The tax system in the US: A complete guide for expats

Taxes are one of the most important things to understand when moving to a new country. If you relocate and earn income abroad, you’ll likely have tax obligations in your new home and possibly in your home country as well.

The US tax system is complex and far-reaching. It includes several types of taxes and has specific rules that apply to both residents and US citizens living overseas.

This guide explains the essentials of the US tax system and how services like Wise can help expats manage their finances across borders. While this is intended as an informative overview, it does not constitute professional tax advice. For guidance on your individual circumstances, you should consult a qualified US tax professional.

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Understanding the tax system in the US

The US has a complex tax system consisting of both federal taxes and taxes imposed by states (and sometimes local governments) on individuals and businesses. The federal tax authority is the Internal Revenue Service (IRS), which administers the tax laws of the US. For most individual taxpayers, the tax year is the calendar year – 1 January to 31 January.

Taxes such as income tax in the US are progressive, meaning the tax rate generally increases as income goes up. The US is often viewed as having a lower overall tax burden than many other advanced economies: in 2023, the US tax-to-GDP ratio was 25.2% compared to an OECD average of 33.9%.

Federal taxes help fund services such as healthcare, social security, national defense, and other federal programs. State (and local) taxes typically fund education, state healthcare programs, law enforcement, transportation, and local infrastructure. The mix and rates vary from state to state.

Recent tax developments in the US include the “One Big Beautiful Bill Act” (OBBBA), which was signed into law in July 2025. Among its many provisions, it extends many individual tax cuts introduced in 2017 and raises various deduction limits. The Trump administration has also introduced new international trade tariffs, including 100% tariffs on many patented drugs.

Who pays tax in the US?

The following groups have to pay tax in the US:

• US citizens pay tax on their worldwide income, no matter where they live
• US residents pay tax on their worldwide income if they meet the legal definition of a tax resident
• Non-residents generally pay US tax only on income earned within the US

You are legally considered a US resident for tax purposes if you meet the IRS “substantial presence” test.

This test applies if you are physically present in the US for at least:

• 31 days during the current year, and
• 183 days during the three-year period including the current year and the two years immediately before that, counting all the days in the current year, ⅓ of the days in the first previous year, and ⅙ of the days in the second previous year.

To reduce or eliminate double taxation (being taxed on the same income in two countries), the US provides several mechanisms, including:

• Tax treaties with other countries that prevent or limit double taxation
• Foreign tax credit which allows you to claim a credit for income taxes paid overseas

Your US tax filing tax obligations in the US apply in the year following the year you earned income. For example, if you earn income in 2025, you’ll report it on your 2026 tax return.

For expats earning or managing income across multiple countries, handling tax obligations efficiently can be a challenge. Exchange rates, transfer fees, and currency conversions often add unnecessary stress and expense. Wise makes managing international tax payments simpler and more affordable.

With Wise, you can send money to 140+ countries using the mid-market exchange rate with low, transparent fees. There are high transfer limits (up to around 1 million GBP or equivalent), and discounts for transfers above 20k GBP (or equivalent). This means you can pay taxes abroad or move funds between countries without hidden costs – saving time and money while keeping your finances under control.

How do taxes work for expats in the US?

If you are an expat living and earning income in the US, you’ll generally be subject to the same federal tax rules as US citizens if you qualify as a US tax resident. This means you’ll pay US tax on your worldwide income.

However, if you spend limited time in the US and do not meet the “substantial presence” test, you’ll only pay US tax on income earned within the US.

Do I need a tax ID number in the US?

Yes – you’ll need a tax identification number to file or pay taxes in the US.

For most US residents, this is your Social Security Number (SSN). If you’re not eligible for an SSN – for example, if you’re a non-resident or foreign national without US work authorization – you’ll need to apply for an Individual Taxpayer Identification Number (ITIN) instead.

Your SSN is a unique 9-digit number issued by the Social Security Administration (SSA). It appears on your social security card and is used for tax, employment, and identification purposes. You can apply for an SSN online or by completing an Form SS-5 and submitting it to your local Social Security office.

An ITIN is also a unique 9-digit number, issued by the IRS. It’s used only for federal tax reporting. You can apply for an ITIN by completing Form W-7 and submitting it by mail to the IRS or in person at a local tax office.

