Simple Tax Guide for Americans in Switzerland
At TFX we’ve been preparing U.S. taxes for Americans living in Switzerland for over 20 years. Our clients hail from all parts of this small yet diverse country but roughly half come from Zurich, Geneva and Bern.
US citizens, as well as permanent residents, are required to file expatriate tax returns with the federal government every year regardless of where they reside. Along with the typical tax return for income, many people are also required to submit a return disclosing assets which are held in bank accounts in foreign countries by using FinCEN Form 114 (FBAR).
Please note - if you have undeclared Swiss bank account(s), we can help you resolve this issue with the IRS. Do not wait for your bank to contact you first or even freeze your account. Find out more about our special service for Swiss Clients:
The United States is among only a few governments who tax international income earned by their citizens, as well as permanent residents, residing overseas. There are, however, some provisions that help protect from possible double taxation. These include:
- The Foreign Earned Income Exclusion. This exclusion allows one to exclude USD 101,300 (this amount is for 2016 taxes) in earned income from foreign sources.
- A tax credit allowing tax on remaining income to be reduced based on the taxes paid to foreign governments.
- An exclusion on foreign housing that allows additional exclusions from their income for some amounts paid to cover household expenses due to living abroad.
Preparing a quality tax return following proper tax planning should allow one to use these, as well as other strategies, in minimizing or possibly eliminating tax liability. Note that in most cases the filing of a tax return is required, even if taxes are not owed.
Am I Required to File My Taxes if I’m Residing in Switzerland?
Absolutely! Even if you are not living in the United States or in a US territory, and even if you don’t have any income from the US, you must still file a tax return, as well as pay taxes, calculated on all your income worldwide. The tax laws are quite confusing, and frequently change. It seems nearly impossible to file a return accurately. Along with filing income taxes, you might have compliance obligations for the Foreign Bank and Financial Account Reporting (FBAR) regulations as well. Penalties for incorrect reporting can be substantial.
What Happens if I Have Not Filed My Taxes?
The IRS offers some relief to delinquent taxpayers via a special procedure for filing. This may be a benefit to you if your returns have not been filed in previous years. Contact an expert tax advisor, who can help you get back on schedule with IRS filings.
If I Pay Swiss Taxes, Do I Need to Pay US Taxes?
There are ways for United States expatriates to avoid much double taxation. There is a treaty between Switzerland and the United States that outlines some of these benefits. A tax professional will help you understand the treaty and the available benefits.
We'd like to shed light on many questions that we are frequently asked by our clients from the Switzerland. Below we will explain tax concepts that are important to you as a Swiss resident and also explain how to report the details of your Swiss life on our Tax Questionnaire.
How to Report Swiss Income on our Tax Questionnaire
For income you earned while being employed:
Gross salary = Shown on line 8 of the Certificat de Salaire.
Separately report the amount of employer contributions to Pillar 2.
- Generally the amount of your employer contributions to Pillar 2 is equal to your own Regular Contributions shown on line 10.1 of the Certificat de Salaire.
- If you had more than one employer over the year, add amounts from both Certificats.
- Contributions to Pillar 1 (Social security) shown on line 9 are not necessary for your US tax return.
For income earned from self-employment
Income from self-employment is a turnover of your unincorporated business. Report it on the Gross Income from Self-employment tab of the Self-employment questionnaire (Supplemental income tab)1.
- Each type of income is reported as gross amount, before any deductions allowed in Switzerland (i.e. before contributions to Pillar 1).
If you received redundancy pay, add gross amount as additional wages. Report other types of income (i.e. workplace pension, State pension, dividends, alimony, royalties, unemployment) on the respective lines of Pension or Other Income tabs of the tax questionnaire.
Similarly to income, tax also has to be reported separately for each type of income on which tax was paid. Base amount of income tax withheld from wages is shown on line 12 of the Certificat de Salaire.
If there was additional tax payment during the calendar year (i.e., paid tax bill for federal or cantonal taxes on income earned this or previous year) - add that amount to tax withheld from wages.
Taxes on unearned income may be withheld by the payor (i.e.,bank withheld income tax from dividends) or you may owe tax upon completion of tax assessment form. Report each type of tax paid during the filing year in the respective section, even if it applied to income received in prior years.
Wealth tax is not a part of income tax. It can be deducted on your US tax return as a part of itemized deductions. Report wealth tax in section “Tax paid on Unearned income” of tab Other Income2.
2. Add Question 5.17 “Wealth Tax or other tax based on the value of assets “ in section “Other Income”
We will take specific deductions allowed for Swiss residents by the US/Swiss Tax Treaty (i.e Swiss Resident who remain in the United States long enough to become tax residents under U.S. internal law, but do not acquire permanent residence status (i.e., they do not become "green card" holders), will qualify for various tax exemption benefits if they conflict with the Internal Revenue Code rules.
Further, section “Deductions” of TQ offers you questions related to various deductions Examples of such deductions are mortgage interest, alimony payments, investment advisor fees. Similarly to personal allowance in the UK, the U.S. tax system also applies a concept of “Standard deduction”: $6,300 per single person and $12,600 for married couple for 2015 tax year. For most Swiss residents filing U.S. tax return standard deduction option is more tax efficient than “itemized deductions” - grossing up individual deductions.
