U.S. CITIZEN AND RESIDENT TAXPAYERS LIVING AND WORKING IN SWITZERLAND
As a U.S. citizen or resident living and working in Switzerland you should be aware of the following:
Reporting of Worldwide Income
U.S. citizens and residents are required to report their income from worldwide sources. If you are a U.S. citizen living in Switzerland with income from sources within Switzerland, this income will be taxed both in Switzerland and the United States. The tax treaty between Switzerland and the United States will provide some relief for double taxation.
Tax Credits, Deductions and Exclusions Available to U.S. Citizens Living in Switzerland
Foreign Earned Income Exclusion. If you live and work abroad, you may be able to claim the Foreign Earned Income Exclusion. If you qualify, you will not pay tax on up to $101,300 of your Swiss wages and other foreign earned income in 2016. The exclusion amount is adjusted annually for inflation. In addition, taxpayers may also exclude employer-provided housing amounts or deduct non-employer provided housing costs.
Please not that only earned income can be excluded, which does not include unemployment benefits, social security income, pension income and other unearned income.
Foreign Tax Credit. You can claim a credit for income taxes (Swiss federal, cantonal, and communal taxes) paid to Switzerland to offset your U.S. tax liability. Most cantons in Switzerland have tax rates that are low in comparison to the U.S. tax rates. Therefore, you should not be surprised if after claiming the Foreign Tax Credit, you still owe some residual tax to the IRS.
It might be beneficial for you to claim both the Foreign Earned Income Exclusion and the Foreign Tax Credit. However, you are not allowed a Foreign Tax Credit on foreign taxes that relate to amount excluded under the Foreign Earned Income Exclusion.
Standard Deduction and Itemized Deduction. Every taxpayer can avail of either the Standard Deduction (a fixed deduction amount which is based on your Filing Status) or the Itemized Deduction (deduction of actual expense incurred subject to limitations), whichever is higher.
Examples of Itemized Deductions include, but are not limited to: unreimbursed medical expenses, unreimbursed employee business expenses, tax preparation fees, mortgage interest, certain taxes, U.S. charitable contributions (contributions to Swiss charities are not deductible) and miscellaneous expenses.
Key Differences between U.S. and Swiss Tax Code
Employer contributions to 2nd Pillar (2. Säule). Contributions your Swiss employer makes to your 2nd Pillar Pension Plan represent additional income to you for U.S. tax purposes. This is because the Swiss pension plan is deemed a non-qualifying pension plan under U.S. tax law and thus the income is taxed at the time of contribution as opposed to when it is distributed.
Catch-up contributions to your 2nd Pillar Pension Plan. Citizens moving to Switzerland who have never been a member of a Swiss pension plan are given the possibility to make voluntary catch-up contributions (subject to limitations) into the plan to close the ‘gap’ for the past years for which they have not contributed to the plan, thus increasing their pension rights.
Such contributions are tax deductible on the Swiss tax return and consequently reduce the Swiss tax due for the year of the contribution. U.S. citizens living in Switzerland need to be aware that the contribution into the Swiss pension plan is not only not deductible on the U.S. tax return but it also reduces the amount of Swiss tax that can be used as a credit to offset the U.S. tax for the year.
If you would like to know more, or if you would like to know how much you should contribute to your Swiss 2nd Pillar Pension Plan to optimize from a U.S. and Swiss tax perspective, talk to us.
Reporting of gross income. While you report your net wages on your Swiss tax return, you need to report you gross wages on your U.S. tax return. Many deductions allowed for Swiss tax purposes to arrive at your net taxable income (such as AHV contributions and 2nd Pillar contributions) are not deductible under U.S. tax law.
Capital Gains. Capital gains from the sale of securities are not taxable in Switzerland. However, capital gains from the sale of securities are taxable on your U.S. tax return. Tax rates differ based on the holding period (short-term or long-term) and the tax bracket of the taxpayer.
The tax rate on most net capital gain income (the amount by which your net long-term capital gain for the year is more than your net short-term capital loss) is not higher than 15% for most taxpayers. Some or all net capital gain may be taxed at 0% if you are in the 10% or 15% ordinary income tax brackets. However, a 20% tax rate on the net capital gain applies to the extent that a taxpayer’s taxable income exceeds certain thresholds. Net short-term capital gains are subject to taxation as ordinary income at graduated rates.
Additional Forms U.S. Citizens Living Abroad are often Required to File
If you are a U.S. citizen or resident alien, the rules for filing income tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. However, additional rules may apply and additional forms may have to be filed depending on your specific facts and circumstances. Some of the most common tax forms filed by Americans living abroad:
FBAR – FinCEN Form 114, Report of Foreign Bank and Financial Accounts. You are required to file this form if you have one or more foreign financial accounts with an aggregate value that exceeds $10,000 at any time during the year. We charge a flat fee of €80 (approx. $90) for the preparation and electronic filing of your FBAR with up to 5 foreign financial accounts.
Form 8938, Statement of Specified Foreign Financial Assets. You need to file this form with your federal income tax return if the total value of your specified foreign financial assets exceeds a certain threshold.
Form 5471, Information Return of U.S. Person With Respect to Certain Foreign Corporations. This return must be filed as part of the U.S. federal income tax return of certain U.S. citizens and residents who are officers, directors, or shareholders in certain foreign corporations. For example, if you are a U.S. citizen living in Switzerland and you (partly) own a non-U.S. legal entity, you may be required to file this form with your U.S. tax return.
Non-compliance with the tax rules that require you to file the above forms can potentially result in serious fines. Please contact us if you would like know whether you have a filing requirement. In addition, the website of the U.S. Embassy in Bern contains useful information.
Form 1040, U.S. Individual Income Tax Return. As a U.S. citizen living abroad, you receive an automatic 2-month extension of time to file your U.S. federal income tax return and time to pay your tax. The deadline to file your 2017 tax return is June 15, 2018. Interest will still be charged, however, on payments made after the regular due date, which is April 18, 2018, without regard to the extension.
FBAR – FinCEN Form 114, Report of Foreign Bank and Financial Accounts. As a U.S. citizen living abroad, you receive an automatic 2-month extension of time to file your 2016 FBAR. An additional 6-month extension can be requested through October 15, 2018.
If you’re a U.S. citizen in Switzerland, contact us with any questions you have about your U.S. tax filing requirements. We would be more than happy to meet with you at our office in Zürich.