Overview-United States Individual – Taxes on personal income 2023 

Introduction: The United States Individual Income Tax for 2023 comes with various nuances affecting single, married, and head-of-household taxpayers. This comprehensive guide delves into tax rates, income determination, personal deductions, interest expenses, standard deductions, and other critical aspects.

Single taxpayers (1)

Married taxpayers filing jointly (1, 2)

Head-of-household taxpayers (1, 2)

Married taxpayers filing separately (1)

 Individual – Income Determination:

1. Employment Income:

• Citizens, resident aliens, and non-resident aliens are taxed on compensation earned for work in the U.S., unless a treaty or Internal Revenue Code provision states otherwise.
• Reimbursements for personal living and travel expenses while ‘away from home’ are generally not taxable, but similar expenses for a spouse or dependent are taxable.
• After-tax dollars contributed to a pension are partially taxable; the return of the after-tax amount is not subject to tax.

2. Equity Compensation:

• Various equity compensation types exist, such as stock options, with taxation varying.
• Income may be recognized upon receiving an option or exercising it, but statutory stock options may defer taxation until the stock is sold.
• Foreign nationals may face U.S. income tax on stock option exercise if granted before U.S. residency, with a potential foreign tax credit.

3. Business Income:

• Self-employment income is taxed similarly to employment compensation.
• Self-employed individuals can claim more liberal deductions for business expenses than employees.
• Citizens and resident aliens may face increased social security contributions on self-employment income earned in the U.S.

4. Capital Gains:

• Citizens and resident aliens include worldwide capital gains in income, subject to U.S. taxation.
• Non-resident aliens are taxed at 30% on U.S.-source net capital gains if present for 183 days or more, with exceptions for residency.

5. Dividend Income:

• Dividend income received by citizens and resident aliens is subject to U.S. tax, with a maximum federal income tax rate of 20%.
• Non-resident aliens face a flat 30% tax on U.S.-source dividends, usually withheld at source.

6. Interest Income:

• Interest income received by citizens and resident aliens is subject to U.S. tax, regardless of the source.
• Non-resident aliens’ U.S.-source interest is generally subject to a flat 30% tax rate, with certain ‘portfolio interest’ exempt.

7. Rental Income:

• Rental income received by citizens and resident aliens is subject to U.S. tax, regardless of the source.
• Non-resident aliens’ U.S.-source rents are generally subject to a flat 30% tax rate, but they can elect to report net income subject to graduated rates.

8. Exempt Income:

• Certain items are generally exempt from personal income tax, such as property acquired by gift or bequest.
• Tax-exempt income includes interest from municipal bonds.

Personal Deductions:

Citizens and Resident Aliens:

• Qualified Residence Interest:

• Deduction for interest paid on qualified residence loans, including mortgages on primary and secondary homes.
• Applies to loans used for acquisition, construction, or substantial improvement of the residence.

• State and Local Taxes (SALT):

• Deduction for state and local income or sales taxes, as well as property taxes.
• Aggregate deduction capped at USD 10,000 for combined state and local income or sales taxes and property taxes.

• Medical Expenses, Casualty, Disaster, and Theft Losses, and Charitable Contributions:

• Deduction for medical expenses exceeding a percentage of adjusted gross income (AGI).
• Deductions allowed for certain casualty, disaster, and theft losses, subject to limitations.
• Charitable contributions to qualified organizations are deductible within specific limits.

• Child Care Expenses:

• Eligible child care expenses may be deductible, particularly those related to enabling the taxpayer to work or look for work.
• The Child and Dependent Care Credit may also be applicable.

• Alimony (Before 2019):

• Deduction allowed for alimony payments made under divorce or separation agreements finalized before December 31, 2018.
• Recipients include alimony in their income.

Non-Resident Aliens:

• Casualty and Theft Losses:

• Deduction allowed for non-resident aliens for casualty and theft losses incurred in the United States.

• Contributions to U.S. Charitable Organizations:

• Non-resident aliens can deduct contributions to qualified U.S. charitable organizations, subject to specific rules.

• State and Local Income Taxes:

• Deduction allowed for non-resident aliens for state and local income taxes paid in the U.S., subject to limitations.

Interest Expenses:

• Personal Interest:

• No deduction allowed for personal interest.

• Investment Debt:

• Deduction allowed for interest paid on investment debt, limited to the extent of net investment income (investment income net of investment expenses, excluding interest).

