U.S. Tax Law: Everything Immigrants Need to Know

Navigating the intricacies of the United States tax system can be complex for immigrants. Whether you’re a resident alien, nonresident alien, or somewhere in between, this guide will provide you with the knowledge to navigate the U.S. tax system confidently.

Let’s start by noting the U.S. tax system is composed of both federal and state taxes. It’s important to understand the distinction between the two, as they have different rules and regulations.

U.S. Federal Taxes

Income Tax

This is the tax levied on the income of individuals, corporations, estates, and trusts. The U.S. has a progressive tax system, meaning that higher-income individuals pay a higher percentage of their income in taxes. Income tax is the largest source of revenue for the federal government.

Social Security Tax

This tax, often called the FICA (Federal Insurance Contributions Act) tax, is a payroll tax that funds the Social Security program, which provides benefits to retirees, disabled individuals, and survivors of deceased workers.

Medicare Tax

This is another payroll tax, also known as the Hospital Insurance (HI) tax, that funds the Medicare program, which provides health insurance to individuals aged 65 and older, as well as certain younger people with disabilities.

Capital Gains Tax

This tax is levied on the profits from the sale of assets such as stocks, bonds, real estate, and businesses. The rate at which capital gains are taxed depends on how long the asset was held before it was sold.

Corporate Tax

This tax is levied on the income of corporations. The corporate tax rate can vary depending on the size of the corporation and the amount of income it earns.

Gift Tax

This tax is levied on the transfer of property by one individual to another while receiving nothing, or less than full value, in return. Like the estate tax, not everyone is subject to the gift tax, as some exemptions and exclusions can apply.

Excise Tax

This tax is levied on the sale of specific goods, such as gasoline, alcohol, and tobacco. It is often included in the price of the product and paid by the seller, but it can also be imposed directly on the consumer.

Federal Unemployment Tax

This tax is paid by employers to fund unemployment benefits for workers who have lost their jobs.

U.S. State Taxes

State taxes vary widely depending on the state you live in, but they generally include:

Sales Tax

This tax on the sale of goods and services is generally imposed by state and local governments. The federal government does not impose a national sales tax, but some states do have their own sales tax.

Property Tax

This tax on real estate is imposed by local governments. The amount of property tax you pay is based on the value of your property.

Payroll Taxes

Some states have their payroll taxes, which are typically used to fund state-run programs such as disability insurance or unemployment benefits.

Each state has its tax rates and rules, so it’s important to be aware of the specific tax laws in your state.

Tax Filing Status

Tax filing status is a category that defines how you will file your federal income tax return and the tax rates that apply to you. Your tax filing status is determined by your marital status and family situation on the last day of the tax year (usually December 31st). It’s important to choose the correct filing status because it affects your standard deduction, tax rates, and eligibility for certain tax credits and deductions.

Here are the five tax filing statuses recognized by the Internal Revenue Service (IRS):

• Single: You are unmarried, divorced, or legally separated under a separate maintenance decree on the last day of the tax year.
• Married Filing Jointly: You are married and file a joint tax return with your spouse. This status generally offers the most tax benefits.
• Married Filing Separately: You are married but choose to file separate tax returns from your spouse. This status may be beneficial in certain situations, but it often results in higher taxes.
• Head of Household: You are unmarried, have paid more than half the cost of keeping up a home for the year, and have a qualifying child or dependent. This status typically offers more favorable tax rates and a higher standard deduction compared to filing as Single.
• Qualifying Widow(er) with Dependent Child: Your spouse died within the past two years, you have a dependent child, and you meet certain other conditions. This status allows you to use the Married Filing Jointly tax rates and standard deduction for the year of your spouse’s death.

Tax Brackets and Rates

United States tax brackets and rates are the progressive income tax system used by the federal government to determine the amount of income tax owed by individuals and married couples filing jointly. The tax brackets are a series of income ranges, each with a corresponding tax rate, which increases as income rises.

There are seven federal income tax rates and brackets in 2023 and 2024. NerdWallet provides a handy table so you can know which bracket you fit in:

Tax Obligations for Immigrants

There are two types of immigrants in the U.S.:

• Resident Aliens: A resident alien is a foreign-born individual who meets the criteria for being treated as a U.S. resident for tax purposes. This generally includes individuals who have a Green Card (lawful permanent resident status), individuals who meet the Substantial Presence Test, or individuals who elect to be treated as a resident for tax purposes.