Types of tax in the US

There are several different kinds of taxes in the US. These generally fall into three main categories:

• Taxes on what you earn: This group includes income tax, payroll tax, corporate tax, and capital gains tax
• Taxes on what you buy: These include sales tax and excise taxes
• Taxes on what you own: These cover property tax and, in some cases, estate or inheritance taxes

Some taxes are collected by the federal government, while others are administered by state or local governments. The specific rates and rules can vary widely depending on where you live and what type of tax applies.

Below is an overview on how each major US tax works, who pays it, and what the general rates look like.

US income tax

Most types of income you earn during the year are subject to tax in the US. This includes:

• Salary or wages from employment
• Self-employment or business income not subject to corporate tax
• Investment income, such as dividends, interest, or capital gains

US citizens and lawful tax residents must report all income they earn worldwide, even if they live abroad. Non-residents, on the other hand, only report US-sourced income.

If you are an employee, your employer typically withholds income tax from your paycheck throughout the year. Self-employed individuals, meanwhile, generally make quarterly estimated payments directly to the IRS.

For individuals filing single in 2025, federal income tax rates are as follows:

Income	Tax rate
$0 – $11,925	10%
$11,926 – $48,475	12%
$48,476 – $103,350	22%
$103,351 – $197,300	24%
$197,301 – $250,525	32%
$250,526 – $626,350	35%
Above $626,350	37%

Income brackets differ for those filing as married couples (jointly or separately) or as heads of household.

In addition to federal income tax, many states and some cities also collect their own income taxes.

• 42 states and Washington DC levy a state income tax, using either a flat rate or graduated rates that increase with income.
• In 2025, rates range roughly from 1% to 13.3%, depending on the state.
• Only a few local governments charge income tax, and these rates are usually below 1%, although New York City has higher rates between 3.078% and 3.876%.

If you earn money from foreign sources or live abroad while earning US income, your tax situation can become more complex. Using Wise to receive international income can help you avoid unnecessary transaction costs.

Wise multi-currency accounts support 40+ currencies for hold & exchange, and account details in 20+ currencies to receive money from abroad conveniently.

Wise uses the mid-market exchange rate with transparent fees, which can help you maximize your net income when filing US income tax returns.

US payroll taxes

Payroll taxes fund key social insurance programs in the US. They’re primarily used to support:

• Social Security: Benefits for retirees, people with disabilities, and surviving family members of deceased workers.
• Medicare: Helps pay for medical services and hospital care for people aged 65 and over.
• Unemployment insurance: Provides temporary payments to workers who lose their jobs through no fault of their own.

Together, Social Security and Medicare taxes are known as FICA taxes (from the Federal Insurance Contributions Act). Current rates are (2025):

• Social Security tax: 12.4% on earnings up to $176,100
• Medicare tax: 2.9% on all earnings

If you are an employee, your employer pays half of these taxes, meaning that you pay a combined rate of 7.65% yourself. Self-employed workers pay the full combined rate of 15.3% under the Self-Employment Contributions Act (SECA), although they can deduct the employer-equivalent portion when filing their income tax return.

Non-resident workers with self-employment income from US sources generally do not pay Social Security or Medicare taxes unless they are from a country without a totalization agreement and are considered engaged in trade or business in the US.

Federal unemployment tax (FUTA) is 6% on the first $7,000 of annual wages, although employers cover this in full. Employees do not have to pay unemployment tax. Self-employed workers are generally not covered by unemployment insurance, though some states allow voluntary coverage or private policies for business owners.

As with income tax, US payroll taxes are automatically withheld from paychecks and remitted to the IRS by employers. Self-employed individuals report and pay these taxes when they file their annual tax return.

Corporate tax

Corporate tax is a business tax on the profits made by incorporated businesses in the US. All domestic corporations – that is, companies formed under US law – must pay corporate income tax on their net profits. Foreign corporations also pay tax on income connected to a trade or business in the US, such as profits from a US-based branch or subsidiary.

Not all businesses are subject to corporate tax:

• Sole proprietors and unincorporated partnerships report their business income on their individual income tax returns rather than paying corporate tax.
• Businesses structured as S Corporations generally don’t pay corporate tax either. Instead, they are pass-through entities, meaning their profits and losses are passed directly to shareholders, who report them on their personal tax returns.