Report employer contributions to Pillar 2 on the tab Earned Income.
Contributions to Pillar 1 and Pillar 3 do not need to be reported.
Report payouts from foreign pension of all types: Social Security, Occupational Pension on the tab Pension.
If you have not received your AHV tax certificate please request one at your cantonal Compensation office: Addresses of the Compensation Offices.
Report distributions from Pillar 3 accounts as income from regular investment. From the IRS prospective, contributions to Pillar 3 were made from after tax funds. Therefore only growth in the account is subject to tax. Report interest and dividends as if you have received it from bank account or brokerage account.
Contributions to AVS and other components of Pillar 1 ( AHV/IV/EO, AVS/AI/APG) is not deductible. Likewise, you do not “deduct” income tax - we need to report gross salary and then take foreign tax credit for income tax (not for the contributions to Pillar 1 ).
Other example of non-deductible taxes is VAT.
Swiss Pension and Social Security Systems
Contributions to Swiss Social Insurance system withheld from your pay-check or made on self-employment income are not deductible from the U.S. taxable income and do not qualify for the foreign earned income credit.
A bilateral agreement between the United States and Switzerland improves Social Security protection for people who work or have worked in both countries. It helps people who, without the agreement, would not be eligible for retirement, disability or survivors benefits under the Social Security system of one or both countries. It also helps many people who would otherwise have to pay Social Security taxes to both countries on the same earnings.
The provisions of the agreement eliminate double Social Security taxation and permit dual residents to use their work in both countries to qualify for benefits.
If you are self-employed
Contributions to Social Insurance system make you exempt from contributions to the U.S. Social Security system that otherwise would be required in the U.S. on self-employment income.
How it impacts those who want to earn US Social Security credits
If you have Social Security credits in both the United States and Switzerland, you may be eligible for benefits from one or both countries. If you meet all the basic requirements under one country's system, you will get a regular benefit from that country. If you do not have enough work credits under the U.S. system to qualify for regular benefits, you may be able to qualify for a partial benefit from the United States based on both U.S. and Swiss. credits. To be eligible to have your Swiss. credits counted, you must have earned at least six credits under the U.S. system.
Although the agreement allows the Social Security Administration to qualify for U.S. retirement, disability or survivor benefits, the agreement doesn’t cover Medicare benefits.
U.S. Social Security Benefits paid to Swiss residents
The United States, as the source country, subjects up to 85 percent of the benefits paid to U.S. citizens residing in Switzerland to taxation. Switzerland, as the residence country, also subjects the U.S. benefits received by those individuals to taxation. Foreign tax credit relief can be applied only on the U.S. side
Swiss Social Security Benefits paid to US residents
No special double taxation relief rule is required in the reverse situation where Swiss social security benefits are paid to U.S. residents because Switzerland does not tax the benefits when it is the source country.
When a US citizen/green card holder is a participant in Pillar 2 pension plan:
Contributions paid by or on behalf of that individual to the pension scheme may not be excluded in computing his U.S. taxable income. Employer contributions are added to gross annual wages for calculation of taxable earned income.
Pensions and other similar remunerations paid to US citizen/green card holder residing in Switzerland are taxable in both countries.
However - you can eliminate the burden of double taxation. Taxes paid in Switzerland on pension income are applied as a foreign tax credit against tax owed on the same income in the U.S.
Article 24 of US/Swiss Tax Treaty requires United States to grant national treatment to residents and citizens of Switzerland even if that person is a citizen of the United States. Specifically, application of Non-Discrimination Clause allows deferral of income earned in pension funds through the time when benefits are paid, although in absence of non-discrimination clause, income in pension funds earned by U.S. tax residents must be included in U.S. annual taxable income.
U.S.. green card holders residing in the Switzerland may elect to apply what is known as the tie-breaker rule of the US/Swiss Tax Treaty and be deemed a resident only of the State (ie country) with which their personal and economic relations are closer (Switzerland).
Under such election, the individual would file form 1040NR and report only income derived from U.S. sourced. The requirement to provide full disclosure of foreign bank accounts remains and tax on income from U.S. sources will be higher than tax on the same income when applied to U.S. residents filing form 1040.
Moreover, the person would be treated as a U.S.resident for U.S. tax purposes other than determining the individual's U.S. tax liability. For example, in determining whether a foreign corporation is a controlled foreign corporation, shares in that corporation held by the individual would be considered to be held by a U.S. resident and form 5471 information return with respect to certain foreign corporations will be required.
When you start receiving pension distributions your monthly benefit will have taxable and non-taxable portion. The main nontaxable portion is all of your own contributions that have not been deducted from taxable income in the U.S. In addition, employer contributions that have been reported on your U.S. tax return will be a part of nontaxable part. All this taken together will constitute the "cost" in pension.
The taxable portion will be calculated using the IRS calculator that factors in your cost in pension and your age at the time when you receive the benefits. This is not a simple calculation but after it's done once it will be easy to continue in the following years.
