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Taxation in San Jose


The principal federal taxes for individuals are the individual income tax and the social security tax, which is imposed on wages of US employees regardless of where they are employed and on wages of non-US employees employed in the US. In addition to the regular income tax, individuals may be subject to the alternative minimum tax (AMT), which is triggered where an individual’s AMT liability exceeds that individual’s regular income tax liability.

Most states and some municipalities impose individual income tax. State and local income taxes generally follow the federal income tax in the way income is calculated but they may use apportionment in some cases.

The tax year for individuals is generally the calendar year, although a fiscal year or a 52-53-week year may be used in certain circumstances (if the taxpayer regularly keeps books on that basis). Individuals generally must file a tax return by 15 April after the end of the tax year. Extensions of time to file are available, but all tax payments must be made by 15 April. Penalties and interest can apply for failure to file or for late filing.


All US citizens and residents, including resident aliens, pay federal tax on their worldwide income and are allowed a foreign tax credit for foreign taxes paid or accrued. Aliens who have entered the US as permanent residents and who have not officially surrendered or lost the right to permanent US residency are taxed as US residents. Also taxed as residents are aliens who meet a 'substantial presence test', which requires physical presence in the US for (1) 31 days during the current calendar year and (2) a weighted number of 183 days over the course of the current calendar year and the two immediately preceding calendar years.

Non-resident aliens pay US personal taxes on all income from US sources 'effectively connected' with trade or business in the US on a net basis at graduated rates. Investment and other fixed or determinable income not 'effectively connected' with a US trade or business is taxed at a flat rate of 30% or a lower treaty rate, regardless of the amount.

Taxable Income and Rates

The tax burden on individuals is low in the US, compared with other industrialised nations. It is a progressive system on paper, though this is complicated by an intricate system of tax regulations. For higher-income individuals, the US tax code phases out personal exemptions and imposes a ceiling on itemised deductions.

In May 2001 the US Congress approved the Bush administration’s Economic Growth and Tax Relief Reconciliation Act (EGTRRA), which cuts taxes by US$1.35 trn over a decade. Under the legislation, marginal rates were reduced across the board. All of these tax breaks, including the reduction in tax rates and repeal of the estate tax, are set to expire at the stroke of midnight on December 31st 2010. This expiration of the tax measures, or 'sunsetting', is an accounting device that allows the government to consider the costs for a ten-year window to comply with congressional budget parameters. Additional legislation, and revised fiscal calculations, will be required to make the reductions permanent.

In May 2003 Congress passed a second sweeping tax-cut package, the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA). The legislation, with a price tag of US$350 bn over a decade, accelerated the cuts to marginal rates, the increase in the child tax credit and marriage penalty relief provided by EGTRRA, and reduced taxes on certain corporate dividends and capital gains.

In September 2004 Congress passed the Working Families Tax Relief Act (WFTRA) of 2004, a US$146 bn bill, which extended popular middle-income tax relief provided by JGTRRA. The legislation extended marriage penalty relief, the US$1,000 child tax credit and the expanded 10% income tax bracket through 2010. It also extended the increased AMT exemption amounts (US$58,000 for married couples and US$40,250 for singles) through 2005.

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