What You Need To Know About Paying US Taxes While Living In Switzerland
Living in Switzerland is a fantastic experience but if you’re one of the 40,000 Americans living in Switzerland, there are some important things you need to know about paying the US taxes Switzerland residents are required to pay. US tax laws are something that can be daunting but they don’t have to be. Knowing the basics of how taxes work for expats like you will help you avoid any tax penalties in the future.
All US citizens and US green card holders who earn a minimum of $10,000 (US Dollars) (or just $400 in self-employment income) anywhere in the world are required to file a US federal tax return and pay tax to the IRS. It doesn’t matter where you live or where your income is generated, a US federal tax return is required.
The good news is that doesn’t necessarily mean that you’ll owe US tax to the IRS. If you are paying income tax in Switzerland, there are several tax exclusions and exemptions available to prevent you from paying tax twice on your income and being required to pay that in US taxes.
US Tax – The Basics
If you earn more than $10,000 in Switzerland (or $400 if you’re self-employed), you have to file tax Form 1040 just like you would when filing taxes in America. Taxes are still due by April 15th but expats like you get an automatic tax filing extension until June 15th. If you need more time to file your taxes, this tax deadline can be extended further until October 15th. This is very similar to filing a tax return in the US. Where things start to differ is when you get into the tax on assets held outside of the US.
If you have foreign assets worth $200,000 per person or more, excluding your home if it is owned in your own name, you’ll need to file tax Form 8938 to declare them. If you had a total of at least $10,000 in one or more foreign accounts at any time during the tax year, you are also required to file FinCEN Form 114, better known as a Foreign Bank Account Report or FBAR.
Be sure you file your US tax return and FBARs annually and on-time, even if you don’t owe. This will help you avoid any tax non-compliance penalties now that they have become more severe and enforceable. The FBAR is due in the US by June 30th and even though the tax filing deadline can be extended, US tax owed to the IRS are due by April 15th.
US Tax Exclusions
If you pay income tax in Switzerland, there are several ways you can reduce or completely cancel out any US tax due on the same income to the IRS. There are two primary ways of reducing or canceling out tax due to the US and the first is called the Foreign Earned Income Exclusion. This exclusion allows you to exclude the first around $100,000 (US Dollars) of foreign earned income from US tax as long as you can demonstrate that you are a Swiss resident. In order to qualify as a Swiss resident in the eyes of the US government, you must pass the bona fide residence test or the physical presence test.
In order to pass for the US bona fide residence test, you must to reside in a foreign country, such as Switzerland, for an uninterrupted period that includes an entire tax year. In addition, the bona fide residence test takes into account factors such as the individual’s intention, the purpose of any trips, and the length and nature of the stay. You must be a US citizen or US resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect to qualify for this test. Finally, you are not considered a bona fide resident of a foreign country if you make a statement to the authorities of that country that you are not a resident of that country and the authorities determine that you are not subject to their income tax laws as a resident or have not made a final decision on your status.
The US physical presence test focuses on your location. You meet the physical presence test if you are physically present in a foreign country, such as Switzerland, or multiple countries for 330 full days during a period of 12 consecutive months. These 330 days do not have to be consecutive and any US citizen or resident alien can use the physical presence to qualify for the exclusions and the deduction on their taxes.
Another way to decrease US taxes Switzerland residents are required to pay is through the US Foreign Tax Credit which gives you a dollar-for-dollar tax credit for every dollar you’ve paid in tax to Switzerland. The US Foreign Tax Credit is a great option for those who pay more tax in Switzerland than you would owe in taxes to the US.
When it comes to US tax Switzerland residents must pay on assets, you should know that the US and Swiss governments share taxpayer info and banks in Switzerland are required to pass account information to the IRS. Because Switzerland is required to do this, it’s much less likely that you can get away with not fully disclosing your finances and the penalties for not filing a tax return or paying required taxes are more strict than ever.
If you’re a US citizen, green card holder, or US & Switzerland dual citizen and you didn’t know about these tax requirements to file a US tax return, it’s okay. There is a program designed exactly for this case called the IRS Streamlined Procedure. This program allows you to catch up with your tax filing without facing any penalties so take advantage of it to avoid severe penalties. It is best to catch up using this program and not to avoid your taxes because eventually, they will catch up with you and the penalties for avoiding taxes are only increasing.
Switzerland & US Social Security
Any contributions you make to the Social Insurance system in Switzerland, including taxes that are withheld from your paycheck for this purpose or made on self-employment income are not deductible from the US taxable income and do not qualify for the foreign earned income credit. These taxes may not qualify for the foreign earned income credit but they will come in handy later in life as we’ll cover.
The good news is that there is a tax totalization agreement in place between the US and Switzerland. This agreement 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. This eliminates paying double tax to Social Security and it allows dual residents to use their work in both countries to qualify for benefits. If you are self-employed, the contributions you make to the Switzerland Social Insurance system make you exempt from contributions to the US Social Security system that would normally be required in all self-employment income. These contributions are the ones you may have previously paid as part of doing your estimated taxes.
How do taxes affect your benefits later in life?
If you have Social Security credits in both the US 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 US system to qualify for full benefits, you may be able to qualify for a partial benefit from on both US and Swiss credits.
Dealing with one tax system is complicated and, as you can imagine, dealing with the tax systems of both the US and Switzerland can make things even more complicated. The US taxes Switzerland residents have to deal with can make you want to pull your hair out. The good news is, you don’t have to do this alone. We specialize in working with US citizens living in Switzerland and would be happy to help you with all of your tax needs.