Financial Year – 1 January – 31 December Currency – US dollar (USD)
Corporate Tax Summary
Residence – A company is resident in the USA if it is incorporated in the USA, regardless of its place of management.
Basis of Taxation – Resident companies are taxed on worldwide income. A non-resident company generally pays taxes only on income derived from US sources or effectively connected to a US trade or business. Whether a foreign entity is considered to be engaged in a US trade or business is based largely on facts and circumstances. The tax rates and treatment are the same for companies and branches of foreign companies.
Corporate Income Tax Rate (%)
Federal – 21 %
Branch Tax Rate (%)
Federal – 21%
Withholding Tax Rate:
Dividends – Franked
Dividends paid by US resident corporations to non-resident shareholders are subject to a withholding tax rate of 30% unless reduced by treaty. An exception exists for dividends from US corporations with substantial active foreign business income. There is no withholding tax on dividends to US resident shareholders. The withholding tax serves as the final tax.
Dividends – Unfranked
Dividends – Conduit Foreign Income
Interest payments by US resident corporations or individuals to non-residents are subject to a final withholding tax of 30% unless reduced by treaty. This withholding tax is subject to exceptions, most notably the Portfolio Interest Exception. This exception provides for a zero rate of withholding tax on interest payments on debt instruments that are geared towards foreign lenders as long as certain conditions are met.
Royalties from Intellectual Property
Payments to non-residents with respect to intangible property used in the US are subject to a withholding tax rate of 30% unless reduced by treaty.
Fund Payments from Managed Investment Trusts
Branch Remittance Tax
Treated as dividends and subject to a flat rate of 30% unless reduced by treaty.
Net Operating Losses (Years)
No carryback for taxable years ending after 31 December 2017. The CARES Act passed in March 2020 provided an exception to this with respect to the years 2017 to 2020, for which a five-year carryback is allowed.
Indefinite for taxable years beginning after 31 December 2017. However, the loss usage is limited to 80 percent of taxable income.
Individual Tax Summary
Residence – For tax purposes, an individual is a resident if he/she is a US citizen or permanent resident, or meets the requisite days of presence under the substantial presence test. Under this test, an individual will be considered a US tax resident for a particular year if the individual’s days of presence in the US totals 183 days or more under the following formula:
Current year days are counted at 100%
Preceding year days are counted at 1/3
Second preceding year days are counted at 1/6
An individual who meets the US days of presence for a particular year under the substantial presence test formula may still be treated as a non-resident for that year under the Closer Connection Exception. Under this exception, the individual may be treated as a non-resident if he or she was present in the US for less than 183 days in the year, had a closer connection to a foreign country in which he or she maintains a tax base and meets certain other conditions.
Basis of Taxation – Resident taxpayers are generally taxed on worldwide income, with a tax credit for foreign income tax paid on foreign income, up to the amount of US tax payable on that income. Income is divided into separate “baskets”, along with the corresponding foreign income tax paid or accrued on that income. Cross crediting among different baskets of income is not permitted. Foreign residents are taxable only on US source income and income effectively connected with a US trade or business.
Filing Status – Joint returns may be filed for married resident taxpayers. Married taxpayers may also file married filing separately. Individuals may file as single or head of household if they so qualify.
Personal Income Tax Rates
Tax Payable – Residents
Tax Payable – Non Residents
The seven federal tax brackets are 10%, 12%, 22%, 24%, 32%, 35% and 37%.
Long-term capital gains, i.e., gains with holding periods of more than one year are taxed at a maximum rate of 20%. In addition, there is a 3.8% Net Investment Income Tax for individuals over certain income thresholds.
Goods and Services Tax (GST)
The US does not have federal value added tax, but each state levies sales and use tax on revenue from the sale of goods and certain services. Sales tax rates vary from state to state.
Sales tax may apply in each state depending on the level of sales or revenue generated in that state.
States may tax income based on taxable nexus. As with sales tax rates, state income tax rates vary from state to state.
Filing and Payment
Other Taxes Payable
Payroll tax is levied on employers at the federal level and by states and cities. Federal social security taxes are levied on employers on wages at a rate of 6.2% up to $137,700. Medicare taxes apply to employers on federal wages at a rate of 1.35% with no threshold limit. Employees are also subject to these taxes at the same rates and threshold. State rates vary.
States impose stamp duty at varying rates on mortgages, liens or other evidence of indebtedness filed or recorded in that state.