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#17-169US Income TaxPDFReturnURL
This section has a variety of information that is useful to know when living in the United States.
The United States government receives the majority of their budget revenue by levying income tax which is collected by the federal government via the IRS, and some states/cities, depending on the local rules. The US has a progressive tax system on the federal level and most states. Some states impose a flat rate while some have no income tax. Depending on the location and resident status, taxpayers generally pay up to four types of tax (federal, state, FICA, and local). Regardless of tax status, exchange visitors are obligated to pay taxes on all the income that they earn from US sources. Exchange visitors considered “non-resident aliens” may be exempt from FICA.

Types of income. Income can be unearned and earned. Unearned income includes interest, dividends, profit from selling of goods/services or business activities, rental income, royalties, gambling winnings, gifts, and inheritances. Earned income includes salary/wages, tips, commissions, bonuses, unemployment benefits, sick pay, and some noncash fringe benefits. In addition to salary and wages, US sourced stipends, subsidies, scholarships, and bonuses are also considered taxable income.

Federal, state, and local taxes. The US federal income tax is progressive, i.e., the higher the income, the higher the tax rate. For the state and local taxes, it can be progressive, flat or none. As examples, California, Hawaii, and New Jersey have over 10% income taxes at the highest brackets, while Texas has no state income taxes. However, taxes within the same state could differ depending on if the city levies its own taxes. As an example, NYC residents pay city taxes while Long Islanders do not. If there are state/city taxes, exchange visitors may have to complete or file additional tax forms required by their state.

Tax residency status. Exchange visitors are considered “aliens” of the US for tax purposes. “Aliens” refers to temporary visitors (including international students and exchange visitors) in the US, and there are two types of aliens, i.e., “resident aliens” who are taxed in the same manner as US citizens on their worldwide income and “nonresident aliens” who enjoy special tax rules. Click HERE and HERE for more. To find out whether you are a resident or nonresident alien, complete the Substantial Presence Test.

Contributions. Generally, taxpayers pay taxes levied by the governments plus additional contributions, e.g., FICA and 401(k)/IRA contributions (if any) but exchange visitors are generally exempt from such contributions. If they are categorized as “nonresident aliens,” they are exempt from paying FICA - click HERE. Since exchange visitors are non-permanent employees, they won’t be subject to any retirement contributions. Exchange visitors categorized as “nonresident aliens” are exempt from paying FICA (Social Security and Medicare) taxes.

Tax withholding. The amount received on paychecks are generally less than the actual amount earned. This is because the US employers are required to withhold a portion of the income paid to their employees. Since a portion has been withheld ahead of time, taxpayers would pay the total amount of tax due minus any withheld portion. When the tax is due, taxpayers file their tax returns to the IRS which will determine whether the correct amount of tax was paid. The IRS will refund taxpayers if there was too much tax money withheld. If there was an underpayment, the taxpayer must pay the difference.