• Nonresident Aliens: A nonresident alien is a foreign-born individual who does not meet the criteria for being treated as a U.S. resident for tax purposes. This generally includes individuals who are in the U.S. temporarily, such as students, scholars, and certain visa holders.

Tax Residency Rules

The IRS uses two primary tests to determine an individual’s tax residency status:

1. Substantial Presence Test: To be considered a resident for tax purposes under the Substantial Presence Test, an individual must be physically present in the U.S. for at least:

• 31 days during the current year, and
• 183 days during the 3-year period that includes the current year and the two preceding years, counting:
• All the days present in the current year,
• 1/3 of the days present in the first preceding year, and
• 1/6 of the days present in the second preceding year.

2. Green Card Test: An individual is considered a resident for tax purposes if they have been granted lawful permanent resident status (a Green Card) at any time during the calendar year.

Taxation of Worldwide Income

The United States taxes its citizens, Green Card holders, and certain foreign nationals as resident aliens on their worldwide income. This means that these individuals are required to report all their income, regardless of where it was earned, on their U.S. tax return and pay taxes on it to the U.S. government:

Resident Aliens: In some cases, individuals who are not U.S. citizens or Green Card holders may be considered resident aliens for tax purposes. This can happen if they meet the Substantial Presence Test or if they elect to be treated as a resident for tax purposes. Resident aliens are also subject to taxation on their worldwide income.

Certain Nonresident Aliens: Some nonresident aliens may be subject to taxation on their worldwide income if they are engaged in a U.S. trade or business and have income that is effectively connected with that business. This generally applies to nonresident aliens who are self-employed or own a business in the U.S.

USCIS Tax Return Requirement

The USCIS tax return requirement refers to the situation where the United States Citizenship and Immigration Services (USCIS) may request copies of an immigrant’s U.S. tax returns as part of the immigration application process.

This requirement can apply to various immigration applications, such as those for Green Card  status or certain nonimmigrant visas.

The USCIS may ask for an immigrant’s tax returns to verify the individual’s income, tax filing status, and compliance with U.S. tax laws. The USCIS may use this information to assess the immigrant’s financial stability and eligibility for the immigration benefit they are seeking.

For example, when applying for a Green Card, the USCIS may request copies of the applicant’s U.S. tax returns for the past several years to ensure that the applicant has sufficient income to support themselves and their family members in the U.S. This requirement helps the USCIS assess whether the applicant is likely to become a public charge (reliant on public assistance) if granted lawful permanent resident status.

State-Specific Tax Considerations

California

• State Income Tax: California imposes a progressive income tax system with rates ranging from 1% to 13.3%, depending on income level.
• Sales Tax: California has a statewide sales tax rate of 7.25%, with additional local sales taxes that can bring the total rate to as high as 10.25% in some areas.
• Property Tax: Property taxes in California are based on the assessed value of the property and are limited to 1% of the property’s taxable value, plus any voter-approved local taxes and assessments.
• Special Taxes: California imposes additional taxes on specific items, such as gasoline, tobacco, and cannabis products.
• Tax Credits and Deductions: California offers various tax credits and deductions, including the Earned Income Tax Credit (EITC), dependent care expenses credit, and college tuition credit.

New York

• State Income Tax: New York also has a progressive income tax system with rates ranging from 4% to 10.9%.
• Sales Tax: The statewide sales tax rate in New York is 4%, but local jurisdictions can add their own sales taxes, resulting in total rates as high as 8.875% in some areas.
• Property Tax: Property taxes in New York vary by county and municipality, with rates based on assessed property values.
• Special Taxes: New York imposes additional taxes on items such as cigarettes, alcohol, and motor fuel.
• Tax Credits and Deductions: New York offers various tax credits and deductions, including the Empire State Child Tax Credit, School Tax Relief (STAR) program, and property tax relief credit.

Texas

• No State Income Tax: Texas is one of the few states that does not impose a state income tax on individuals.
• Sales Tax: Texas has a statewide sales tax rate of 6.25%, with additional local sales taxes that can bring the total rate to as high as 8.25% in some areas.
• Property Tax: Property taxes in Texas are among the highest in the country, with rates varying by county and municipality.
• Other Taxes: While Texas does not have a state income tax, it does impose other taxes, such as franchise taxes on businesses and taxes on motor vehicles.
• Tax Exemptions: Texas offers various tax exemptions, including exemptions for certain types of property, such as homesteads and agricultural land.

