When deciding to immigrate to the US, besides visa interviews, job selection, financial preparation, and other considerations, understanding the tax system in the US is also crucial for Vietnamese immigrants. The US tax system is more diverse and generally higher than Vietnam. In this article, Thinksmart Insurance will introduce the 8 types of taxes in the US that Vietnamese immigrants need to know!
8 Basic Types of Taxes in the US
Personal Income Tax
Personal income tax (or Income Tax) is the most fundamental tax anyone must pay when living in the US. As the name suggests, the higher your income, the more tax you will owe. Depending on the type of income, taxpayers will report their taxes using forms such as 1040EZ, 1040A, 1040, etc.
Personal income tax in the US is one of the most complex tax systems in the world. It is divided into 3 main levels:
- Federal Level (Federal Income Taxes): This is the tax rate applied by the US federal government to all individuals with income above a certain threshold. The tax rate changes annually based on an individual’s total income.
- State Level (State Income Taxes): Most US states have their income taxes. Tax rates and calculation methods can differ between states and even between counties and cities within the same state.
- Local Level (Local Income Taxes): Some localities, such as cities or counties, may impose additional income taxes.
According to the 2023 IRS tax reform law, personal income tax in the US is applied according to the brackets and income ranges shown below:
US Personal Income Tax Rates Table (updated 2023)
| Tax Rate | Income Range by Filing Status | ||
| Single | Married
(Filing Jointly) |
Head of Household | |
| 10% | $0 – $10,275 | $0 – $20,550 | $0 – $10,275 |
| 12% | $10,276 – $41,775 | $20,551 – $83,550 | $10,276 – $41,775 |
| 22% | $41,776 – $89,075 | $83,551 – $178,150 | $41,776 – $89,075 |
| 24% | $89,076 – $170,050 | $178,151 – $340,100 | $89,076 – $170,050 |
| 32% | $170,051 – $215,950 | $340,101 – $431,900 | $170,051 – $215,950 |
| 35% | $215,951 – $539,900 | $431,901 – $647,850 | $215,951 – $323,925 |
| 37% | $539,901+ | $647,851+ | $323,926+ |
For example, if you are married and you and your spouse have a total income of $200,000 in 2023, your income tax will be:
- 10% on income from $0 to $20,550: $2,055
- 12% on income from $20,551 – $83,550: $7,559.88
- 22% on income from $83,551 – $178,150: $20,811.78
- 24% on income from $178,151 – $340,100: $5,244
Thus, the total tax owed will be $35,670.66.
Sales Tax
Sales tax is the tax that buyers must pay when purchasing goods. According to US tax law, buyers will have to pay a sales tax ranging from 0% to 16% of the value of goods, depending on the type of product, service, and location.
Typically, sales tax is included in the sale price of goods by the seller. Some stores may list sales tax separately on the receipt. Therefore, understanding this type of tax in the US will help you manage your budget more effectively.
Property Tax
Property tax is a type of tax in the U.S. that requires every business and individual to pay for the property they own, such as land, houses, and other fixed assets.
Property tax is collected by local government agencies where the taxpayer resides, such as city or county governments in the U.S.
Gift Tax
Gift Tax is a unique type of tax in the U.S. that might seem unusual if you are accustomed to living in Vietnam, where such a tax is not common. Specifically, if you receive a gift, you are responsible for paying tax on it, not the person who gave the gift. This is a distinctive feature of the U.S. tax system.
The purpose of the Gift Tax is to regulate the transfer of assets and money, especially high-value assets. In the U.S., Gift Tax includes both federal and state taxes. The federal Gift Tax has a high exclusion threshold, which can vary from year to year.
Payroll Tax
Payroll tax in the US is the tax deducted directly from employees’ wages to fund social welfare programs, such as:
- Social Security: Used to pay retirement benefits, disability benefits, and survivor benefits.
- Medicare: A health insurance program for the elderly and disabled.
Payroll tax is divided into 2 main types:
- FICA (Federal Insurance Contributions Act): Includes tax for Social Security and Medicare programs.
- FUTA (Federal Unemployment Tax Act): Federal unemployment tax used to fund unemployment benefits programs.
The amount owed depends on 2 factors: the tax rate and the wage base. Specifically:
- Tax Rate: The payroll tax rate changes over time and may vary depending on the type of insurance and the employee’s wages.
- Wage Base: Only a portion of your income is subject to payroll tax. Income above the wage base is not subject to FICA tax. The wage base is adjusted annually.
Capital Gains Tax
Capital gains tax applies to income from investments, such as:
- Dividends: Profit from stocks.
- Capital Gains: Profit from selling assets at a higher price than the purchase price (e.g., stocks, bonds, real estate).
- Interest Income: Profit from loans or savings accounts.
In the US, there are 2 common types of capital gains tax:
- Individual Capital Gains Tax: Applied to individuals receiving income from investments.
- Business Capital Gains Tax: Applied to businesses with income from investment activities.
Estate Tax
Estate tax in the US is a tax levied on the estate of a deceased person that is transferred to heirs. This type of tax is quite complex and frequently changes with government tax policies.
Not all inherited assets are taxed; only those exceeding a certain threshold are subject to tax. This threshold is known as the estate tax exclusion, which changes over time and may be adjusted by new tax laws.
Import Duty
Import duty in the US is a tax levied on imported goods. The main purposes are to protect domestic industries, generate revenue for the government, and regulate international trade.
