Managing and filing US taxes can be difficult to understand so we've broken it all down for IrishCentral readers.

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US income tax system explained

It can be very difficult to understand the different Internal Revenue Service (IRS) filing requirements and potential pitfalls a person can face if they do not properly stay in IRS compliance.

The US tax year runs commensurate to the calendar year and federal income tax is calculated by measuring income earned during that period.

However, taxpayers can adopt a fiscal year other than the calendar year.

United States citizens and residents pay income taxes to different levels of government.

  • Federal income tax is paid to the US federal government and is administered by IRS, a division of the US Treasury Department.

  • State income tax is also paid to the state or states where one resides or earns income and is mandatory in most states bar Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming who have no income tax levies for any residents.
    • Residents of New Hampshire and Tennessee are also spared from state income taxes although they do pay tax on dividends and income from investments.

  • Local income taxes are imposed in some cities, counties and other small areas across the US. There are permanent local income taxes which are often used to fund operating budgets and temporary local income taxes which fund specific, short-term purposes like such as education, parks, and community improvement.
    • States with local income taxes include Alabama, Arkansas, Colorado, Delaware, Indiana, Iowa, Kentucky, Maryland, Michigan, Missouri, New Jersey, New York, Ohio, Oregon, Pennsylvania, West Virginia.
  • Federal Insurance Contributions Act (FICA) taxes are the social security and medicare taxes paid by individuals and employers. FICA taxes are called payroll taxes because they are based on the amounts paid to employees.

These taxes are often paid by the employee by being withheld or deposited by the employer.

Deductions from income subject to tax

Some types of expenses like medical expenses or charitable donations can be deducted from income, resulting in a lower net income that's subject to tax.

Other expenses can be used to generate a tax credit which further reduces any tax owed.

Read More: Donald Trump’s tax deal could spell trouble for Ireland

Taxpayers are responsible for calculating how much federal, state and local income taxes they owe.

This is accomplished by preparing the appropriate tax returns, which can be done individually or by a professional tax accountant.

How do deductions for state and local taxes work?

Taxpayers who itemize deductions on their federal income tax returns can deduct state and local real estate and personal property taxes, as well as either income taxes or general sales taxes.

The Tax Cut and Jobs Act limit the total state and local tax deduction to $10,000.

What income tax bracket do I fall under?

Income tax brackets determine the percentage of income, after claiming various deductions, that are owed to the IRS.

The top marginal income tax rate of 37 percent will hit taxpayers with a taxable income of $510,300 and higher for single filers and $612,350 and higher for married couples filing jointly.

Below is the breakdown for the 2019 tax year which will be filed in 2020.

Here are your new income tax brackets for 2019. https://t.co/9pIr5gChJw pic.twitter.com/FvFWb9OZ93

— CNBC (@CNBC) January 13, 2019

Does everyone have to pay income taxes?

The good news is that not everyone has to file a personal income tax return.

The bad news is the only people excluded are those who rely solely on social security benefits or disability insurance payments for income.  The same applies to supplemental security income.

Do immigrants have to pay income taxes?

Immigrants who have the right to work in the US must adhere to federal tax laws and pay the same taxes as American citizens.

There are two classifications of people the US uses with regards to taxes:
tax residents and non-tax residents

For example, all permanent residents, or green card holders are considered tax residents.

Tax residents must report their entire income to the IRS even if monies were earned outside the US. Reporting all income to the IRS does not mean it will all be taxed by the US government however, as those decisions are governed by international tax treaties.

Not all non-immigrant visa holders are tax residents.

Holders of non-immigrant visas only become tax residents if they spend at least 183 days of the current year within the United States. 

In addition, there is a weighted system that could also put non-immigrant visa holders into tax resident status even if less than 183 days are spent in the US during the current year.

If you have been in the United States for a total of at least 183 "weighted" days during the prior three years in the United States, then you are also a tax resident. 

Under the weighted system, all days in the current year count as one day, all days in the previous year count as 1/3 of a day, and all days in the year before that count as 1/6 of a day. If the total is at least 183 days, you may become a tax resident.

However, exemptions are made if less than 30 days are spent in the US during the current year. 

Filing income tax returns recommended

Even if you are not a tax resident, it may be a good idea to file an income tax return if you have been working for an employer that withholds taxes from your wages as you may be entitled to a tax refund.

Further, it would be prudent to do so should you intend on applying for US citizenship or future visa applications.

The IRS provides further information on immigration and taxes via IRS Form 519, U.S. Tax Guide for Aliens. 

Do J-1 visa holders have to file tax returns?

Most J-1 visa exchange holders are considered non-residents for tax purposes meaning a number of different taxes will be deducted from their paychecks: federal, state and local but they should not be charged FICA tax.

As non-residents, J-1 visa holders will only pay tax on income from US sources. Exactly how much tax depends on how much is earned and where it was earned, as taxes vary by state. 

J-1 students may also be liable to pay tax on money from stipends, fellowships, grants or awards.

Even if J-1 holders have returned home by April 2020 they should still file for 2019 as they may receive a refund and it will put them in good standing with the US government for future visa applications.

Websites like taxback.com will help J-1 visa holders file their income tax returns.

J-1 holders may receive a tax refund. Image: Getty

J-1 holders may receive a tax refund. Image: Getty

Do US citizens living outside the US pay taxes?

The short answer is yes! US citizens or green card holder living abroad are still obligated to file a US federal tax return even if taking up residence in a new country.

This means that income earned abroad are still subject to US taxes.

The IRS also requires that you disclose your foreign accounts and assets that cross a certain value threshold.

Read More: How hard is it to move to Ireland as an American?

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

It can be very difficult to understand the different IRS filing requirements. A woman calculating her tax returnsGetty Images