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Banks & Taxes in the US
A Comprehensive Guide About Opening a Bank Account and Managing Your Taxes
When it comes to taxes, managing your finance in the US can be quite complicated. However, the tax rate here is rather low, which might be one of the reasons why the US has the biggest number of millionaires in the world.
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The US is home to some of the world’s largest banks. Additionally, the financial sector is saturated with smaller local banks as well. Together they offer customers plenty of choice when it comes to bank accounts and financial assistance.
When it comes to the US tax system, one might need to seek financial advice trying to understand it. Its complex nature is one of the major downsides of managing your finances in the US. People usually need to pay separate taxes on both the federal and state level. In some cases, taxpayers are subject to city or district taxes as well.
How to Open a Bank Account in the US
While the process of opening a bank account in the US for non-residents can be slightly more complicated than it is for the US citizens, it is still pretty straightforward. All you need to do is gather all the necessary documents, go to your bank of choice, and your account should be set up within minutes.
The most common types of banks you will come across are:
- Retail Banks – offer services for individuals and small businesses.
- Commercial Banks – offer services for corporations and the general public.
- Credit Unions – non-profit cooperatives that allow their members to borrow money with low interest rates.
- Savings and Loans Banks – offer services to the general public with the main focus on home loans.
When choosing where to deposit your money, make sure that your financial institution of choice is on the list of places insured by the Federal Deposit Insurance Corporation or the National Credit Union Administration. This means that in case of a financial crisis, the money in your account will be insured for up to 250,000 USD.
Can a Foreigner Open a Bank Account in the US?
As mentioned above, opening a bank account in the US for nonresidents is fairly simple. Still, keep in mind that not all banks are lenient about the matter and, in most cases, will require an applicant to meet additional requirements (see below).
Can a Non-Resident Open a US Bank Account Online?
For expats, opening a bank account online can be an issue. That is because, usually, banks require specific identification and immigration information. The documents that nonresidents need to present as proof of such information are not standard, which makes it more difficult to process online. That is why your online request might be denied. Additionally, getting approval through an online application takes more time. Therefore, the best solution is taking care of your bank account in person.
What are the Requirements for Opening a Bank Account as a Non-Resident?
These are the documents you will need when setting up a US bank account:
- proof of ID (passport);
- proof of address (rental contract, a bill in your name, etc.);
- Social Security Number or Taxpayer Identification Number.
In some cases, you also need to prove your source of income by showing your employment contract or a similar document that states where are you getting your funds from.
Keep in mind that each bank usually has its own set of regulations in regard to the needed documents and processes involved. Thus, once you decide on your bank of choice, make sure to read up on their regulations online.
The Top Banks in the US
The biggest banks in the US are:
The following banks are considered the best personal finance banks by Forbes Magazine:
- Centennial Bank (Home BancShares)
- First Merchants
- Community Bank
- Citizens Business Bank (CVB Financial)
- Axos Bank (online-only bank)
Best Online Banks
Some of the international banks operating in the US:
The Best US Bank Accounts
The majority of bank accounts in the US will require you to pay maintenance fees. Those can range from a few dollars to about 30 USD per month, depending on the type of account you choose. However, in most cases, you can avoid bank fees by maintaining a certain balance in your account. The requirements for minimum deposit vary as well and can be anywhere from 10 to 10,000 USD.
Popular no-fee checking accounts:
- 360 Checking (Capital One)
- Cashback Debit (Discover)
- Essential Checking (Axos)
- Interest Checking (Ally)
- High Yield Investor Checking (Charles Schwab)
Savings accounts with best interest rates:
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What is the Tax System in the US?
Internal Revenue Service (IRS) is the US government agency that regulates what the federal tax is in the country. State taxes are administered by each state individually.
Types of Taxes in the US
In the US, people are taxed on both federal and state level. The US is also one of the few countries that taxes its non-residents on their worldwide income.
The tax system in the US is comprised of several types of taxes. Those are:
- Federal Income – progressive federal tax imposed on income.
