United States

Individual - Income determination

Last reviewed - 01 August 2022

Employment income

Citizens, resident aliens, and non-resident aliens are taxed on compensation earned for work performed in the United States, regardless of when or where payments are made, absent a treaty or Internal Revenue Code provision to the contrary. Employees are generally not taxed on reimbursements for either personal living expenses (i.e. food and housing) or for travel expenses while 'away from home'. However, reimbursements for similar expenses of a spouse or dependent are taxable. Note that being 'away from home' requires a temporary absence from an individual's tax home. Assignments for more than one year in a single work location are not considered to be temporary, regardless of all other facts and circumstances.

After-tax dollars contributed by the taxpayer to a pension are partially taxable. The component of the pension payment that represents a return of the after-tax amount paid is not subject to tax.

Equity compensation

The United States recognises multiple types of equity compensation. These include stock options and various payment rights based on stock value. The taxation of these different instruments varies. If a taxpayer receives an option to buy or sell stock or other property as payment for services, the taxpayer may have income when the option is received (the grant) or when the option is exercised (used to buy or sell the stock or other property). Upon grant and exercise of a statutory stock option, however, taxpayers generally do not include any amount in income for regular tax purposes until the stock purchased by exercising the option is sold.

Foreign nationals who are granted stock options prior to the start date of their residency in the United States may be subject to US income tax at exercise on all or part of the realised income at such time. In most cases, when a foreign national who is a resident alien exercises an option to buy foreign stock, the spread between the option price and the fair market value of the stock at the time of exercise is subject to US income tax. A portion of the spread will be treated as foreign-source (to the extent allocable to services rendered in the foreign country). As a result, even though the full spread will be subject to tax in the United States, a foreign tax credit may generally be claimed to minimise the US income tax (assuming foreign tax is paid on this income).

Business income

When an individual works for oneself, that individual generally is deemed to have self-employment income. Self-employment income is taxed under US law in a manner similar to employment compensation. However, a self-employed individual often may claim more liberal deductions for business expenses than an employee. It is important to note that citizens and resident alien individuals may (subject to certain exceptions) be subject to increased social security contributions in the United States on self-employment income earned while resident in the United States (see Social security contributions in the Other taxes section for more information).

Capital gains

Capital gains of a citizen and a resident alien are included in worldwide income and are subject to US taxation (see Capital gains tax in the Other taxes section for more information).

Non-resident aliens are taxed at 30%, collected by withholding at the source of the payment, on US-source net capital gains if they are in the United States for 183 days or more during the taxable year in which the gain occurs. The operation of this provision is limited to situations in which an alien is not otherwise taxed as a resident under the substantial presence test (see the Residence section for more information). Capital gains from US real property interests are taxable regardless of US presence. Additionally, capital gains from the sale by non-residents of US partnerships with effectively connected income (ECI) now will be subject to US tax. There are also withholding requirements on the gross proceeds from the sale of US real property interests as well as partnerships with ECI.

Interest income

Interest income received by citizens and resident aliens is subject to US tax, whether it is from US or foreign sources.

Non-resident aliens' US-source interest is generally subject to a flat 30% tax rate (or lower treaty rate), usually withheld at source. Note that certain 'portfolio interest' earned by a non-resident alien is generally exempt from tax.

Rental income

Rental income received by citizens and resident aliens is subject to US tax, whether it is from US or foreign sources.

Non-resident aliens' US-source rents are generally subject to a flat 30% tax rate (or lower treaty rate), usually withheld at source. However, a non-resident alien can elect to report real property rental income net of expenses, subject to tax at graduated rates.

Exempt income

Certain items are generally exempt from personal income tax. For example, property acquired by gift or bequest is generally not included as taxable income (although income generated on that property would be subject to tax).  A common type of tax-exempt income is interest from municipal bonds.