Import duty is divided into 3 main types:
- Ad Valorem Duty: Based on the value of the imported goods.
- Specific Duty: Based on the quantity or weight of the goods.
- Compound Duty: A combination of ad valorem and specific duties.
Understanding these types of taxes can help you better manage your financial obligations and plan for your future in the US.
Tax Exemptions & Deductions in the U.S.
While there is no fixed list of exemptions from taxes in the U.S., certain types of income or assets may be exempt from taxes or significantly reduced under specific circumstances:
- Profit from Selling a Primary Residence: When selling a primary residence and using the proceeds to buy a new home, you might be exempt from taxes on part or all of the profit from the sale of the old home.
- Profit from College Savings Plans: Withdrawals from college savings plans such as the 529 Plan to pay for educational expenses are generally not subject to federal income tax.
- Interest from Municipal Bonds: Certain municipal bonds are exempt from federal income tax.
- Income from Certain Senior Sources: Seniors may receive specific tax benefits, including exemptions on a portion of Social Security income.
- Charitable Contributions: Donations to qualified charitable organizations can be deducted, helping to reduce your tax liability.
- Mortgage Interest: Interest paid on a mortgage for a primary residence is usually tax-deductible.
- Medical Expenses: Medical expenses that exceed a certain percentage of your adjusted gross income may be deductible.
Another way to reduce taxes in the U.S. is through Tax Credits, which are increasingly popular. Unlike deductions, tax credits reduce the tax you owe directly. For instance, a $1,000 tax credit directly reduces your tax bill by $1,000. Common Tax credits include: Earned Income Tax Credit (EITC), Child Tax Credit, and Child and Dependent Care Credit
Tax Responsibilities for Vietnamese Immigrants in the U.S.
Vietnamese immigrants in the U.S., like any other citizens or permanent residents, are obligated to pay taxes. Whether you are new to the U.S. or have lived here for years, understanding tax regulations is crucial to complying with the law and avoiding unnecessary complications.
Why Compliance is Important
- Avoid Penalties: Failure to pay taxes or incorrect reporting can result in fines, penalties, and even criminal charges.
- Protect Your Rights: Paying taxes entitles you to benefits like tax refunds and access to government social programs.
- Contribute to the Community: Taxes help fund infrastructure, education, healthcare, and more.
How to File Taxes in the U.S.
- Use Tax Forms: The IRS provides various tax forms depending on your situation.
- File Online: Many people choose to file taxes online for convenience and speed.
- Include Necessary Documentation: Submit documents proving income such as W-2s, 1099s, and receipts.
Ways to Accumulate Tax-Free Assets in the U.S.
U.S. tax policies are stringent, making it nearly impossible to accumulate assets without paying taxes. However, there are legal ways to minimize taxes and effectively build assets, including:
Retirement Accounts
- 401(k): A popular method for saving for retirement. Contributions are often tax-deductible, reducing taxable income.
- IRA (Individual Retirement Account): Similar to a 401(k), but individually managed. Includes Traditional IRA and Roth IRA, each with different tax benefits.
- SEP IRA: For small business owners and self-employed individuals.
- SIMPLE IRA: For small businesses with few employees.
Investment Accounts
- Brokerage Accounts: Allow investment in stocks, bonds, mutual funds, etc., though investment gains are taxed upon sale.
- 529 Plan: Used for college savings. Contributions are not tax-deductible, but withdrawals for education expenses are tax-free.
Real Estate
- Primary Residence: Mortgage interest is usually deductible.
- Investment Properties: Can provide steady income and appreciation, though rental income and capital gains are taxable.
Life Insurance
Several life insurance programs offer tax-free benefits in the U.S., meaning that when the insurance policy matures, participants can receive the full accumulated amount without any tax liability. Here are some notable programs:
- IUL Secrets: This life insurance program is tailored for individuals with low to moderate incomes. With contributions starting from as little as $100 per month, participants receive coverage against 16 types of diseases and disabilities. In the event of death, a payout is made, and upon policy maturity, participants receive tax-free retirement income. When comparing IUL with 401(k), IUL Secrets offers several advantages due to its comprehensive coverage and tax-free growth.
- Max Funded IUL: This program combines life insurance with tax-free investment growth. Notable for its ability to leverage the benefits of IUL Secrets, Max Funded IUL features rapid cash growth. Participants contribute $2000 per month for the first five years. From the sixth year onward, no additional contributions are needed, yet the accumulated value continues to grow tax-free.
- Kaizen: Similar to Max Funded IUL, Kaizen integrates life insurance with retirement investment capabilities. The key difference is that in the first five years, participants make contributions alongside a bank. From the sixth to the tenth year, the bank covers 100% of the annual insurance premiums. Due to the bank’s involvement, the accumulated value in Kaizen is substantially higher. At the end of the policy term, this accumulated amount can be withdrawn tax-free in the U.S.
These methods of accumulating tax-free assets through life insurance are very safe and legal. They not only provide significant tax-free savings but also offer protection against illness or death, ensuring family financial stability.
Thinksmart Insurance has outlined 8 types of taxes in the U.S. that Vietnamese immigrants should be aware of and methods for legal tax reduction. For any inquiries, contact us at (678) 722 3447, message us on Messenger, or email us at Support@Thinksmartinsurance.com for free consultation and 24/7 support.
