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How to Figure Your Federal Income Tax

Paying income tax in the US is complicated. Tax is due on several levels: You need to pay US income tax to the federal government as well as the individual state. Sometimes, local income tax is also due. This overview helps expats to navigate such tax issues, providing guidance for filing your tax returns.
You can deduct, for example, various business expenses from your adjusted gross income.

To file your US income tax return as a resident alien, you need to choose a fiscal year first. The tax year in the United States is usually identical with the calendar year, but you may choose a different period if you wish.

Regardless of the fiscal period, the deadline set by the IRS is April 15. If you cannot hand in your complete tax return by this date, you can request an automatic extension until October 15. This gives you a little more leeway.

Step 3: List Your Income Sources and Capital Gains

When filing your federal income taxes, you usually start by determining all your sources of income. Resident aliens living and/or working in the US are taxed on their worldwide income. The IRS defines income as all money, goods, property, or services that you have received during the tax year.

However, you may be able to exclude some items from your total gross income for tax purposes. Unfortunately, explaining all those exceptions isn’t possible here. Please ask the IRS or a tax professional for further details.

When you list your global income sources, these are the most frequent kinds of income that you might need to include:

  • income from employment, e.g. wages, salary, allowances, reimbursements, bonuses, awards, tips, severance pay, sick pay, as well as certain fringe benefits
  • additional income from self-employment (e.g. from working part-time as a freelance copywriter on the weekend)
  • interest (e.g. from US banks, credit unions, or money market funds)
  • dividends and other kinds of financial distributions (e.g. from corporate stock)
  • rental income (e.g. from letting your family home in your country of origin)
  • income from employee pension plans, disability retirement payments, purchased commercial annuities, and similar sources
  • income from US social security benefits
  • other kinds of income (e.g. gambling winnings, royalties, unemployment benefits, or alimony payments)

Capital gains – for example, from the sale of property – have to be reported separately from your other income. If you have made capital gains during the fiscal year, they will be taxed at rates varying from 0% to 28%.

If you have incurred a net loss, e.g. by selling real estate for less than the original price of purchase, up to $3,000 is deductible from your taxable income in this year’s tax return. In case the net loss was higher than $3,000, the rest can be used for capital loss carryovers in future tax returns.

Step 4: Choose Your Filing Status

After reporting your income and capital gains (or losses), you have to choose the appropriate filing status to fill in on the tax return forms. For resident aliens, the following options are eligible:

Your filing status will influence various details when it comes to the rest of your tax return. If you now want to work out how much tax is due, you have to follow several more steps.

Step 5: Adjust Your Gross Income

First, you have to adjust your income. From your total income, as determined above, you may deduct certain items immediately. These include, for example, alimony payments to a divorced spouse, interest on paying off student loans, tuition fees for further education, moving expenses, or contributions to health savings and individual retirement accounts.

Once you have made these deductions, you have calculated your AGI, or adjusted gross income. From the AGI, you can then deduct further expenses.

Step 6: Work Out Your Taxable Income

When it comes to deducting expenses from your AGI, the easier, less time-consuming option is to go for the so-called standard deduction. You simply subtract a specific lump sum for yourself, as well as your dependents. For instance, a single resident taxpayer (who is neither elderly nor blind) could decrease his or her AGI by $6,100.

The alternative to the standard deduction is the itemized deduction. Instead of choosing the lump-sum amount, you list all eligible expenses and then subtract their total cost. In some cases, this sum will be higher than the lump-sum deduction. Thus, going through all your expenses for a tax year might well be worth the while!

Here are some itemized expenses that you might be able to deduct:

  • medical and dental expenses (if they are higher than 10% of the AGI)
  • state and local income tax
  • home mortgage interest
  • charitable contributions
  • casualty losses
  • expenses for job-related education or training
  • miscellaneous expenses (e.g. union dues, membership fees for professional associations)

Once you have subtracted either the standard deduction or all itemized deductions, you have arrived at your taxable income.

Step 7: Calculate Your Income Tax

As soon as you know the exact sum of your taxable income, you can figure your income tax. The rates for income tax in the United States range from 10% to 39.6%, depending on the various income brackets.

For example, if you’re a single resident alien with no dependents and a taxable income of $50,000, your 2013 income tax would be calculated as follows:

  • 1st tax bracket [$0 – $8,925]: $8,925 (full bracket) taxed at 10%: $892.50 in tax
  • 2nd tax bracket [$8,926 – $36,250]: $27,325 (full bracket) taxed at 15%: $4,098.75 in tax
  • 3rd tax bracket [$36,251 - $87,850]: $13,750 ($50,000 - $36,250) taxed at 25%: $3,437.50 in tax
  • This adds up to a total federal income tax burden of $8,428.75 ($892.50 + $4,098.75 + $3,437.50).

However, in practice, the IRS urges you to work with tax tables or a special kind of tax computation sheet when you need to figure your income tax burden. You can find in-depth information on this topic in chapter 30 of the IRS tax guide.

But wait! Your income tax is not necessarily the final amount that you need to pay to the IRS. Why that is so, we’ll show you on the next page. 


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