• Excess Investment Interest Expense:

• Disallowed excess investment interest expense can be carried forward and claimed as a deduction in subsequent years against net investment income.

Standard Deductions:

• Available to Citizens and Resident Aliens:

• Instead of itemizing deductions, citizens and resident aliens can claim a standard deduction.
• Amounts for 2022: USD 25,900 for married couples filing jointly, USD 12,950 for individuals, and USD 19,400 for heads of household.
• Amounts for 2023: USD 27,700 for married couples filing jointly, USD 13,850 for individuals, and USD 20,800 for heads of household.
• Additional amounts for individuals 65 or older or blind.

• Non-Resident Aliens:

• Non-resident aliens cannot claim a standard deduction.

Business Expenses (Before 2018):

• Travel, Living Expenses, and Business Moving:

• Deduction allowed for travel or personal living expenses not reimbursed while ‘away from home.’
• Business-related moving expenses were deductible without the 2% floor for unreimbursed moving expenses.

• Travel and Entertainment Expenses:

• Deduction allowed for travel and entertainment expenses, with meal and entertainment expenses subject to a 50% limit.

Losses:

• Capital Loss Deduction:

• Limited to the individual’s capital gains plus USD 3,000.

• Hobby Loss:

• Losses attributable to non-profitable activities (‘hobby losses’) are deductible only to the extent of income produced by the activity.
• Disallowed hobby loss deductions categorized as miscellaneous itemized deductions (disallowed under P.L. 115-97).

• Non-Corporate Taxpayer Loss Limitations (CARES Act):

• The CARES Act deferred the excess active business loss limitation rule of P.L. 115-97 for tax years beginning after December 31, 2020.
• For tax year 2023, amounts are USD 279,000 (USD 578,000 for joint filers) for determining net business losses.
• Excess business losses will be carried forward as a net operating loss carryover.

Individual – Foreign Tax Relief and Tax Treaties:

Foreign Tax Relief:

Taxpayers, including both US persons and foreign persons with effectively connected US trade or business income, may utilize foreign tax relief mechanisms to manage their US federal income tax liability. The primary tool for this relief is the Foreign Tax Credit. Here are the key aspects:

• Foreign Tax Credit:

• Taxpayers can claim a credit against US federal income tax for certain taxes paid to foreign countries and US possessions.
• Eligible taxes include foreign income taxes, war profits taxes, and excess profits taxes.
• Taxpayers have the option to either deduct these foreign taxes (with no limitation) or claim a credit, subject to certain limitations.

Tax Treaties:

The United States has established tax treaties with numerous foreign countries. These treaties aim to avoid double taxation and provide a framework for taxation of cross-border income. Key points about tax treaties include:

• Reduced Tax Rates or Exemptions:

• Residents (not necessarily citizens) of foreign countries may benefit from reduced US tax rates or exemptions on specific income items sourced within the United States.
• Similarly, US residents or citizens may enjoy reduced foreign tax rates or exemptions on certain income received from foreign sources.

• Saving Clause:

• Most income tax treaties contain a “saving clause” that prevents US citizens or residents from using the treaty to avoid taxation on US-source income.

• Variability Among Countries:

• The terms of reduced rates and exemptions can vary significantly among countries and specific types of income.

• List of Countries with Tax Treaties:

• The US has tax treaties with a broad range of countries, including but not limited to:

• Armenia, Australia, Austria, Canada, China, France, Germany, India, Italy, Japan, Mexico, Netherlands, Russia, South Africa, Switzerland, United Kingdom, and many more.

• Totalisation Agreements:

In addition to income tax treaties, the United States has Totalisation Agreements (related to social security contributions) with several nations. These agreements are designed to prevent double social security taxation and ensure individuals participating in multiple social security systems can qualify for benefits. The nations with Totalisation Agreements include:

• Australia, Germany, Poland, Austria, Greece, Portugal, Belgium, Hungary, Slovak Republic, Brazil, Iceland, Slovenia, Canada, Ireland, South Korea, Chile, Italy, Spain, Czech Republic, Japan, Sweden, Denmark, Luxembourg, Switzerland, Finland, Netherlands, United Kingdom, France, Norway, and Uruguay.

