U.S. Taxes for Americans Living in Switzerland
Sanders US Tax Services is located in Zurich, Switzerland. Our services include US tax return preparation for individuals and companies. If you’re an American living in Switzerland, contact us to schedule a meeting at our office in the heart of Zurich. We speak English and German.
Am I required to file a US tax return?
As an American living in Switzerland, you’re generally required to file a U.S. tax return. Americans are required to report their worldwide income on their U.S. tax return. If you are a U.S. citizen living in Switzerland, you’re required to report your Swiss income on your U.S. tax return. However, you can claim a credit on your U.S. tax return for the income tax paid to Switzerland.
If you’re not a U.S. citizen, but you have income from the United States, you may be required to file a U.S. non-resident tax return. For example, if you own property in the U.S., you’re required to file a U.S. tax return to report your U.S. rental income. When you sell your U.S. property, the gain is reported on your U.S. non-resident tax return.
What credits and exclusions are allowed on a U.S. tax return filed by an American living in Switzerland?
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 $112,000 of your Swiss wages and other foreign earned income. 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 note that only earned income can be excluded, which does not include unemployment benefits, social security income, pension income and other unearned income.
You can claim a credit for income 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, the amount you can claim on your U.S. tax return as a foreign tax credit may not be sufficient to fully offset your U.S. federal income tax. The IRS does not allow claiming a Foreign Tax Credit for the Swiss income tax on the part of your income excluded under the Foreign Earned Income Exclusion.
How are Swiss pensions reported on a U.S. tax return?
The contributions made by your Swiss employer to your Second Pillar pension plan represent additional income to you for U.S. tax purposes. The Swiss pension plan is deemed a non-qualifying pension plan under the U.S. tax code and thus the income is taxed at the time of contribution as opposed to when it is distributed.
On your Swiss tax return, you may be able to make a voluntary catch-up contribution to your Swiss pension. Generally, catch-up contributions are deductible in Switzerland. In other words, they reduce your taxable income and therefore the amount of Swiss tax owed. Before making a catch-up contribution, one should consider the U.S. tax consequences. 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 Second Pillar Pension Plan to optimize from a U.S. and Swiss tax perspective, contact us.
How are capital gains taxed in Switzerland?
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 gains 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.
What U.S. tax forms are Americans living in Switzerland 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.
You are required to file FinCEN Form 114 (“FBAR”) if you have one or more foreign financial accounts with an aggregate value that exceeds $10,000 at any time during the year. You may be required to file Form 8938 as part of your tax return. Form 8938 is required if the total value of your specified foreign financial assets exceeds a certain threshold. Form 8938 mostly is a copy of the FBAR. However, certain financial assets that are not reported on an FBAR are reported on Form 8938.
If you own shares in a Swiss limited liability company (GmbH) or corporation (AG), you may be required to file Form 5471. Whether you’re required to file Form 5471 depends on your ownership percentage and who the other shareholders are.
What is the filing due date for my U.S. tax return?
As a U.S. citizen living is Switzerland, 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 2022 tax return is June 15, 2023. However, the IRS still charges interest on payments made after the regular due date, which is April 18, 2023. The filing due date for your FBAR generally is October 16, 2023.
We specialize in the preparation of U.S. tax returns for U.S. taxpayers living abroad. We’re based in Zurich, Switzerland and speak English and German. We work with several Zurich-based Swiss tax firms and can coordinate the preparation of your Swiss tax return. We also have offices in Denver, CO as well as Germany, the United Kingdom and the Netherlands. Contact us to schedule an online meeting or a meeting in person at our office in Zurich.