The United States today includes 50 different states that are united as one federation. The meaning of this is that a difference in tax laws between the different states within the United States is to be expected. This difference could possibly heavily affect the profitability of investing in profit yielding properties in the United States, depending on the location of the property being invested in.
This is where the large importance of a full and detailed understanding of the United States tax system comes in to play, as well as professional tax planning with an American tax consultant, when approaching the beginning of the investment process.
How does the tax system work in the United States?
The tax system in the United States work in a multi – staged way, including federal tax, state tax, and city tax.
The federal tax system in the United States
Federal tax in the United States is implemented by the American taxing authority – the IRS, an equivalent to the Israeli income tax authority. All American citizens have to pay it, as well as green card holders, foreign residents, and foreign investors in the United States the have income generated from properties and businesses running within the borders of the United States.
The state tax system in the United States
In addition to federal tax, in some states of the American federation a state tax is implemented as well, at varying rate from state to state. In most cases the state tax is implemented on net profits of the tax – payer or profits earned within the borders of the state itself, and the tax rates is relatively low. It is important to note that despite the fact that every state in well within its rights to decide its own tax laws, the state tax system is similar to the federal tax system in most cases, implementing a marginal and classified tax on the tax payer.
With that being said, there are specific states in the United States that collect taxes on a fixed rate on all tax – payers in their state (like Colorado, Illinois, Utah, Pennsylvania, Michigan, Massachusetts, and Indiana), or some states that don’t require personal taxes on ongoing revenue at all (Alaska, Florida, Washington, Wyoming, Texas, South Dakota, and Nevada). The rest of the states in the United States tax their residents and those making profits from properties / businesses within their borders according to the designated tax bracket in that state (in other words, a leveled or progressive tax system.)
In most cases a state tax is deductible and so it lowers the amount owed in federal tax like the taxes owed to the Israeli tax authority. As mentioned, this is true in relation to the American state income tax, collected on earning, and not in relation to levies and general fees collected by states, property tax, municipal rates, or franchise tax.
The city tax system in the United States
In some of the cities and counties in the United States, there is, in addition to the federal tax and the state tax, a city tax or county tax. The requirement to declare on income and the tax laws differ between city to city and county to county in the different states of the United States, where each local municipality in the United States is allowed to decide for itself different tax laws and different systems in place to collect the local taxes. As a general rule though, and in most cases, the city tax in the United States is implemented as a fixes tax rate on the net profit of the tax – payer.
When you come to the point of picking a country in the United States where you with to invest or start a business, it is very important to check ahead of time if the specific city or county you are aiming towards charge a city or state tax. This is because taxes like these could easily torpedo the profitability of your investment. It is even more important to look into the subject of city tax in the United States before going into an investment in the United States, if you are registered as Israeli residents, as the Israel tax authority does not recognize these taxes as eligible for deduction for income tax in Israel.
Taxation in states within the United States on income from rent
It is important to know that taxing in the United States for income made from rent applies not only to the citizens of the United States and its residents, but also on the Israelis that don’t live in the United States and are not registered as American citizens, as long as those people purchase profit yielding real estate in the United States that generates income for them through rent.
In those instances, Israelis are also required to pay federal tax to the IRS, and following that, to the Israeli tax authority as well. Luckily, thanks to a tax treaty between Israel and the United States, it is at least possibly to avoid collection of a doubled tax.
Seeing as the United States, other than federal tax, there is a state tax system as well, and in some case also city tax, depending on the where the property is it is possible to deduct different expenses having to do with ownership of real estate from taxable income, for example: funding expenses, reductions, maintenance and maintenance management costs, estate tax, and more.
Offsetting these expenses could heavily affect the profitability of investing in the United States real estate market, which is why it’s important to consult with tax experts before purchasing real estate in the United States.
Taxing in the United States on capital gain from selling American real estate
The federal tax applies to capital gains as well, so does the state tax and in some cases the city or county tax. Even so, there is still an option to reduce the size of taxes to pay by using clever tax planning, when the option to reduce taxes owed are dependent on the length of ownership of the property and the maintenance output.
Can Israelis get tax refunds for withholding tax in the United States?
Israelis (and foreign investors in general) that are a part of American collaborations, have a withholding federal tax requirement, at the highest tax rate. In certain states within the United States there is a withholding tax requirement from the income of foreign investors, Israelis included, with the tax rate changing from state to state in the United States, although in most of the states the tax withholding is implemented according to the highest tax bracket as well.
You can deduce from this that much like filing taxes with the IRS – it is advisable to file taxes to the specific state where the tax withholding took place, in order to get tax refunds on the state level as well.
Is it possible to get tax refunds in Israel for taxes in the United States?
The Israeli tax authority recognizes the effective tax paid by the Israeli tax payers in states within the United States, but so in the tax withholding that can be eligible for tax refunds in the United States.
How can the amount of taxes owed to the state in the United States be lowered?
State income tax in the United States as well as city income tax or county income tax in the United States can usually be offset from the federal tax payments. In addition, thanks to a tax treaty between Israel and the United States it’s possible to prevent another tax collection in Israel after the one in the United States in terms of federal tax and sometimes even state tax.
Among the notable ways to reduce the amount of taxes collected in the United States where the tax rates are high is to ascribe the income created in high tax rate states in the United States to an entity based outside said states. This can be done, for example, when working with a third – party company when investing or maintaining real estate.
When these services are provided by an entity registered in a low – rate tax state – this can allow for a lower amount of tax owed. With that, each investment requires its own examination, and it is of the highest importance to make sure that tax planning of this type goes against the tax laws in the state where your investments are in the United States.
Who can consult you about taxing in the United States and lowering the American tax amounts?
It is clear to see taxes in certain states in the United States and lowering taxed owed to the United States are complex matters that require intensive and carful attention. In these topics it’s important to use the services of professional tax consultant who are well versed in the topics of taxes and American tax laws within the United States and the different states in them, so that an efficient tax plan can be made, one that will positively affect the profitability of investing in the United States.
Need guidance in taxation in the United States? The team at “America Tax” will be happy to help you. Contact us as soon as possible!
