Financial planner Jonathan Lachowitz provides tax tips for US citizens living in Switzerland, including how to file your US tax return as an expat living abroad.
As an American citizen living overseas, one of your biggest financial risks is making a misstep when filing (or not filing) your US tax return each year. Tax nightmares can generally be avoided with a combination of regular filing, good planning and a basic understanding of the US tax code (as it relates to overseas Americans). However, if your situation is even mildly complex, seriously consider hiring a tax preparer who specialises in working with Americans overseas.
One thing to remember is that traditionally good advice for a Swiss resident/employee can often be very harmful (i.e., expensive) for a US citizen who lives in Switzerland, so keep that in mind when consulting a well-meaning colleague or friend.
The following list of suggestions should provide a good starting point for dealing with some of the most common areas in personal finance where Americans overseas run into tax or financial difficulties. However, you should always consult a US tax, investment and/or legal professional before making financial decisions.
Tips for US expats in Switzerland
- Read International Tax Tips from the IRS and IRS Publications 54 and 593 (even if you use a professional tax preparer).
- If you use a paid tax preparer, make certain that they specialise in working with overseas Americans.
- If you find that the Swiss-based US tax preparers are too busy or not within your budget, find a US-based specialist.
- Pension buy-backs to reduce Swiss taxes are generally counter-productive if they increase your US taxes. Check this in advance to avoid double taxation.
- File your US tax return and FBARs annually and on-time, even if you don’t owe taxes. The FBAR is due in the US by 30 June each year; taxes owed to the US are due by 15 April (even though the tax filing deadline can be extended).
- Become familiar with the form 8938: Statement of Specified Foreign Financial Assets. This is like the FBAR but filed with your tax return and, unfortunately, it does not replace the FBAR.
- Make sure your Swiss investment manager knows the US tax implications of PFICs (generally most non-US investment funds). Income taxes on the gains can run up to 50% and annual reporting of PFICs are a bit of a nightmare. Your investment advisor should also understand income, capital gains, estate, gift, dividends, and interest taxes. If they don’t, they can put you at risk of some very expensive surprises.
- Most US banks and brokerages will not allow you to buy US mutual funds unless you have a US residential or mailing address on your account. Most Swiss banks will not let you have an investment account and, if they do, they will often restrict you from buying US securities.
- If you are more than two years delinquent in filing your US taxes, it is strongly suggested that you seek professional help from an attorney or a tax advisor who is experienced in helping clients to re-enter the tax system. Re-entering the tax system is full of perils in both the OVDI (Overseas Voluntary Disclosure Initiative) and the Quiet Disclosure (just sending in all of your old tax returns and hoping for the best).
- If you are considering giving up your US citizenship, you need to be up to date on your tax filing. If you have over $2 million in assets, make sure you understand the exit tax and estate tax implications, especially if you have US citizen heirs.
- If you move to Switzerland as a US Green Card holder, you must understand that immigration laws and tax laws are different. Giving up your Green Card (voluntarily or not) can have serious tax consequences, especially if you have held your green card for more than eight of the last 15 years.
- There are tax risks of taking non-US dollar mortgages, especially when the dollar is weak. You want to understand these risks before taking out a non-US Dollar mortgage.
- If you have signatory power over your employer’s bank accounts (outside the US), you may have an additional filing requirement on the FBAR.
- Your employer contribution to the second pillar should be reported as income on your annual US tax return.
- Review your US will, Swiss inheritance law is different. A non-Swiss can elect to have home country regulations apply.
- Consider equity investing in the US for better tax reporting information and lower fees.
- Only give your investment advisor a limited (not full) power of attorney over your investments.
- Don’t buy non-US compliant life insurance.
- Life-insurance tends to be much cheaper in the US, though you need to buy it before you move to Switzerland since most US-based insurance companies cannot sell insurance to Swiss residents.
- Keep a US credit card to retain your credit rating; request an annual copy.
- Contact the US Embassy to get your social security statements or inquire about other Federal Benefits.
- If you have a non-US spouse, know the rules on inter-family gift limitations (for US tax purposes) as well as the pros and cons of including a non-US spouse on a US tax return. You may be able to file as Head-of-Household instead of Married Filing Separately and this could save you a lot in US taxes.
- Report third pillar and second pillar libre-passage accounts on your FBARs and 8938s.
- Keep good records on second pillar contributions reported on US tax returns; this way you can track your tax basis and avoid double taxation in the US.
- Starting a non-US company has special US tax reporting requirements. Start with IRS form 5471.
- If you think Americans overseas are treated unfairly on any issues (taxes or otherwise), consider joining the advocacy group American Citizens Abroad with headquarters in Geneva.
Filing US taxes from Switzerland
Despite the fact that every US citizen and Green Card holder is required to file a tax return with the IRS even when living abroad, many expatriates still fail to do so. Many are are unaware of these obligations, thinking that as an expat they do not need to pay or file tax returns in the US. You do! For more information and help filing your US tax returns from Switzerland, contact Taxes for Expats and see our Guide to taxes for American expats.
And, finally, remember that careful planning, some time spent on research and/or hiring an experienced advisor can help make your time in Switzerland more enjoyable, whether you are here for a short-term expat assignment or plan to make Switzerland your long-term home.