Tax treaties with some countries have a far simpler way of calculating the taxable portion: i.e. 25% of UK is non-taxable in the US
Swiss Financial Accounts and FBAR/FATCA
The Foreign Account Tax Compliance Act (FATCA) is a piece of legislation introduced by the United States government in 2010, to help counter US tax evasion.
There are two FATCA model types.
Model 1, chosen by most European countries, is based on the principle of automatic exchange of information. Financial institutions provide details of all capital subject to US tax to their local authorities, who pass these details on to the IRS.
Switzerland opted for Model 2, according to which Washington is supplied with information directly by the financial institutions – but this only concerns capital held by American customers who consent to their details being released.
For customers who do not consent to this, the financial institutions must tell the IRS the number and the total value of these accounts. The IRS can then put in a request for “administrative assistance” to the Swiss government to get the full details.
Financial institution must search their data to identify financial accounts held by US Specified Persons, or by foreign entities in which US taxpayers hold a substantial ownership interest.
In order to achieve this, financial institution need to search their data looking for any one of seven indications (indicia) that an account holder may be a US person. These indicia are:
1. US citizen (check for US passport or Green Card).
2. US residential address
3. Place of birth in the US
4. US telephone number
5. Standing instructions to send funds to a US bank account
6. Power of attorney (PoA) or third party authority in favour of a person with a US address
7. Use of a c/o or hold mail address
- Individual bank accounts such as savings accounts, checking accounts, and time deposits.
- Retirement accounts - balance on Pillar 2 and Pillar 3 accounts
- Brokerage accounts, commodity futures or options accounts,
- Insurance policies and annuity contracts with a cash value
- Business accounts where U.S person has a greater than 50 percent interest in the entity
Certain categories of entities as exempt or deemed FATCA compliant, because they are considered to present a low risk of being used by US persons to evade US taxes.Examples of such entities/financial products are vested benefits insurances under Swiss law, restricted pension plan insurances (pillar 3a), certain employer-funded welfare funds, and certain investment foundations.
Even though certain retirement plans are exempt from direct FATCA reporting, the FATCA rules applying to individuals were not relaxed. Form 8938 specifically requires reporting by U.S. taxpayers who participate in foreign pension plans.
Swiss financial assets exempt from FBAR/FATCA reporting are limited to Social Insurance (Pillar 1), Real Estate Holding, precious metals held directly, and collectibles.
Swiss Tax Glossary for US Expats
Les parts sociales are shares of bank capital that account holders may own like shares of any other company. Share ownership does not need to be reported. Passive income received from those share should be reported as foreign qualified dividends.
Family allowances - various federal and cantonal allowances for children, education, birth and adoption. Included in U.S. taxable income.
Social Insurance - The basic pension insurance, Taxable income in Switzerland and in the United States,subject to the foreign tax credit to eliminate double taxation. Report in Pension section of our Tax Questionnaire.
The salary statement used throughout Switzerland to provide information about income and expenses received. Main document required for preparation of U.S. tax return for expats employed in Switzerland.
Choosing your name after marriage - Regardless of the family name used on Swiss documents you must provide your family name in the Main section of our Tax Questionnaire as shown on your U.S. Social Security card until you officially change your name with the U.S. Social Security administration.
Taxation on Inheritance - May be imposed by cantons on the person who inherits the estate. No U.S. federal taxation on U.S. or foreign inheritance. U.S. inheritance in some cases may be taxed at the state level. Report inheritance in Other Income section of our Tax Questionnaire.
Pillar 2- Occupational Pension Provision. Employer contributions to Pillar 2 included in calculation of U.S.annual taxable income of employee. Report in Earned Income section of our Tax Questionnaire
Pillar 3 - Individual Pension Provisions. Contributions to Pillar 3 are not deductible from the U.S. annual income but distributions are treated on U.S. tax return as payout from the regular investment made with the previously taxed money (only growth is taxable). Report income in the Supplemental section of our Tax Questionnaire.
Income earned from gainful employment.
Property tax, sometimes known as land or real estate tax, is a cantonal or communal tax on land and buildings. It is calculated on the full taxable value of the property, i.e. without taking account of any related debts or mortgages. Report in Deductions section of our Tax Questionnaire or in Rental section of the Supplemental Tax Questionnaire if property was rented out..
Tax on gains from selling of property. In Switzerland, a profit made on the sale of property is either subject to a special tax (property gains tax) or should be declared as ordinary income. In the U.S., tax on gains from sale of property may be treated as long-term or short-term gains and in certain cases may be tax-exempt. Report in the Supplemental Section of our Tax Questionnaire.
Wealth tax on the value of real estate property - not allowed as a foreign tax credit but can be deducted as a part of itemized deductions on U.S. tax returns. Report in Deductions section of our Tax Questionnaire.
Income Tax - Amount of foreign income tax (federal and cantonal) can be utilized as a foreign tax credit to offset U.S. tax liability. Report tax imposed on the particular income type in the same section of our Tax Questionnaire where you reported that income.
Spousal support, Alimony - Deductible from taxable income by the spouse paying alimony. Report in Other Income section of our Tax Questionnaire.