The federal corporate tax rate in the US is 21%. In addition, 44 states and Washington DC levy their own corporate income taxes. Rates generally range from about 1% to 10%. The highest state corporate tax rate in 2025 is 11.5%, which applies in New Jersey to businesses with net income over $10 million.

Capital gains tax

Capital gains tax is what you pay on the profit (or “gain”) when you sell an asset for more than you paid for it. The taxable gain is the difference between the purchase price and the selling price.

Assets that can trigger capital gains tax include things like real estate, stocks and shares, bonds, collectibles, and valuable personal property such as jewelry or art.

How long you hold an asset before selling it determines the tax rate you pay:

• Short-term capital gains apply to assets held one year or less. These are taxed at your ordinary income tax rate.
• Long-term capital gains apply to assets held for more than one year and are taxed at lower, preferential rates.

The following rates apply to long-term capital gains for the 2025 tax year:

Single taxpayers	Married filing jointly	Married filing separately	Head of household	Tax rate
Up to $48,350	Up to $96,700	Up to $48,350	Up to $64,750	0%
$48,351 to $533,400	$96,701 to $600,050	$48,351 to $300,000	$64,751 to $566,700	15%
Over $533,400	Over $600,050	Over $300,000	Over $566,700	20%

If you sell an asset for less than you paid, you can use that capital loss to offset your capital gains.

• You can deduct up to $3,000 in net capital losses ($1,500 if married filing separately) against ordinary income each year.
• Any unused losses can be carried forward to future years.

If you sell your primary residence, you may qualify for a capital gains exclusion:

• Up to $250,000 of gain if you’re single
• Up to $500,000 if you’re married filing jointly

To qualify, you must have owned and lived in the home as your main residence for at least two of the five years before the sale.

Sales tax

Sales tax is the primary form of consumption tax in the United States. Unlike most European countries, the US does not have a national Value Added Tax (VAT). Instead, sales taxes are set and collected by state and local governments.

Retailers add sales tax to the price of taxable goods and services at the point of sale. The customer pays this tax as part of the total purchase cost, and the retailer then reports and remits the collected tax to the relevant state or local tax authority.

Because there is no federal sales tax, each state (and often its cities and counties) sets its own tax rates, rules, and exemptions. As of 2024, 45 states and Washington DC levy a statewide sales tax. Average combined rates (state plus local) range from about 1.82% in Alaska—which has no state sales tax but allows local ones—to 9.56% in Louisiana, the highest in the country.

Common items often exempt from sales tax include:

• Groceries
• Essential clothing
• Prescription medications
• Necessary medical devices
• Services provided by charities and nonprofits
• Certain community-based services

Revenue from sales taxes helps fund a wide range of state and local programs, including schools, healthcare, public safety, local parks, and community services.

Excise taxes

Excise taxes are taxes applied to specific goods, services, or activities rather than to general sales. In the U.S., most excise taxes are imposed at the federal level, though many states also levy their own excise taxes on certain products.

Like sales taxes, excise taxes are a form of indirect consumption tax, meaning they are typically passed on to consumers through higher prices. However, excise taxes apply only to particular items or transactions, not to most everyday purchases.

Common products and services subject to federal excise tax include:

• Fuel (gasoline, diesel, and aviation fuel)
• Alcohol
• Tobacco products
• Firearms and ammunition
• Certain sporting goods
• Specific vehicles (such as heavy trucks)
• Insurance premiums (for some types of coverage)

Excise taxes can be charged at different points in the supply chain — for example, when goods are manufactured, imported, sold to a retailer, or sold to the end customer. The applicable tax rate depends on the type of product or activity and may be calculated as a fixed amount per unit (e.g., per gallon or per pack) or as a percentage of the sale price.

Property tax in the US

Property tax is a tax on the assessed value of real estate—both residential and commercial—owned in the US. If you own property, you’re typically required to pay this tax each year.

Property taxes are set and collected mainly by local governments, such as counties, cities, and school districts, rather than by the federal government. The revenue helps fund essential community services, including public schools, road maintenance, police and fire departments, and other local infrastructure.

Rates vary widely across the country and are usually expressed as a percentage of a property’s assessed value. While most rates are below 2%, statewide averages in 2023 ranged from about 0.32% in Hawaii to 1.83% in Illinois.

Local assessors determine property values periodically, and tax bills are based on that assessed value multiplied by the local tax rate.

Inheritance, estate, and gift taxes

Inheritance and estate taxes apply to the value of a person’s assets and property after their death. Estate tax is paid by the deceased person’s estate before assets are distributed, while inheritance tax is paid by the individual beneficiaries who receive an inheritance.

Inheritance tax in the US exists in only five states – Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Rates in 2025 range from 1% and 16%, depending on inheritance size and the relationship between the deceased and the beneficiary. In most cases, immediate family members are exempt.

The federal estate tax applies only to high-value estates. For 2025, estates worth $13.99 million or more are subject to the tax, with rates ranging from 18% to 40% depending on total value. Some states also have their own estate taxes, which can apply at lower thresholds.

Gift tax is closely related to estate tax and applies to large gifts given during someone’s lifetime. In 2025, the annual exclusion is $19,000 per recipient — gifts below this amount are not taxable. Gifts above this limit may be subject to federal gift tax at rates between 18% and 40%, usually paid by the donor.

These taxes can affect non-residents with property in the US, as well as high net worth expats who may need to transfer large inheritance sums abroad after their death.

Wise can help with the low-cost transfers of large inheritance amounts. There are high transfer limits (usually equivalent to 1 million GBP) and automatic fee discounts on transfers above 20,000 GBP (or equivalent in other currencies).

Wise uses the mid-market exchange rate with transparent pricing structure, and there is help from a dedicated support team if you need it.

Glossary of US tax terminology

Name	Description
Capital gains	Profit from the sale of assets, such as stocks, bonds, or real estate.
Consumption tax	Tax applied to goods and services rather than income or profits.
Deductions and expenses	Allowable costs that reduce taxable income, thereby lowering your tax liability.
Exemption	Person, property, or income that is not subject to taxation.
Gross income	Total income before any deductions, exemptions, or taxes.
Head of household	Tax filing status for an unmarried individual who provides a home for dependents (e.g., children or elderly parents).
Immovable asset	Assets such as real estate that cannot be moved or easily transferred.
Internal Revenue Service (IRS)	Federal tax authority in the US responsible for collecting taxes and enforcing tax laws.
Levy	The legal collection or enforcement of a tax.
Net income	Income remaining after all taxes and deductions have been applied.
Net operating loss	Occurs when allowable business deductions exceed gross income in a tax year. Losses can often be carried forward to offset income in other years, subject to IRS rules.
Progressive tax	Tax system where higher-income individuals or businesses pay higher tax rates on higher levels of income.
Tax bracket	Range of income subject to a specific tax rate.
Tax credit	Amount that directly reduces your tax liability, dollar for dollar.
Tax avoidance	Legal strategies used to minimize taxes owed.
Tax evasion	Illegal failure to report income, file tax returns, or pay taxes owed.
Tax liability	Total amount of tax owed to authorities.
Taxable income	Gross income minus deductions, expenses, and adjustments.
Withholding tax	Tax withheld at source, such as income tax deducted from wages by an employer.

How to file taxes in US as an expat

Most US taxpayers, including expats living in the country, must file annual tax returns with the IRS and local tax authorities. US citizens and legal tax residents living abroad also have tax filing obligations with the IRS, even if they didn’t earn income in the US during the tax year.

The IRS has tax filing information for individuals and businesses on its website. For state and local government requirements, check with the relevant tax authorities.

Below is a step-by-step guide to filing federal US taxes as an foreign resident.

Step 1: Check if you need to file a tax return

US citizens and Green Card holding residents need to file a tax return if their income is over the filing requirement for the tax year assessed. For 2024, the thresholds were:

• $14,600 for a single person under 65
• $16,550 for a single person over 65

Different thresholds apply for married couples, heads of households, and surviving spouses.

You may also need to file if you meet certain other requirements. See the IRS website for details.

Step 2: Gather your documents

Before filing, collect the necessary information and forms, such as:

• Your tax number (SSN or ITIN)
• Bank account details
• Current address
• Form W2 (wages from US employers, if applicable)
• Forms 1099 (income not withheld at source, such as self-employment or investment income)
• Records for credits and deductions (e.g., charitable donations, medical expenses, or dependent care)
• Income records for self-employment

Step 3: Claim your allowable credits and deductions

Tax credits and deductions can help reduce your US tax liability:

• Deductions reduce your taxable income
• Credits directly reduce your tax bill

For 2024, the standard deduction was $14,600 for single filers. If your individual deductions exceed that, you can choose to itemize them instead.

See the IRS website for full details on available credits and deductions.

Step 4: File your tax return

You can file your federal return electronically or by mail. Options include:

• IRS Direct File
• Free File
• Through an IRS-approved tax professional
• Using paper forms (PDFs and information available on the IRS website)
• With help from IRS-certified volunteers, if you earn under $67,000 or meet certain other criteria

The filing deadline for US tax returns is usually 15 April each year. Extensions until 15 October are available if you meet certain criteria.

Step 5: Pay any tax due

Finally, you will need to pay any tax you owe. This is your total tax liability for the year, minus tax withheld at source (e.g., deducted from wages) and applicable tax credits.

Taxes are generally due on 15 April each year along with tax returns, even if you have a filing extension. Self-employed taxpayers may need to make quarterly estimated payments.

The IRS website has details on the various different ways that you can pay your tax bill.

If you have paid more tax than you owe through the year, you may be entitled to a tax refund.

If you have tax obligations in more than one country, you can use a Wise multi-currency account to manage your money. This enables you to hold and exchange funds in 40+ currencies.

With Wise, you can also send payments to 140+ countries with low-fee international transfers, using the mid-market exchange rate with no hidden costs. This can help you to save money as well as making things easier when it comes to international tax.

Tax fines and penalties

You may face a fine or penalty if you don’t:

• File your tax return on time
• Pay your tax bill by the deadline
• Provide accurate and complete information on your return

If you fail to file your federal tax return on time, the standard penalty is 5% of the unpaid tax for each month (or part of a month) your return is late, up to a maximum of 25%.

The standard failure-to-pay penalty is 0.5% of the unpaid tax for each month (or part of a month) the payment is late, also capped at 25%.

If you provide incorrect or incomplete information that results in underpayment of tax, the IRS may charge an accuracy-related penalty equal to 20% of the amount underpaid.

Interest also accrues on any unpaid tax and penalties until they’re fully paid.

Penalties for late filing or payment of state and local taxes vary. Check with the relevant state or local tax authority for specific rules and rates.

Double taxation agreements

The US has tax treaties with over 60 countries worldwide to prevent double taxation, both to foreign nationals in the US and to US expats abroad. Countries that have tax agreements with the US include:

• Australia
• Canada
• France
• Germany
• Japan
• UK

Tax avoidance and tax evasion in the US

According to the Tax Justice Network, the United States loses more than $177 billion each year to tax abuse. This includes both tax avoidance and tax evasion — but there’s an important difference between the two.

• Tax avoidance uses legal methods to reduce the amount of tax owed. For example, a person or business might use tax deductions, credits, or move profits to lower-tax jurisdictions within the bounds of the law.
• Tax evasion involves illegal actions to avoid paying taxes, such as failing to report income, hiding money offshore, or not paying taxes owed.

While tax avoidance stays within the law (though sometimes controversial), tax evasion is a crime. Penalties for tax evasion can include fines, interest on unpaid taxes, and in serious cases, imprisonment.

If you suspect someone of committing tax evasion, you can report it anonymously through the IRS website.

Tax advice in the US

This is a general guide intended for informational purposes only and should not be treated as professional advice. You should consult a qualified tax expert if you have any queries about your own situation.

The IRS has several free assistance tools, and you can check state and local government tax authorities for help and advice. You can also find numerous advisors with expat and international tax expertise. Services available in the US include:

• CST
• HSBC Expat
• Taxes For Expats

Useful Resources

• Internal Revenue Service (IRS) – federal tax authority in the US (accessed 20 Oct 2025)
• Federation of Tax Administrators – find information official tax agencies in each US state
• Tax Foundation – US nonprofit with information and research on tax in the US and many overseas countries