Basic Tax Information: An Introduction to U.S. taxes through 13 topics

The following topics summarize some of the important points for nonresident taxes. These topics are intended to provide a basic level of information for educational purposes. Please see an appropriate tax authority’s website for further information that may be applicable to your situation - a list of them is included further below.

1. Terminology

   • When words are used for taxes they will have a very specific meaning. This meaning is often different from when the word is used in a different context. For example, resident for immigration purposes is different from resident for tax purposes, and resident for federal tax purposes is not the same as resident for state tax, and different states also have different rules for being a resident.

2. Basic tax concepts

   • Taxes are based on a calendar year - January 1 to December 31. You file a tax return for a full year, and you cannot do this until after the calendar year has ended. Tax returns report all income for the calendar year - you do not file a separate return for a specific job or income document.

   • Taxes are based on your personal circumstances. This makes every individual’s income tax return unique. It also makes it impossible for the government or your employer to calculate your taxes for you as they do not have the information needed.

   • It is every individual’s responsibility to calculate and pay their own taxes, and tell the tax authorities what they calculated. You tell the tax authorities by filing your income tax return.

   • You are ultimately responsible for the information on your tax return.

   • Tax return forms and payments are generally due on April 15th.

3. Federal Tax Residency

   • Tax residents of the U.S. use the same tax rules as U.S. citizens, although they can occasionally still claim some treaty benefits.

   • Those whose federal tax residency status is nonresident alien use a modified set of tax rules to calculate their income taxes.

4. Tax ID Numbers

   • Social Security Number (SSN):

   • Individual Taxpayer Identification Number (ITIN): If you need to file a tax return but are not eligible for a SSN

5. Income

   • At the most basic level, income is something of value that you receive. It does not matter what form that the value takes. It can be physical currency, an electronic payment (such as Venmo or direct deposit to a bank account), digital currency or assets, physical items, and so on.

   • In the U.S., income is generally classified based on how or why the money was received.

   • Earned income is generally value received for work that you do, including services or goods that you provide. The most common example of this is wages that are earned working as an employee.

   • Unearned income is generally value received for something that you own, or that you are awarded (and you don’t have to provide services for). This can include interest, dividends, and capital gains, such as those earned on your bank account or from stocks / mutual funds you own. This also includes most scholarship and fellowship grants, as well as prizes or gambling / lottery winnings.

   • Generally most income will be taxed. The tax rates will depend on the amounts and types of income you have. There are a few types of income that are generally not taxed, including gifts or inheritances you receive, life insurance proceeds, and others.

6. Income Tax Treaties

   • Treaties are legally binding agreements between nation-level governments that specify how each will tax the other country’s residents.

   • If you are a nonresident alien you are not a resident of the U.S. You are a resident of the country you were living in before you came to the U.S.

   • The most common treaty provisions will either exempt (reduce to zero) the tax on a certain amount/type of income, or specify a lower tax rate for a certain amount/type of income.

   • You can use our tool to check if you may be eligible for treaty benefits: What Are My Treaty Benefits?

7. Federal Income Tax

   • Nonresident aliens are taxed on their U.S. source income. This includes earned income for work performed in the U.S., or unearned income from sources that are in the U.S. (such as a fellowship from a U.S. college or university).

   • The organization that administers this tax is the Internal Revenue Service (IRS).

8. State & Local Income Tax

   • State & Local taxes are completely separate from federal taxes.

   • State tax rules vary widely. Some states do not tax income at all. Others tax only certain types of income. Still others tax even more types of income than the federal government. Some states also have local income taxes for other levels of government, such as counties or cities.

   • Some states will honor federal income tax treaties, and some do not.

   • States will have a government organization that administers their taxes. Generally they are called a Department of Revenue or Department of Taxation. A Google search for “Income tax” + “(state name)” will usually get you to the right organization website where you can find more information.

9. Withholding

   • The U.S. tax system is a pay-as-you-go system - you are required to pay your income tax at approximately the same you earn the income.

   • The tax authorities require organizations that provide income to individuals to report the income on a tax document, and to withhold a portion that income - to send a portion of that income straight to the tax authorities on your behalf.

   • The requirement to do this depends on the type and amount of the income, upon your personal circumstances (such as your federal tax residency, what country you are a tax resident of), and what you have communicated to the organization. For example, you can provide your employer with a W-4 form to adjust the amount of federal taxes that are withheld.

   • If you don’t pay enough tax while you were earning your income - if you owe “too much” when you file your tax return - the tax authorities will charge interest and penalties.

   • To avoid this interest and penalties, you can make payments on your own during the year. This is called making estimated payments, as you are estimating the amount of tax you will owe, and making a partial payment of that amount.

10. Deductions & Credits

    • Deductions reduce your taxable income, and from that, the amount of tax you owe. Most nonresident aliens must itemize their deductions - they can only reduce their taxable income based on amounts paid for certain types of expenses (state and local income taxes are the most common one). Students, and only students, from India may choose to take the standard deduction, which reduces taxable income by a set amount.

    • Credits can either reduce your tax down to zero, or give you money back, even if you don’t owe any tax. Unfortunately nonresident aliens are not eligible for most credits, including the education credits.

11. Tax Refunds & Payments

    1. When you prepare your tax return you will calculate how much tax you owe.

    2. You will then compare this to the amount of tax that has been withheld, and any amounts that you sent in to the tax authorities as an estimated payment.

    3. If your tax owed is less than the amounts withheld + estimated payments, you can get a refund of this extra tax you have paid.

    4. If your tax owed is more than the amounts withheld + estimated payments, you will need to pay this additional amount of tax.

12. Social Security & Medicare taxes

    • Social Security is a federal government pension plan. Medicare is a federal government health insurance plan.

    • Nonresident alien primary visa holders (F-1, J-1) do not have to pay Social Security & Medicare taxes. However, if and when they become resident aliens they do have to pay these taxes.

    • Dependent visa holders (F-2, J-2) DO have to pay Social Security & Medicare taxes. Their federal tax residency status does not change their requirement to pay these taxes.

13. Other Taxes

    • Sales tax - taxes you pay when you purchase something. There is not a federal sales tax, but there can be state and local sales taxes. The amounts will vary based on the tax authority and the type of item you are purchasing. There are no tax returns, additional tax, or refunds for sales tax.

    • Property tax - taxes you pay on real property you own, such as a house or condo. There is not a federal property tax, but there can be state and local property taxes. There are no tax returns or additional tax. Some government organizations to have refund programs that may reduce part of the tax you owe.

    • Registration tax - taxes you pay on personal property you own, such as a car or a boat. There is not a federal registration tax, but there can be state and local registration taxes. There are no tax returns, additional tax, or refunds for registration tax.