or royalty. Typically, the tax payers in the US that fall under this category are taxed at a flat rate of 30%.

Indians who pass the green card test or the substantial presence test are subject to US income tax at par with US citizens. Their global income is accounted for and is subject to income tax in the US. They can claim standard deductions, pegged at $12,550 for single taxpayers. For married taxpayers filing jointly, the standard deduction is $25,100.

Types of Taxes in the USA

Just like any other country, the government money that we call revenue by raising taxes. These taxes come in various forms. Each country follows their own tax system. Let us have a look at the 7 different types of taxes in the USA.

  1. Income Tax
  2. Property Tax
  3. Sales Tax
  4. Estate Tax
  5. Gift Tax
  6. Social Security Tax
  7. Mediocre Tax
  8. Tariffs

Tax System in the US : Forms to Be Filed


Depending on residency status, the American income tax forms that are filed are:

  • For a non-resident alien - Form 1040NR/1040NR-EZ
  • For a resident alien - Tax Form 1040

Individuals can be non-resident aliens and resident aliens in the same financial year. In that case, they must file both the Form 1040NR/1040NR-EZ as well as the Tax Form 1040.

Tax Free States in USA

The tax system in the US is well structured and followed in each state of the country. In addition to the federal taxes, the states can also impose state taxes. However, there are nine tax free states in USA. They are:

  • Alaska
  • Florida
  • Nevada
  • New Hampshire*
  • South Dakota
  • Tennessee*
  • Texas
  • Washington
  • Wyoming

* According to the tax system in the US, tax is applied on capital gains but not on earned income.

Tax Filing Date


Employees who receive wages must file their taxes by the 15th of April every calendar year to adhere to the rules of the tax system in the US. Self-employed individuals can file their taxes by the 15th of June every calendar year. These Taxpayers in the US are given a later date since they are not part of any organizations or registered firms.


Knowing one's tax liability is the first step towards ensuring compliance while filing and following the tax system in the US. For some tax-related matters, you might require an active US bank account, especially when it comes to paying income tax in the US for Indians. Zolve is helping Indians moving to the US for work or studies to sign up for a US bank account and US credit card while they're still in India. This allows them to build a credit score from day one without making any compromises.