Taxes work differently in different countries. While India taxes its citizens on age-based slabs, taxation in the U.S. 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 taxation works in the U.S. and the tax liability of Indians working there.
Classification of Taxpayers in the U.S.
The IRS treats U.S. persons and foreign persons separately for tax purposes. In this regard, the term U.S. 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 administrated primarily by U.S. 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 U.S. person
Tax Liabilities of a 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 U.S. source of income. 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 U.S. income, while the latter is passive income in the form of interests, dividends, rent, or royalty. Typically, this income is taxed at a flat rate of 30%.
Indians who pass the green card test or the substantial presence test are subject to U.S. income tax at par with U.S. citizens. Their global income is accounted for and is subject to income tax in the USA. They can claim standard deductions, pegged at $12,550 for single taxpayers. For married taxpayers filing jointly, the standard deduction is $25,100.
Income Tax Forms in the USA
Depending on residency status, the relevant tax forms for income tax filing are:
- For a non-resident alien - Form 1040NR/1040NR-EZ
- For a resident alien - Form 1040
Individuals can be non-resident aliens and resident aliens in the same financial year. In that case, they must file both forms.
Tax-free states in the U.S.
In addition to the federal taxes, the states can also impose state taxes. However, these nine states in the U.S. offer tax exemption:
- New Hampshire*
- South Dakota
* tax applies 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. Self-employed individuals can file their taxes by the 15th of June every calendar year.
Knowing one's tax liability is the first step towards ensuring compliance while filing income tax returns in the USA. For some tax-related matters, you might require an active bank account. Zolve is helping Indians moving to the U.S. for work or studies to sign up for a U.S. bank account and credit card while they're still India. This allows them build a credit score from day one without making any compromises.