Florida

• No State Income Tax: Like Texas, Florida does not impose a state income tax on individuals.
• Sales Tax: Florida has a statewide sales tax rate of 6%, with additional local sales taxes that can bring the total rate to as high as 8.5% in some areas.
• Property Tax: Property taxes in Florida are based on the assessed value of the property and are capped at 10% of the property’s assessed value for non-homestead properties.
• Other Taxes: Florida imposes other taxes, such as documentary stamp taxes on real estate transactions and taxes on motor fuel and cigarettes.
• Tax Exemptions: Florida offers various tax exemptions, including exemptions for homestead properties and certain types of agricultural property.

Illinois    

• State Income Tax: Illinois has a flat income tax rate of 4.95% for individuals.
• Sales Tax: The statewide sales tax rate in Illinois is 6.25%, with additional local sales taxes that can bring the total rate to as high as 11.5% in some areas.
• Property Tax: Property taxes in Illinois are among the highest in the country, with rates varying by county and municipality.
• Other Taxes: Illinois imposes other taxes, such as taxes on gasoline, cigarettes, and alcohol.
• Tax Credits and Deductions: Illinois offers various tax credits and deductions, including the Property Tax Credit, Earned Income Credit, and Education Expense Credit.

Tax Filing Deadlines

Tax filing deadlines are critical dates that taxpayers must adhere to when submitting their income tax returns to the Internal Revenue Service (IRS) and state tax authorities. Understanding these deadlines is essential for ensuring timely filing and avoiding potential penalties and interest charges.

• Federal Tax Filing Deadline: The deadline for filing federal income tax returns for most individuals is typically April 15th of each year. However, if April 15th falls on a weekend or holiday, the deadline is extended to the next business day.
• State Tax Filing Deadline: State tax filing deadlines vary by state. In some states, the deadline aligns with the federal deadline, while others may have different deadlines. For example, in Texas, the state tax filing deadline generally aligns with the federal deadline of April 15th.
• Extensions: Taxpayers can request an extension to file their tax return if they need more time. For federal taxes, the extension deadline is typically October 15th. State extension deadlines may vary.

Filing Options

Tax filing presents various options for taxpayers to fulfill their obligations: from traditional paper filing to modern electronic methods, taxpayers have a range of choices to suit their preferences and circumstances.

• E-file: Electronic filing, or e-filing, is a convenient and secure way to submit your tax return to the IRS and state tax authorities. Taxpayers can use tax preparation software or online tax services to e-file their returns.
• Mail-In: Taxpayers also have the option to file their tax returns by mail. Paper forms can be obtained from the IRS website or local tax offices and must be postmarked by the filing deadline.
• Tax Professionals: Some taxpayers prefer to work with tax professionals, such as certified public accountants (CPAs) or tax preparers, who can assist with tax preparation and filing. Tax professionals can provide personalized advice and ensure accurate completion of tax returns.

Tax Software, Tools and Resources

Taxpayers now have access to a plethora of software, tools, and resources to simplify the process. From comprehensive tax preparation software to online calculators and informational guides, these tools offer valuable assistance in navigating the complexities of tax filing.

• Tax Preparation Software: There are various tax preparation software options available, such as TurboTax, H&R Block, and TaxAct. These software programs guide taxpayers through the tax preparation process, help identify deductions and credits, and facilitate e-filing.
• Online Tools and Resources: The IRS and state tax agencies offer online tools and resources to help taxpayers navigate the tax filing process. These may include interactive tax calculators, educational articles, and frequently asked questions (FAQs) sections.
• Tax Withholding Estimators: Taxpayers can use tax withholding estimators provided by the IRS to calculate the appropriate amount of federal income tax to withhold from their paychecks. This helps avoid underpayment or overpayment of taxes throughout the year.

As immigrants in the United States, it’s crucial to prioritize tax compliance and seek out resources and assistance when needed. Whether leveraging tax preparation software, consulting with tax professionals, or accessing online resources provided by the IRS and state tax agencies, immigrants have access to a wealth of support to help navigate the tax landscape effectively.