[2023] Income Tax in the USA: get to know the IRS website

How does income tax work in the USA? How much is it? How do you calculate the tax rate?  Who should file a tax return? What are the differences between US and Brazil income tax? How does income tax work in the USA for foreigners?

These, without a doubt, are the biggest questions Brazilians and foreigners who live in the United States ask themselves.

One of the best places to get this answer is in the online portal of the Internal Revenue Service (IRS).

Read this article until the end and get to know everything about the Income Tax in the USA.

What is the Internal Revenue Service (IRS)

The Internal Revenue Service (IRS) is a branch of the US government that regulates and enforces all tax-related processes in the USA.

In addition to performing tax collection, the IRS is in charge of interpreting and enforcing the Internal Revenue Code, the American body responsible for tax law.

How does income tax work in the USA?

Many Brazilians do not know about the existence of income tax in the USA, and several other people think that the American income tax works just like the one in Brazil.

The American tax system is based on declarations.

The US government does not collect financial data from citizens (such as bank statements). Nevertheless, the taxpayer must provide such information when submitting his or her US tax return.

Internal Revenue Service website

Practically 90% of tax returns in the US today are processed electronically (i.e. online).

This agility and security is possible thanks to multiple investments by the U.S. Treasury in process improvements and information systems technologies that always aim to provide a good experience for the taxpayer.

Currently, on the IRS website, there are dozens of model forms that contemplate the most varied cases of income tax application, of which we cite:

FORM 1040 – INDIVIDUAL TAX RETURN

This model form (1040) is best suited for people who contribute in the US and need to file their annual income tax return.

It is ideal for individuals.

In addition, there are extra attachments to address unusual situations such as:

• Have additional income, such as unemployment insurance, prizes or prize money, gambling winnings.
• Have any deductions to claim, such as student loan interest deduction, self-employment tax, educator expenses.

FORM W-9 – APPLICATION FOR TAXPAYER IDENTIFICATION NUMBER (TIN) AND CERTIFICATION

Form W-9 is used to report the TIN (Taxpayer Identification Number) equivalent of the citizen who will be filing information with the IRS (website) to portray cases such as:

• Income paid to you. 
• Real estate transactions. 
• Interest on the mortgage you paid. 
• Acquisition or abandonment of secured property. 
• Cancellation of debt.

Recently, the withholding tax rate was changed from 28% to 24% by Law 115-97.

FORM 4506-T – REQUEST FOR TAX RETURN TRANSCRIPTION

Form 4506-T is used to request tax return data. This is necessary when the taxpayer uses a tax year that starts in the calendar year and ends in the next (following tax year).

FORM W-4 – EMPLOYEE RETENTION CERTIFICATE

The W-4 is required so that the employer can properly withhold U.S. federal income tax with respect to his employee. This form must be completed every year and when the employee’s personal and/or financial situation changes.

If you wish to work in the USA, you will need a green card.

FORM 941 – QUARTERLY FEDERAL EMPLOYER TAX RETURN

Those with employees (employers) should use Form 941 for:

1. Report the income tax, Social Security tax, or Medicare tax withheld from the employee’s pay stubs.
2. Pay the employer’s portion of the Social Security or Medicare tax.

According to the IRS website itself, employers must complete and submit such forms quarterly (every 3 months).

FORM W-2 – EMPLOYERS ENGAGED IN A TRADE OR BUSINESS THAT PAYS COMPENSATION

If you have or are involved with any business or trade that pays remuneration, including commissions of $600 or more (even if not in kind) each year for services rendered by an employee, the W-2 form is the right one. This case is handled on an individual basis, i.e. 1 form for each employee (even a direct relative of the employer).

Important to note that such employees must:

• Have had income, social security or Medicare taxes withheld.
• Withhold income tax if you had not claimed more than one withholding allowance or if you had not claimed exemption from withholding through Form W-4.

FORM 9465 – INSTALLMENT CONTRACT REQUEST

The US government allows you to pay your tax in installments if you are unable to pay. To do this, you need to use form 9465. Here you can apply for a monthly installment plan to pay the total amount due as shown on your tax return (or on a notice that the IRS sent you).

FORM 1040-X – CORRECT RETURN OF INCOME TAX RETURN FOR INDIVIDUAL CHANGED FROM USA

The citizen may file Form 1040-X in light of:

1. Correct 1040, 1040-A, 1040-EZ, 1040-NR or 1040-NR EZ forms.
2. Certain elections after the prescribed period.
3. Change in IRS adjusted amounts (previously).
4. Requesting a refund due to an unused credit or a loss.

FORM 2848 – APPLY FOR A PROXY AND DECLARATION OF THE REPRESENTATIVE

It is possible to enlist someone else to represent you before the IRS. Such a person must be professionally qualified.

A student who serves in a low-income contribution clinic (LITC) or the Student Tax Clinic Program (STCP), for example, could fully be responsible for representing a citizen (after special appearance authorization, which is issued by the Taxpayer Advocate Service).

Form 2848 can be well used in case the IRS has initiated a foreign bank and financial account analysis (FBAR) process as a consequence of a US income tax assessment.

You can understand more about it on the official website.

FORM W-7 – APPLY FOR AN ITIN

Form W-7 is used to renew or apply for an ITIN – individual taxpayer identification number from the IRS.

This identification issued by the US Internal Revenue Service (IRS) is for those individuals who do not have and/or are not eligible to obtain a Social Security Number (SSN).

The ITIN consists of 9 numbers and is used solely for US income tax and federal purposes.

How much is the income tax in the USA (rate)?

The rates that individuals and companies are subject to in the USA vary and are graduated:

• Income tax in the US is calculated individually, per person (whether a US resident or citizen).
• The basis of the calculation is always total income, domestic and international inclusive.
• Non-residents are always taxed on income earned within the United States – including income from commerce, business and/or real estate investments.
• Income from long-term capital has a maximum tax rate of 20%.
• Short term capital income has a maximum tax rate of 39.6%.
• US and foreign companies pay a maximum tax rate of 35%.

US income tax for foreigners

Non-US persons (foreigners) who do not meet the requirements to be considered residents can also be taxed on income earned in the US.

1. Royalties
2. Rental Property
3. Services Rendered
4. Interest, dividends from commercial operations of any nature

The U.S. government’s basis for calculating withholding taxes is “at source”, and the rate in this case is set at 30%.

Who must file income tax returns in the USA?

Every citizen who somehow generates income in the United States of America must file income taxes; whether there are US companies or citizens, naturalized, resident, working foreigners, or even foreign companies.

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