Tax in the United States

The United States runs one of the world's more unusual tax systems: it taxes its own citizens and green-card holders on their worldwide income no matter where on Earth they live, while taxing foreign persons only on US-source income — often withheld before they ever see it. On the business side, the entity you choose (C-corporation, S-corporation, LLC, partnership or sole proprietorship) decides whether your profit is taxed once or twice, and who is even allowed to own it.

Personal tax: no one is exempt

The US uses citizenship-based taxation — nearly unique among major economies (the only other country that does this is Eritrea). Every US citizen and green-card holder must file a federal return (Form 1040) and report worldwide income every year, regardless of where they live or whether any of that income touched US soil. Living abroad reduces the bill but does not remove the obligation: the Foreign Earned Income Exclusion (FEIE) lets qualifying expats exclude up to $130,000 of foreign earned income for 2025 (rising to $132,900 for 2026), available to anyone who passes either the Physical Presence Test (330 full days abroad in a 12-month period) or the Bona Fide Residence Test. The FEIE only covers earned income — it does not touch rental income, dividends, interest, capital gains, pensions or Social Security. Separately, Americans with foreign financial accounts must consider FBAR (aggregate foreign accounts over $10,000) and FATCA Form 8938 (higher thresholds, commonly $200,000–$300,000 for those abroad) — neither is optional, and neither is satisfied by the FEIE.

Who has to file

Filing thresholds depend on filing status, age and income type — but the bar is much lower than most people assume. Self-employment income of just $400 or more triggers a filing requirement regardless of total income. Dependents, non-resident aliens with US-source income, and anyone owing special taxes (early retirement withdrawals, household employment tax) may have to file even below the standard thresholds. Foreign persons with no US filing obligation otherwise may still need to file solely to claim a tax treaty benefit or a withholding refund.

Corporate tax and entity types

The federal corporate income tax rate has been a flat 21% since the 2017 Tax Cuts and Jobs Act, and the 2025 One Big Beautiful Bill Act left that headline rate untouched while making the 20% pass-through Qualified Business Income deduction permanent and restoring 100% bonus depreciation. Which entity you pick decides whether that 21% ever applies to you at all:

Foreign persons: W-8BEN, SSN and ITIN

A foreign person receiving US-source income — dividends, royalties, certain interest — is subject to a default 30% withholding tax, which a tax treaty can reduce. To claim that reduced rate, an individual files Form W-8BEN and an entity files Form W-8BEN-E with the US payer, certifying foreign status and (if applicable) the treaty article being relied on. US persons use a Social Security Number (SSN); foreign individuals who need a US taxpayer ID but aren't eligible for an SSN instead apply for an Individual Taxpayer Identification Number (ITIN).

Withholding and deduction at source

US employees have tax withheld from every paycheck based on Form W-4. US persons who fail to provide a correct taxpayer ID, or whose reported income doesn't match IRS records, can be hit with backup withholding at 24% on future payments. Foreign persons receiving US-source income instead face NRA (nonresident alien) withholding, typically the same 30% default rate (reduced by treaty), reported annually to both payee and IRS on Form 1042-S rather than the domestic Form 1099.

Tax treaties and pension eligibility outside the US

The US has Social Security Totalization Agreements with 30 countries (as of January 2025), which prevent double Social Security taxation for people who split a career between the US and a treaty partner, and let workers combine credits from both countries to qualify for a pension in either. Separately, US Social Security retirement benefits are generally payable for life to US citizens living anywhere abroad (with a short list of sanctioned-country exceptions); non-citizens can generally keep receiving payments abroad only if they are a citizen of a treaty country, hold specific residency history, or meet other SSA conditions — the SSA's "Payments Abroad Screening Tool" gives a country-specific answer. Income tax treaties separately allocate which country gets to tax a given pension, which is a different question from whether the pension can be paid at all.

References

IRS — Foreign Earned Income Exclusion · IRS — Totalization Agreements · SSA — Status of Totalization Agreements · IRS — Form W-8BEN · Tax Foundation — 2026 federal tax brackets

This page is general information, not tax advice, and not a substitute for advice on your specific situation. US federal tax law changes yearly and sometimes mid-year — always confirm the current position with the IRS or a qualified professional and contact us before acting. ← Back to Tax overview