- Personal Income – progressive or fixed state tax imposed on income.
- Capital Gains – federal tax imposed on income received from stock and bond transactions.
- Payroll – federal tax imposed on employee’s salary, usually withheld by the employer. These are your contributions to Social Security and Medicare.
- Property – state tax imposed on real estate property (land, buildings, factories, etc.) and, in some states, valuable goods (car, computers, equipment, jewelry, furniture, etc.)
- Sales – state tax imposed on good and services.
Note that sales taxes are usually imposed on top of the price indicated on an item’s price tag so do not be surprised when you are asked to pay more than the price stated on the tag.
What is the Income Tax Rate in the US?
Before calculating your yearly income tax, you need to determine your taxable income. To find it out, you need to subtract the standard or alternative deduction from your overall income. A deduction is the money the government does not tax you on. Standard deduction is a set amount of money that is adjusted every year. The alternative deduction allows you to identify all the expenses that are not taxable (medical expenses, state and local income tax, charitable contributions, etc.).
The income tax in the US is calculated at a progressive rate. The tax brackets are adjusted every year due to inflation.
|Tax Brackets (%)||2020 US Tax Brackets (USD)|
|10||0 – 9,700|
|12||9,701 – 39,475|
|22||39,476 – 84,200|
|24||84,201 – 160,725|
|32||160,726 – 204,100|
|35||204,101 – 510,300|
Example of tax calculation for average income (50,000 USD) in the US (single person, year 2020):
- 50,000 – 12,200 (standard deduction) = 37,800 USD of taxable income.
- 9,700 x 0,1 (10%) = 970 USD
- 28,100 x 0,12 (12%) = 3,372 USD
- 970 + 3,372 = 4,342 USD payable taxes
From your total tax burden, you can directly deduct selected tax credits (child tax credit, education credit, foreign tax credit, etc.) if they fit your particular case.
Keep in mind that you need to have a Social Security Number or a Taxpayer Identification Number when filing your tax returns. Your taxes will also depend on how long you have stayed in the US, i.e., your fiscal resident status (resident alien, non-resident alien, or dual-status taxpayer).
In regard to the fiscal year in the United States, it is usually identical to the calendar year. You do have an option of choosing a different period if you wish; however, the deadline set by the IRS will still be 15 April. If you cannot hand in your complete tax return by this date, you can request an automatic extension until 15 October.
State and Local Taxes
In addition to federal tax, most residents and non-residents of the US need to pay taxes to the state they reside in. The contributions depend on the state you live in, how long you are staying there, as well as your income.
States that do not impose additional state taxes are Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.
Some cities and districts also impose local taxes on their residents. To find out whether these taxes apply to you, you should contact your local government.
The Alternative Minimum Tax
If you have a high income, you might be subject to Alternative Minimum Tax (AMT). If your adjusted gross income surpasses the established threshold (known as “exemption), you are required to pay AMT. This threshold differs each year as it is adjusted to current inflation.
If you earn below the exemption, you do not have to worry about AMT. However, if you earn more, you need to pay either your normal income tax or the AMT – whichever is higher. If you neglect to pay AMT when figuring your taxes, the IRS may collect it from you after processing your annual tax return.
Self-Employed Taxes in the US
In addition to the income tax that is paid by most wage earners, the self-employed also need to pay Self-Employed (SE) taxes. The SE tax in the US acts as payroll taxes do for employed workers as SE contributions go to Social Security and Medicare. You need to pay this tax if your net profit is 400 USD or more.
The rate for SE is 15.3% of your net profit and is divided the following way:
- 4% for Social Security
- 9% for Medicare
Every self-employed individual in the US is required to file their annual taxes and pay the estimated tax every quarter. Estimated tax comprises of all tax responsibilities held by an individual (income tax, self-employment tax, alternative minimum tax, etc.) that need to be estimated and paid throughout the year. Note that tax quarters might be comprised of two, three, or four months.
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