WorldWay's U.S. immigration experts introduce that the tax system in the United States differs significantly from that in China, teaching you to understand the U.S. tax system from several aspects.
Types of Taxes
The United States has individual income tax, corporate income tax, social security tax, Medicare tax, sales tax, gift tax/estate tax, and more. Individual income tax plays a crucial role in the sources of tax revenue in the United States.
Tax Collection System
The United States is divided into federal tax, state tax, and city tax. Therefore, if you live and work in the United States, you need to file for U.S. federal tax and state tax each year, and some cities also require city tax filings. Of course, not all states in the U.S. require state tax payments.
Regions that do not require state tax payments include Alaska, Nevada, Texas (only for intangible asset income), Florida, Washington (this refers to Washington State, not Washington D.C.), Wyoming, South Dakota, Tennessee (only for interest and dividends), and New Hampshire (only for interest and dividends).
So why do these states not have state taxes? The essence of taxation is to maintain the fiscal revenue of the country and to adjust the wealth gap among the people. These states are relatively economically underdeveloped areas in the U.S., so exempting state taxes is also a means for the government to stimulate the local economy.
Tax Authorities
One is the United States Treasury; if you send a check to pay taxes in the U.S., the payee on it will definitely be the United States Treasury, not the tax bureau. The other is the well-known Internal Revenue Service (IRS), which is under the Treasury. In 1862, President Lincoln and the Congress established the IRS to pay for war expenses. Strictly speaking, there is no tax bureau in the U.S.; it is merely a tax service agency. In fact, if you look up foreign tax authorities' official websites, you will find that foreign tax agencies often end with "office" or "service," indicating their role is to better serve taxpayers.
Under what circumstances do you need to pay U.S. taxes?
1. U.S. citizens
2. U.S. permanent residents
3. Even if you do not hold a U.S. green card, if you meet the Substantial Presence Test, you still need to file U.S. annual income tax.
Points 1 and 2 are easy to understand, but point 3 needs some explanation. Although some individuals do not even have a U.S. green card, if they stayed in the U.S. for 183 days or more in 2014, or if they stayed for more than 31 days in 2014 and the total days calculated using the weights of 1/6, 1/3, and 1 for the years 2012, 2013, and 2014 reaches 183 days, they meet the Substantial Presence Test.
For example, if you stayed in the U.S. for 130 days in 2012, 130 days in 2013, and 130 days in 2014, then 130*1/6 + 130*1/3 + 130*1 = 21 + 43 + 130 = 194 > 183, you will need to file your 2014 U.S. taxes in 2015 because you have met the standard for days stayed in the U.S.
Of course, there are exceptions to the Substantial Presence Test: if you meet the day count requirement but can prove that you have closer connections to another country outside the U.S., you can still claim to be a non-resident for U.S. tax purposes.
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