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Overview of US Federal Income Tax Return

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In Japan, tax returns for personal income tax are filed in mid-March in principle, but in many countries, including the United States, the deadline for filing tax returns is longer than in Japan, so there are probably not many people who are preparing to file tax returns. Is it?

Regarding personal income tax, which is levied on income earned by individuals, in Japan, if you work for a company, the company you work for will make year-end adjustments, so you have no income other than salary income, or you have a medical expense deduction or hometown. If you do not apply income deductions such as tax payments, you generally do not need to file a tax return. On the other hand, in many foreign countries such as the United States and Singapore, taxpayers must file their tax returns by themselves, even if they only receive salary income.

In this article, we will explain the outline of the final tax return for US federal income tax, which has much in common with the Japanese tax system, based on the treatment applied to the 2020 tax return. Please note that this article is intended to give readers an overview, so please note that some parts of the article are omitted from the explanation of exceptional handling and corona relief measures (CARES method).

Overview of income tax calculation

In the United States, the calendar year (January-December) tax year is adopted as in Japan.

Calculate taxable income by subtracting income deduction from the total amount of various incomes for the year, multiply the taxable income by the tax rate to calculate the tax amount, and deduct the tax deduction, withholding tax amount, and estimated tax payment amount from the tax amount. It is similar to the Japanese system in that it calculates the amount of tax payment.

The basic idea is that all income is taxable, but tax-exempt income is exceptionally set in consideration of policy considerations and national sentiment. In addition, regarding income deductions, as a general rule, personal expenses and losses cannot be deducted, and items that can be deducted exceptionally are listed in a limited manner.

One of the differences from the Japanese system is the Married Filing Jointly, which allows married couples who are married as of the end of December to add up their incomes.

Declaration obligation

If the total income amount (Gross Income) in the calendar year is equal to or greater than the fixed deduction amount (Standard Deduction), a final tax return is required. The fixed deduction for 2020 is $ 12,400 for singles and $ 24,800 for Married Filing Jointly, with additional deductions for persons aged 65 and over or visually impaired. .. In addition, since there is no year-end adjustment system in the United States, a final tax return is required when receiving a tax refund, such as when the estimated tax payment amount paid within the year or the withholding tax amount is excessive.

US citizens and resident foreigners are taxed on US domestic and non-US source income worldwide. Foreigners who are non-residents are taxed only on US source income. Residents include those who stay in the United States for a certain period, such as green card holders or expatriates.

Declaration deadline

You must submit your tax return to the Internal Revenue Service (hereinafter referred to as the “IRS”) by April 15 of the following year. If you apply for an extension of the filing deadline by April 15, it will be automatically approved and you can extend the filing deadline by 6 months. However, please note that some states do not allow the same filing deadline as federal tax, and the deadline may differ.

The tax return is submitted electronically or by mail. Even if you extend the filing deadline, the tax payment deadline will not be extended, so you must make the expected payment by April 15. If there is a shortfall, a penalty and interest will be levied, so in practice, there are cases where a large amount of expected payment is made and a refund is received.

Tax withholding and scheduled tax payment

The company employee submits Form W-4, which is similar to the “Deduction for Deductions for Dependents of Salary Income”, which is familiar in Japan, to the company where he works, and the company pays monthly based on the contents of the W-4. Income tax is withheld from your salary and paid to the IRS. The company will distribute to employees a tax withholding slip (Form W-2) stating the amount of salary paid and the amount of tax withholding for the year.

In addition, if there is more than a certain amount of income that is not subject to tax withholding, such as real estate rental income and business income of self-employed people, scheduled tax payment is required. Scheduled tax payments will be made in four installments on April 15, June 15, September 15, and January 15 of the following year. The withholding tax amount and the estimated tax payment amount can be deducted from the annual tax amount when filing a final tax return.

Amount of various income

The main contents of various incomes are as follows.

① Salary income: salary, bonus, tip, in-kind salary, etc. In addition to medical insurance premiums borne by the company, welfare expenses such as education expenses and childcare expenses, and commuting expenses are exempt from tax up to a certain amount.

(2) Interest income: Interest on public and corporate bonds, interest on deposits, surcharges for refunds, etc. Interest on bonds issued by states and local governments is tax-exempt but must be declared.

(3) Dividend income: Profit dividends from corporations, etc. Equivalent to a refund of capital is exempt from tax.

④ Retirement pension: Benefits such as individual pension (IRA) and corporate pension are applicable.

⑤ Social security benefits: This is a so-called public pension, and low-income earners are exempt from taxation.

(6) Capital gains: Capital gains or losses caused by the transfer of assets such as real estate and securities. Gains and losses on the transfer of business assets are included in the other gains and losses in ⑩ below. Capital loss on investment assets can only be offset against capital gains, and capital loss on personal assets (homes, private cars, etc.) cannot be offset against any income. Gains on the transfer of residential assets are exempt from tax up to a certain amount ($ 500,000 for married couples combined filing).

⑦ Refund: This applies to refunds when taxes (state income tax, etc.) that have been deducted in the past are refunded. Federal tax refunds are tax exempt as they are not tax-deductible.

⑧ Divorce Compensation (Alimony): The amount of regular divorce compensation received by December 31, 2018. Excludes lump-sum payments, child support, and property sharing.

⑨ Business income: It is the income of a sole proprietor and is calculated by deducting necessary expenses from the total income amount. There is a provision for a net loss carryforward deduction.

⑩ Other gains/losses: Gains/losses on the transfer of business assets are applicable.

⑪ Real estate income, etc.: In addition to rental income from rental real estate, passive income such as royalty income and income passed through from partnerships (excluding income allocated individually such as interest and dividend income). Losses resulting from passive activity can only be offset against passive income.

⑫ Agricultural income: Calculated by deducting necessary expenses from the income from the sale of agricultural products, cows and horses, etc.

⑬ Unemployment insurance benefits: Unemployment insurance benefits are fully taxable because they are considered to be paid instead of salary.

⑭ Miscellaneous income: Prize money, gambling income from casinos and lottery tickets, debt forgiveness gains, etc. Compensation for damages and workmen’s accident compensation for physical injuries are exempt from tax.

Income deduction

Income deductions can be broadly divided into two categories: Above the line deductions and Below the line deductions.

Above the line deductions is the amount of various incomes used to calculate the adjusted total income (Adjusted gross income, also referred to as “AGI”, also known as LINE), which is the basis for deduction limits for various items. Items to be deducted from the total amount (Adjustments to Income). Below the line deductions are items that are deducted from AGI, and you can choose either Itemized Deductions or Standard deductions in your favor.