Taxes

Personal Income Tax in the United States

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Personal Income Tax in the United States. Individuals who are fiscally resident in the United States are subject to taxation on their income whatever the source and in any part of the world produced (principle of worldwide income), as is also the case in Italy.

In contrast, non-resident individuals are taxed only on US source income. Under federal law, an individual is deemed to be a tax resident of the United States for income tax purposes if they meet one of the following conditions:

-If you have American citizenship;

-If you have obtained residence in the United States (so-called green card);

-If it remains on the national territory for at least 183 days during a calendar year;

-If it exceeds the so-called substantial presence test or cumulative presence test which consists of the sum of the total number of days that the person is present in the United States in the reference year plus one third of the days in which he was present in the previous year and one sixth of the days of the year still earlier. If the sum obtained is equal to or greater than 183 days, the subject is considered fiscally resident.

The only exception to the “cumulative presence test” is to demonstrate that the economic entity has its main activity-business center not in the United States and that its family and social ties are relevant in another country and not in the United States.

In this case, it is not considered necessary to prove that the person also has tax residence in another country. The individual who produces an income in the United States must apply for a Social Security Number (obtainable at the Social Security Administration) and, since 1996, foreigners who are fiscally resident in the United States must apply for, and are assigned to from the IRS, a tax identification code, the cd Individual Taxpayer Identification Number or ITIN.

The tax base is composed of different types of income produced: eg. income from self-employment and employees; from investments; from business activities; from capital gains.

Employee income

All salaries regardless of the method of payment are included in the calculation of the tax base for the purposes of calculating the Individual Income Tax.

The employer operates as a withholding agent by operating withholding taxes on the salary (which may concern federal, state and local taxes, but also other taxes such as the so-called social security and Medicare Tax or the Alternatives Minimum Tax (AMT)) which must be paid on a regular basis.

The remuneration received by the directors for the activity carried out is assimilated to that of an employee. Expenses incurred by the employee are normally deductible unless they have been reimbursed directly by the employer.

In this regard, the following are characterized by exemption from tax: the services rendered by the employer to its employees if they are of the same type as those that it usually provides to its customers; discounts on the purchase of goods or on the use of services rendered by the employer; the benefits granted for the performance of work (the company machine, laptop, etc.); expense reimbursements and other benefits relating to transport needs; refresher courses and other training activities; meal vouchers and the provision of a company canteen service.

Investment income

The rate applied to the profits generated by holding equity investments differs depending on the ability to pay and the holding period of the investment made (holding period).

For dividends relating to equity investments held for more than 12 months, the rate is usually 15%. In order to benefit from the reduced rate on foreign-source dividends, a double taxation treaty must be in place with the source country.

Deductions

The federal tax system provides for two distinct types of deductions:

The deductions from the total gross income: are those that are applied to adjust the value of the total gross income and obtain the so-called adjusted gross income (Agi);

The deductions from the Agi: are corrections provided on a flat-rate basis each year by the tax authorities for the purpose of calculating the tax income.

With regard to the first type of deductions, the main categories of deductible costs are: expenses related to the conduct of business activities; alimony paid to the separated spouse; transport costs and contributions to a Medical Saving Account.

With reference to the deductions from the Agi, the US tax administration has established a series of limits: for spouses under joint taxation and for widowers; for the unmarried head of the family; for individuals and spouses under separate taxation.

Annually, the tax administration determines what the deductible amount is for the taxpayer: for himself; for the spouse, in the case of joint taxation of the couple; for children under 19; for full-time student children under 24.

The federal tax system provides for two distinct types of deductions:

The deductions from the total gross income: are those that are applied to adjust the value of the total gross income and obtain the so-called adjusted gross income (Agi);

The deductions from the Agi: are corrections provided on a flat-rate basis each year by the tax authorities for the purpose of calculating the tax income.

With regard to the first type of deductions, the main categories of deductible costs are: expenses related to the conduct of business activities; alimony paid to the separated spouse; transport costs and contributions to a Medical Saving Account.

With reference to the deductions from the Agi, the US tax administration has established a series of limits: for spouses under joint taxation and for widowers; for the unmarried head of the family; for individuals and spouses under separate taxation.

Annually, the tax administration determines what the deductible amount is for the taxpayer: for himself; for the spouse, in the case of joint taxation of the couple; for children under 19; for full-time student children under 24.

The tax rates

The tax is applied on the basis of a progressive rate for income brackets, which differs depending on the type of return presented.

Individuals must submit their tax return to the tax authorities by the 15th day of the fourth month following the end of the relevant tax year (i.e. April 15th, if the tax year coincides with the calendar year) .

For income produced in the United States, non-resident persons are subject to the same tax regulations as for residents. Exceptionally, the expiration date for 2017 falls on April 18, due to a national holiday (Emancipation day) which is celebrated in the State of Columbia. The extension also applies to non-residents in this state.

Next article, we will discuss about the income tax of legal persons.

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