Individual – Other Tax Credits and Incentives

• Child Tax Credit:

• Eligibility: Citizens, resident aliens, and non-resident aliens with a child who is a resident of the United States.
• Amendments: The American Rescue Plan extended eligibility to a child 17 years old and younger. The American Families Plan increased the credit to USD 3,000 per child for dependents ages 6 through 17 and USD 3,600 for dependents age 5 and under.
• Previous Regulations: Under P.L. 115-97, if the child has not reached the age of 17 by the end of the year, a tax credit is allowed for up to USD 2,000 per child (of which up to USD 1,600 is refundable).
• Income Limits: The credit amount reduces for taxpayers with income exceeding USD 400,000 for married filing jointly and USD 200,000 for singles and all other filers.
• Additional Credit: P.L. 115-97 provided a USD 500 non-refundable credit per dependent for a qualifying dependent other than a qualified child.

• Child and Dependent Care Credit:

• Expenses Covered: Dependent care expenses up to USD 3,000 for one qualifying child or USD 6,000 for more than one qualifying child.
• Credit Percentage: The credit ranges from 20% to 35% of the expenses paid, depending on the taxpayer’s adjusted gross income.
• Non-Refundable: The credit is non-refundable.

• New Markets Tax Credit (NMTC):

• Program Description: Enacted by Congress in the Community Renewal Tax Relief Act of 2000, NMTC allows taxpayers to receive a credit against federal income taxes for making Qualified Equity Investments (QEIs) in qualified community development entities (CDEs).
• Renewal Requirement: The NMTC Program is non-permanent and needs renewal during each session of Congress.
• Preservation: P.L. 115-97 preserved the NMTC’s existing authorization.

• Other Tax Credits:

• Diversity: Numerous other tax credits exist at federal, state, and local levels.
• Incentives: These credits aim to incentivize specific actions, and identifying applicable credits for a taxpayer necessitates a comprehensive review of multiple sources of tax law.

Individual – Tax Administration

• Tax Period:

• The U.S. tax year aligns with the calendar year, running from 1 January to 31 December.

• Tax Returns:

• Individual income tax returns (Form 1040) are due on 15 April (or the next business day if the 15th falls on a weekend or federal holiday).
• An automatic six-month extension is available by filing Form 4868, but it does not extend the time to pay taxes.
• Joint filing is generally allowed for citizen or resident husbands and wives.
• Joint filing often results in a lower tax liability.

• Payment of Tax:

• Federal income tax payment is due on 15 April to avoid interest and penalties for non-payment.
• U.S.-source income paid to foreign persons may be subject to a 30% tax rate, with possible exemptions under tax treaties.
• Withholding, reporting (Form 1042-S), and filing (Form 1042) obligations apply to payments to foreign persons.

• Estimated Tax Payments:

• Citizens, resident aliens, and non-resident taxpayers must make quarterly payments of estimated tax if they have significant income not subject to withholding.
• Non-resident aliens without income subject to payroll withholding must make three estimated tax payments.

• Tax Audit Process:

• The Internal Revenue Service (IRS) conducts audits to review individuals’ accounts and financial information.
• Audits may be initiated for various reasons, including computerized screening, random sampling, or income document matching.
• Taxpayers can agree, pay any additional tax owed, or disagree and appeal the decision through the IRS appeals system or take the case to court.

• Claims and Refunds:

• Taxpayers can file a claim for credit or refund if they overpay their tax, using Form 1040X.
• The claim must be filed within a limited time, and a separate form is required for each tax year.

• Statute of Limitations:

• The IRS generally has three years from the due date or filing date (whichever is later) to make tax assessments.
• Statute of limitations also applies to the time taxpayers have to file a claim for credit or refund.

• Topics of Focus for Tax Authorities:

• The Treasury Department’s Office of Tax Policy and IRS use the ‘Priority Guidance Plan’ to prioritize tax issues for administrative guidance.
• The plan focuses on addressing important tax issues and plays a role in increasing voluntary compliance by clarifying ambiguous areas of tax law.

Individual – Sample personal income tax calculation

Assumptions

Calendar year 2023

Resident alien husband and wife with two children (age 7, 9), both of whom qualify for the child tax credit; one spouse earns all the income, none of which is foreign-source income. A joint return is filed. AMT liability is less than regular tax liability.

Calculations based on 2023 tax tables.

Tax computation

Conclusion: This detailed guide provides a comprehensive overview of the United States Individual Income Tax for 2023. Whether you’re a single taxpayer, married couple, or head of a household, understanding tax rates, deductions, and credits is crucial for effective financial planning and compliance with tax obligations. Stay informed to navigate the intricate landscape of personal income taxation in the United States.