Understand American tax: your comprehensive guide

One thing most of us know (and like) about the USA is that it’s a work-hard, tax-low nation. But then you get to the check out and they ask for a “sales tax”? It’s confusing! Let’s understand US taxes…

Understanding how tax works in another country is always a tricky business. And this is only heightened when tax is applied at a federal and state level and when liabilities and rates vary from state to state, as they do in the USA.

We’ve created this handy guide to US taxes to help those of you moving to the USA get a clearer idea of the tax liabilities you’ll encounter once you make the move.

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That moment when you realise you forgot to budget for sales tax…

How is tax charged in the USA?

Those moving to the USA should be aware that there are separate federal, state and local government taxes, and you will be charged at each of these levels on income, property, sales, capital gains, imports, estates and gifts. It is important to note that the USA is also one of only two countries in the world that taxes its non-resident citizens on their worldwide income at the same rate as residents.

When a tax rate is set at a federal level, it means it is a rate established by the US government and applies to residents regardless of location. When a tax is imposed at a state or local level, this means that the state establishes guidelines for how local authorities, i.e. cities, counties and school boards within the state, can charge tax. These guidelines are in place to ensure rates are roughly the same state-wide. As tax rates can change between neighbouring counties, it’s important to establish the rates in your specific zip code before you commit to buying a US property. Calculate how much property tax you’re likely to pay after moving to the USA by entering your potential zip code here.

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Property tax

In the USA, property taxes are imposed at local level, i.e. each state establishes their own guidelines for how the local government in your specific jurisdiction can tax its residents. Interestingly, property taxes are the largest source of revenue for state and local governments in the USA. Property taxes are charged based on the value of your property and currently, the median property tax rate falls between 0.2-1.9%. You can see how your preferred state fares in the chart below.

In terms of what falls under the term ‘property’ – again, this differs from state to state. In most instances, property tax will only apply to residential properties, but there are some jurisdictions which impose a levy on property used for business. Also, some states allow local governments to tax personal property, including ‘moveable’ items like boats, cars, airplanes, jewellery, tools and furniture.

Sales and use tax

While there are a few exceptions to the rule, sales tax is imposed in most US states. It is typically charged at the point of sale for goods or services. This can be an area of confusion for new arrivals as when they first go to make a purchase, the tag will say one price, and when they reach the checkout, the tax is applied and the bill is higher than expected. Sales taxes are charged at a state level in 45 states and Washington D.C, and range from between 0 – 16%. Additionally, consumers are also subject to local sales taxes on top in 38 US states. When you combine the state rate, and the local rate – sales taxes can be significant, so it’s worth checking them before moving in. A combined average for each state is listed below but as an added touch of confusion, these sales taxes fluctuate month-by-month.

Sales tax can be a point of confusion, as it’s charged at point of sale for goods and services, rather than being included in the price.

There are five states that do not charge state-wide sales taxes: Alaska, Delaware, Montana, New Hampshire and Oregon. Of those five states, only Alaska allows local authorities to charge local sales tax.

State income tax

There are seven US states where no income tax is charged at all. In the remaining states, income tax is charged differently depending on your location. Forty-three states impose individual income taxes. Forty-one of those tax wage and salary income, and the remaining two states Tennessee and New Hampshire, only tax interest and dividend income – although Tennessee is expected to have a different system in place by 2021.

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Of those 43 states, nine have one tax rate that applies to every earners’ income. The remaining 32 states and D.C. charge different rates depending on how much you earn and which wage bracket you fall into. You can read more about federal income tax brackets here.

Additionally, payroll taxes are imposed on both employee and employer, which cover Medicare taxes and social security payments. As of 2019, social security tax only applies to the first $132,900 of your annual wage. Furthermore, should you earn over $200,000 – you will encounter an additional Medicare tax of 0.9 percent on the income above that figure.

Capital gains tax

Capital gains tax is applied to profits that come as the result of a sale of an asset, i.e. a business, property, piece of land or stocks and shares. CGT also applies to collectible assets, i.e. antiques and art, in which case CGT is charged at a standard rate of 28 percent.

Capital gains tax is paid on the sale of assets including property.

In the US, how much CGT you are charged will depend on the length of time you have held the asset before selling it. As of 2019-2020, for assets held for more than one-year, long-term capital gains tax rates are either 0 percent, 15 percent or 20 percent. If you have held an asset for one year or less, short-term capital gains tax applies at the same rate you are charged income tax, depending on the wage bracket you fall into. It is possible to use capital losses to offset your capital gains, and if your losses exceed your gains, you can deduct the difference on your annual tax return for a value of up to $3,000.

Estate and inheritance taxes

Estate tax is a tax on the transfer of property deeds following the death of the owner. At a federal level, this estate tax only typically applies when the deceased’s assets total more than $11.58 million – so most of us manage to avoid this one! Also, typically property left to a surviving spouse is exempt from estate tax. As of 2019, 13 states and Washington D.C. have an estate tax. It can be charged at a rate of as much as 40 percent and comes out of the value of the deceased party’s estate.

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Inheritance tax is slightly different in that it is imposed on the individual set to inherit the estate, rather than the deceased. Currently, six US states (Nebraska, Iowa, Kentucky, Pennsylvania and New Jersey) impose inheritance tax, and one (Maryland) applies both inheritance and estate tax. The rate of inheritance tax charged depends upon the relationship between the deceased and the heir. For example, spouses are typically exempt from inheritance tax, but children are taxed, just at a low rate.

As you can see, the tax landscape in the US is complicated. To get an exact picture of your individual liabilities based on your specific circumstances, we recommend consulting an expert.

How do the states compare?

The Property Buyer’s Guide to Currency will help you: