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Taxes in the USA: Which taxes should we pay?

The American dream of living in the United States also comes with tax obligations. Find out about taxes for foreigners in the USA!

Living in the United States is a dream for many. It’s considered the land of great opportunities and of slogans such as “chasing the American dream”: Travelling Route 66, visiting the Colorado Canyon, bathing on the famous beaches of Miami or strolling through Central Park. If this is your case and you’re ready to start a new adventure in America, it’s essential that you first learn about taxes in the USA for foreigners. Being up to date with tax payments helps support the country’s financial system and ensures access to basic services.

What kind of foreigners are obliged to pay these tax charges? Throughout this article, we’re going to look at the different types of people who settle in the United States: Students, workers, entrepreneurs, investors, etc. Each of them will have to pay different taxes and may also benefit from deductions and exemptions, depending on their income, country of origin and personal situation. Welcome to the USA!

In this article

Types of foreigners in the U.S.

The categories by which foreign nationals are classified in the US are according to their legal status, economic activity or reasons for residence. Depending on your position within this general classification, you’ll be liable to pay certain taxes in the USA for foreigners, which may be monthly, quarterly or annually. There are two groups that we’ve to differentiate: Natural persons and legal persons or companies.

Persons

Foreign nationals residing in the US are mostly temporary workers, digital nomads, international students, expatriates and permanent residents. These persons act in their own name, have their own legal capacity to sign documents, to contract insurance own property, work, study and are therefore exposed to the country’s tax obligations. Let’s distinguish the types of resident aliens in the United States:

Permanent residents (Green Cardholders): Foreigners who, thanks to the Green Card, already have legal permanent residence status. Like US citizens, they’re taxed on their worldwide income.
Temporary workers: Workers arriving in the country on a type of visa such as H-1B (skilled workers), L-1 (intra-company transferees), digital nomad visa or temporary agricultural visas. These permits are temporary and at the end of their contract they’ll return to their country of origin. Therefore, they’ll only pay for taxes generated in the US.
Students and academics: The government provides F-1 (for students) or J-1 (for academic exchanges) visas. In addition, they’ve reductions or exemptions, depending on the agreements with their country of origin.
Long-term visitors: Are those tourists who stay more than 183 days per year. They’re considered tax residents and have to pay taxes on their income in the country.

Classes of foreign nationals residing in the USA @shutterstock.

Companies or properties

In this case, companies are entities created by law and are responsible for declaring the profits from their business activity. There are also the properties that foreigners acquire in the US for the purpose of owning their own residence, renting or investing in the real estate market. In both cases, they’re also allocated US taxes for foreigners. Let’s look at the main groups:

Limited Liability Companies (LLC): A type of company for foreigners that allows them some flexibility and protection. They’re allowed to operate in the country and must be taxed on their profits, depending on the organisation of the company.
Corporations (C-Corp): A group of companies reserved for temporary residents only. They allow foreigners unrestricted ownership and are taxed as a separate entity.
Joint Ventures: These are created by foreigners and local companies as a way of supporting different projects such as start-ups or businesses. They’ve tax benefits due to double taxation treaties.
Residential or commercial properties: Foreigners buying homes to reside, rent or sell. Also commercial premises such as offices, shopping centres, hotels, etc. The profits they generate will have to be declared at federal and state level.
Agricultural or forestry investments: Some foreigners choose to invest in agricultural land to develop sustainable projects that also generate incentives and are taxed.

Foreign companies and property in the US @shutterstock.

Taxes for individuals or natural persons in Colombia

Taxes for foreigners in the USA will depend on the status of the person. There are two ways to determine this: The Green Card, which grants you permanent residence in the country, and the Substantial Presence Test, a criterion used by the US Internal Revenue Service (IRS) to determine whether a foreigner should be considered a tax resident. It depends on whether you’re resident or non-resident, so your taxes will be different. These are the main ones:

Federal income tax: Foreigners with permanent residence will have to pay this tax on their overall income. By contrast, non-resident foreigners are only obliged to declare profits earned in the country. Federal rates vary according to annual income, ranging from 10% to 37%. For example, a non-resident working in the US with an income of $50,000 US could pay between 12% and 22%, depending also on his or her deductions.
State and local taxes: Apart from the federal tax, some states such as New York or California have their own taxes with rates ranging from 2 % to 13 %.
Payroll tax: All foreign workers in the country have to contribute from their payroll to pay fees to maintain the service of some insurances, such as Social Security and Medicare. The rate is approximately 7.65% of salary. There are certain treaties that exempt some foreign students from this fee.

Tax or fiscal benefits for foreign persons in the USA.

In addition to all the taxes for foreigners in the USA that we’ve detailed in the previous section, it’s not all about payments in the United States. The government facilitates various programmes and agreements with tax benefits, which can take the form of deductions and even exemptions from some taxes. As always, each tax or benefit depends on the tax status of the foreign person, but these are the most common:

Tax treaties: The United States has signed several agreements with other countries to avoid double taxation and reduce tax burdens. For example, a German student with an F-1 visa will be exempt from paying taxes on his or her scholarships.
Standard deductions and tax credits: Foreign tax residents are entitled to claim a standard deduction. The figure for 2023 was set at $12,950 US. There are also tax credits with relief, e.g. the Child Tax Credit.
Tax exemption: Depending on the applicable treaty, non-resident aliens don’t have to declare interest earned on US bank accounts or on certain dividends, depending on the applicable treaty.

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Taxation of foreign property or business in the USA

Foreign companies that generate profits in the country, or property that a foreigner buys, sells or rents, have their own mandatory taxes to report in the US tax system. Fees vary depending on the company’s business activity, location and profits earned. In addition to federal taxes, some cities have implemented other tax burdens on top of this payment. These are the taxes you need to know about:

Real estate property tax: All property purchased in the United States by foreigners must pay this tax. Local taxes range from 0.5% to 2% of the rateable value. For example, a foreigner with a $500,000 US home in Florida will pay between $2,500 US and $10,000 US per year.
FIRPTA tax (Foreign Investment in Real Property Tax Act): When a sale of property is made, 15% of the sale price is withheld as an advance on the capital gains tax.
Corporate tax: Foreign companies are subject to a 21% federal tax on their income generated in the US. In addition, other local taxes may also be added, depending on the location of the business activity.
Tax on rental income: Depending on the status of the foreigner, for each rental property the person rents, he/she will have to pay taxes varying from 10 % to 37 % of the income.

Fiscal or tax benefits for foreign companies in the US

A tax benefit is a commitment that the US government makes to all foreigners who come to the country to contribute to the improvement of the labour market and to help the financial system. Thanks to these deductions and exemptions, foreign companies choose to set up their business on American soil:

Tax credits for job creation: If you’ve a foreign company and hire local workers, the government benefits you with a tax credit. This is the case in Texas with its Job Creation Tax Credit. In this way, the country helps its citizens to find employment.
Opportunity Zones: There are designated areas to invest in and help repopulate. If you set up your foreign company in one of these regions, you can obtain some tax exemptions. It’s a way of mutually supporting the foreign entrepreneur with the American people who need help the most. For example, the Birmingham, Fresno or Bronx areas.
Accelerated depreciation: Through accelerated depreciation, the company can recover, through tax deductions, its investments in equipment, machinery, buildings, etc., more quickly.
Tax treaties: As mentioned above, it’s a government with agreements signed with several countries for double taxation. If your home country has such a treaty with the United States, you’ll only be obliged to pay taxes generated in one of the countries.

Tax burdens for foreigners in the US @shutterstock.

Taxation of foreign investments in the US stock market

Investing in the stock market also generates taxes for foreigners in the USA that are usually levied on capital gains and dividends. As we’ve seen so far, the rates will depend on the tax status of the individual and the income they generate. If you’re a non-resident foreigner, you must file a W-8BEN form, so you’ll have access to tax benefits. We detail the taxes on the US stock market:

Tax	Features	Rates
Dividends	Withholding tax on dividends paid by US companies.	30% for non-residents. If your country has a treaty with the US, the rate can be reduced to 15% as, for example, in the UK or Canada.
Capital profits	Profits on shares of US companies.	Non-residents don’t have to pay fees, as long as they aren’t substantial property owners. For foreign tax residents the fees range from 10% to 37%
Net Investment Income (NIIT)	It applies to tax residents if their net income exceeds $200,000 US.	3.8% tax on capital profits.

US stock exchange taxes.

Find out about taxes for foreigners in the USA

What taxes do non-US resident foreigners have to pay?

Taxes for non-residents are levied on income generated in the country and on the sale or rental of housing. The fees charged will depend on the profits made.

What is the W-8BEN form and why is it important for foreigners?

This is a form necessary to confirm the tax status of each person and to be able to apply for tax exemption or reduction. This is thanks to double taxation treaties.

Do I have to declare my global income as a foreigner in the US?

If you’re a tax resident, you must declare any income you have, whether it’s earned inside or outside the country. For non-residents, the obligation only applies to profits earned in the United States.

How does the Substantial Presence Test affect my tax obligations?

If it’s confirmed that you live in the USA for more than 183 days, you’re already considered a tax resident and are therefore obliged to declare all your global income from any country.

What happens if I don’t pay taxes as a foreigner in the USA?

If the US tax system investigates you and finds that you’re avoiding paying your mandatory taxes, you can be fined, prosecuted or even removed from the country.