Taxes in the USA Explained

US taxes often puzzle newcomers — not because they are more complex than elsewhere, but because they are structured differently: stacked across several levels, more self-reported, and less automated at the source. This page gives you the big picture: what to expect, who collects what, on what schedule, and where to find the official sources.

This page provides general information only and does not constitute tax advice. For your personal situation, consult a Certified Public Accountant (CPA) or a tax attorney. See our disclaimer.

Three Levels of Taxation

US taxation rests on a vertical stack, inherited from federalism:

• The federal level, run by the Internal Revenue Service (IRS) in Washington. It collects the federal income tax, payroll taxes (FICA), corporate tax, and customs duties.
• The state level, which may levy its own income tax, sales tax, fuel tax, and many other charges. Each state has its own tax administration (Department of Revenue, Franchise Tax Board, etc.).
• The local level (county, city, school district), which funds public schools, roads, and public safety mainly through property tax on real estate.

The practical consequence: the gap in overall tax burden between two neighboring states can be considerable. Before choosing a city to settle in, comparing the total tax burden (income + sales + property) is as important as comparing rents — see cost of living.

Federal Income Tax

The federal income tax is progressive, with several marginal brackets. The system applies:

• To US tax residents (citizens, green card holders, or people who meet the substantial presence test), on their worldwide income.
• To non-residents, only on US-source income.

Tax status and immigration status are not the same thing: an F-1 visa holder can become a tax resident after a few years, and a visitor can become a tax resident through a single long stay. The precise rules are explained by the IRS on its "Determining an Individual's Tax Residency Status" page.

An important quirk: the United States taxes its citizens wherever they live in the world. This is one of only two exceptions to the international norm. If you become a US citizen, your foreign income generally remains reportable to the IRS, subject to tax treaties and foreign tax credits.

Federal Payroll Taxes (FICA)

On each paycheck, the employer withholds the FICA tax, which funds Social Security and Medicare (health coverage for those 65 and over). This is a withholding at the source — the main exception to the otherwise "self-reported" nature of the US system. The self-employed pay an equivalent version called self-employment tax, in which they owe both the employer and the employee share.

State Income Tax

Nine states do not levy an income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (the last of which abolished its residual tax on dividends and interest in 2025). That does not mean taxation is lighter there: these states generally make up for it with a higher sales tax or property tax. By contrast, states like California, New Jersey, New York, and Oregon levy a progressive income tax with high top marginal rates.

Living in one state and working in another is common (the New York metro area, for example) and triggers specific rules: inter-state tax credits, multiple filings, and even reciprocity agreements between states.

Sales Tax

In the US, the price displayed in a store almost never includes sales tax: it is added at the register. The rate combines a state and a local component, and typically ranges from 0% (Oregon, Delaware, Montana, New Hampshire) to over 10% in some California or Illinois cities. Many states exempt basic groceries, and sometimes clothing up to a certain price.

Property Tax

If you buy a home, you will pay an annual property tax to the county or city. This tax mainly funds local public schools, which explains the attention Americans pay to the quality of the school district before buying. Rates vary widely, but New Jersey, Illinois, New Hampshire, and Connecticut are historically among the highest.

The Annual Rhythm: Tax Season

The US tax year is the calendar year (January 1 – December 31). A few milestones to know:

• January–February: employers send the W-2 form (a summary of annual salary and withholding), banks send the 1099-INT/1099-DIV, and brokers send the 1099-B.
• April 15: the usual deadline for filing the federal return (Form 1040) and paying any balance due. An automatic 6-month extension is available with Form 4868, but it only extends the filing, not the payment.
• April as well: the deadline for many state returns, often aligned with the federal calendar.
• Quarterly: the self-employed and some employees make quarterly estimated tax payments to avoid a penalty at filing time.

How You File

Three options come up:

• Yourself via software (TurboTax, H&R Block, FreeTaxUSA, etc.). The IRS also offers the free Free File program under income conditions.
• Through a preparer — an independent or a CPA — especially once there is foreign income, stock options, a recent F/J/H status, or a cross-border situation.
• On paper directly with the IRS, still possible but now marginal.

Three Common Pitfalls for Newcomers

1. Underestimating the reporting obligations tied to foreign accounts. Non-US bank accounts above a combined threshold trigger an FBAR obligation (FinCEN Form 114) and sometimes FATCA (IRS Form 8938). Penalties are heavy if missed.
2. Confusing immigration status with tax status. An F-1 or J-1 visa does not automatically exempt you from US tax; conversely, a short stay with US income may well remain non-taxable at the federal level.
3. Miscalibrating your withholding. In the US, it is the employee who sets their withholding via Form W-4. A poor estimate leads to a large balance due in April, sometimes with interest.

Official Sources

• IRS — federal taxes, forms, instructions, calendar.
• Social Security Administration — for the SSN and payroll taxes.
• The Department of Revenue or equivalent for the state where you reside (search "[State] Department of Revenue").

Tax rules, brackets, thresholds and deadlines change every year. This page is general information, not tax advice; verify current figures with the IRS or a qualified professional.

Related articles:

• Cost of Living in the USA
• Working in the USA
• Moving to the USA
• Banking & Credit Score