Tax is a complicated business no matter where you decide to park yourself in the world. However, when you buy overseas, it’s vital to understand how your tax situation will be affected. For those hoping to buy property in the USA, getting your head around the system might take a head scratching. In America, tax is imposed at a federal, state AND a local government level. Yes – this means that you can be taxed by all three at once! Additionally, the US is one of only two countries in the world to tax non-resident citizens on their worldwide income, although they do offer a tax credit for foreign taxes, which is kind of them! Today, we’re specifically running through local taxes in the USA to establish what kinds of rates to expect and on what.
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What is a local tax?
Local taxes in the USA are classified as those charged by either your individual state or the county or municipality you reside in. The amount of local tax to anticipate when you buy property in the USA will vary significantly from state-to-state and city-to-city. Therefore, it’s important to do your homework on specific taxes in your chosen location.
There is a plethora of local taxes in the USA to brush up on!
Generally, local taxes (or municipal taxes as they are referred to in some states) are used to fund community matters. These include, education and health services, law enforcement and fire services, local government projects, garbage collection, road and sewer maintenance and so on.
What types of local taxes in the USA are there?
Property tax
This is the most significant example of local taxes in the USA you’ll be subject to. How much property tax you can be charged by your local government is determined by the state. Typically, the amount you pay is calculated on how much your USA property is worth, or on a %age of its value. Therefore, always check with your realtor how much property tax you will be expected to pay on the property you’re viewing before you sign on the dotted line, as they will have the most accurate information.
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As an example, in Florida the property tax average is 1.1 % of the property’s assessed value. The average property tax rate for the USA on the whole is 1.211 %. You can get an estimate of what property tax you’ll be subject to when you buy property in the USA here.
Personal income tax
In addition to Federal and state-imposed income taxes, 14 US states and the District of Columbia also allow local income taxes to be charged by individual cities, councils or municipalities. This means that tax can be deducted from your USA pay-check at a Federal, state and a county level. Here is a list of US cities that also levy local income taxes.
Sales tax
Another significant one of the local taxes in the USA is sales tax, which is charged on goods. 45 states and the District of Columbia collect state-wide sales taxes. Additionally, local sales taxes are charged in 38 states. This means you will be charged a sales tax rate combining both state sales tax and local sales tax in one hit. Sales tax is rather controversial in the USA, given it is the only one charged at a flat rate to all people, regardless of their means. Therefore, no matter how much you earn, you will pay the same rate as your neighbour.
To keep things interesting, no general rules apply! In some states, there is no local sales tax imposed at all. In this scenario, residents only have to pay the state sales tax. In other states, local sales tax can be as much as 5% on top of state sales tax. Many states choose to balance their tax rates out, and will factor in income, sales and property tax to keep things on par with other states. However, some states decide to opt out of a tax entirely. For example, New Hampshire doesn’t charge any sales tax at all. Instead, it levies the highest corporate taxes per capita of any other US state.
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As a guide, you can expect to pay between 2.9 % and 7.25 % on top of the price of goods purchased in the USA. You can see how much you will be charged in the location where you plan to buy property in the USA here.
Fuel tax
Furthermore, you will be charged fuel/gas tax at a state level. This is charged on a cents per gallon basis. Again, this rate varies from state-to-state. In Pennsylvania for example, residents are charged fuel tax at 58.7 cents per gallon – the highest rate in the USA. Alaska charges the least at 14.65 cents per gallon. Florida is the 9th most expensive state for gas tax, at 43.36 cents per gallon. You can check the gas tax rates as of July 2018 here.
