The USA has a three-tier tax system. Taxes are charged at the federal, state, and municipal levels. Income, wages, salaries, sales, property, dividends, imports, and other things are subject to taxation in the USA. Besides, various contributions are also due.
The USA is a highly decentralized federation of states and federal taxes are totally separated from the state taxes. Each level of authority has its own taxing power. The federal Government does not have the right to interfere in the taxation system applied in a particular state. Each state has its own taxation system that is different from taxation systems in other states. Besides, counties and cities within the state can also levy taxes on their residents on top of the federal and state taxes. It has to be admitted that the tax system is rather complicated in the USA.
On and the same income can be taxed at all three levels – federal, state, and municipal – at a time. In other cases, the state or the municipality has the prerogative of taxing a certain income or object while the federal Government cannot tax it. Federal tax rates are much higher in the USA than state and municipal tax rates.
Main taxes levied in the USA
Income taxes
Personal income taxes make up more than 50% of the total internal revenue in the USA. The country taxes global incomes of its citizens and legal residents (green card holders). Non-residents are taxed on the income made in the USA as well as income connected with trade or business in the country. The tax rate is progressive and the income tax can be between 10% and 37% depending on the annual amount of income. The tax is levied on work wages (salaries, compensations, bonuses, etc.), passive income such as dividends, interests, and royalties, income from rent, capital gains (when assets, property, corporate ownership shares, etc. are sold), and incomes made by self-employed individuals (sole proprietors or partnerships).
In most states and some municipalities, income tax is levied on the residents of the jurisdiction. Most states tax personal income with the exception of Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming that do not charge personal income tax. In New Hampshire and Tennessee, only dividends and interests are taxed. Few states charge more than 10% as personal income tax. The tax makes up around 40% of the internal revenue of the state.
Corporate profit taxes
At the end of 2017, the tax reform in the USA changed the taxation principle for corporations. Instead of the global taxation principle, the territorial taxation principle was adopted.
In addition to that, the USA has abandoned the progressive income tax scale. The rate could be as high as 35% before but now a flat corporate tax rate of 21% has been set.
The state corporate income tax rates vary from 1% to 12%. Some states do not charge any corporate income tax at all.
The taxation of non-resident companies in the USA depends on the connections with the country. In particular, the level of the company’s presence in the USA is assessed. Does the company have an office in the country? Does its owner live there? Does the company have American citizens among its employees? Does the company have a warehouse in the States? And so on.
Would you like to know how to optimize taxes for LLCs based in America? We must admit that the phrase ‘tax optimization’ has acquired certain negative connotations. For some people, its meaning is equivalent to the meaning of the phrase ‘tax evasion’. We are not speaking about tax optimization in this sense here. Instead, we are describing a legal way of paying zero in taxes in the USA even if your LLC is domiciled there.
What conditions do you have to meet to qualify for corporate tax exemption? Foreign nationals are entitled to register business companies in the USA and it is not a problem at all. If the company engages in business operations within the US boundaries, the corporate taxes are going to be high. However, if the company owner resides outside the States, if the company has neither an office nor any other property nor employees in the USA, it becomes totally tax-exempt in the country. This can be an exciting business opportunity for some entrepreneurs: register a company in a jurisdiction as reputable as the United States of America, live in some other country, and use your American-based company to do business elsewhere.
Sales taxes
There are no sales or use taxes in the USA at the federal level even though most states and some municipalities charge sales and use taxes. Normally, the tax rate is calculated as a percentage of the value of sales and it can be as high as 11% in some states. At the same time, each state decides what the amount of the sales and use tax is going to be and how it is to be calculated.
On June 21, 2018, the Supreme Court overruled the previous court decision that disallowed state Administrations to oblige sellers to charge a sales tax unless they were physically present in the state. The court decision has left many questions unanswered but chances are that the number of states that are going to oblige the sellers to charge a sales tax is going to grow.
Property taxes
No property tax is charged at the federal level in the USA but most states do tax the owners of both commercial and residential property. The amount of the tax depends on the cost of property and it is usually levied at the municipal level or sometimes at the state level. The tax rates differ greatly depending on the particular municipality. Some states (but not many) also tax car owners.
Social security contributions
In addition to taxes, citizens and legal residents of the USA have to pay social security contributions. The amount of the contributions depends on the amount of the person’s salary. The scale is progressive and the worker pays 6.2% of the first US$ 132,000 that he or she earns.