This video and accompanying blog post cover the top tax considerations for Swiss Nationals should consider when moving to the United States. Living in the U.S.A can be exciting, but it also creates a unique set of tax challenges.
1. Hello taxation of worldwide income: How US and Switzerland are different
The US taxes your income from all sources inside and outside the US. Switzerland taxes most of your worldwide income, but there are some exceptions in which foreign income is only taken into account to determine the Swiss tax rate, but it is not taxed by Switzerland Since the USA taxes its residents on their worldwide income, and Switzerland taxes its nonresidents on their Swiss income, if live in the USA and have Swiss source income, both the USA and Switzerland will tax it. There are tools in the US tax laws that can mitigate double taxation, like the foreign tax credit, but what is important to remember is if you live in the US, you will need to report your entire worldwide income on your US tax return
Example: If you own a rental property in France, France taxes the rental income under French tax rules but Switzerland does not. Switzerland takes the rental income into account for the income tax progression, but it does not tax the rental income.
If you own a rental property in France and move to the USA, France will continue to tax the rental income under French tax rules and the USA will also tax the rental income under US tax rules. Both France and the USA tax the French rental income. The USA allows a foreign tax credit for the income tax paid in France on this rental income to avoid double taxation.
2. Bye-bye wealth tax, hello capital gains tax
The USA doesn’t have a wealth tax but it has a capital gains tax. Switzerland has a wealth tax: you pay a percentage of total wealth every year, that varies depending on the canton you reside, with certain assets exempted from wealth tax, such as the balance of retirement accounts The US DOES NOT have a wealth tax, but it does tax the appreciation of your investment assets when your sell them. This is a capital gains tax: the difference between your investment in the asset (how much you paid for it) and the net sales price. When the net sales price is higher, this is a capital gains and income tax is owed on this gain.
Example: Buy a stock at $10, sell it at $100, in the US you pay tax on the $90 capital gain.
Why is it so important to be aware of capital gains tax? Because if, after becoming a US tax resident, you sell an investment that you acquired as a Swiss resident, you are required to pay income tax in the USA on the entire gain. This is something that can catch Swiss citizens moving to the USA by surprise and be a very costly mistake to make! Even if all or most of the appreciation of the asset happened before moving the USA, the USA will tax the entire gain.
3. The joy of FBAR and FATCA reporting
US tax residents are required to report their specified foreign financial assets annually to the IRS, the US tax authority. FBAR: Foreign Bank Account Report & FATCA: Foreign Account Tax Compliance Act. The FBAR is an anti-money laundering form and Form 8938 (FATCA) is an or anti-tax evasion form. The FBAR has a $10,000 filing threshold, and Form 8938 has different thresholds depending on the filing status of the taxpayer and start as low as $50,000. What does this mean? If the total value of your foreign financial accounts at any time during the year exceeds the filing threshold, you are required to file these forms annually.
Most Swiss citizens moving to the USA will have an FBAR and FATCA filing requirement because foreign retirement accounts, such as Pillar 2 and 3, are specified foreign financial assets that require reporting and the reporting thresholds are relatively low.
Why is this important? Because failure to file these forms can carry severe penalties: up to 50% of the value of the undisclosed accounts for the FBAR and a $10,000 failure to file penalty for Form 8938. Gathering all your foreign account information can be quite annoying every year, but it is important you do so to file the FBAR and FATCA forms to avoid potentially large penalties.
4. Choose your tax-pro carefully
Because the USA taxes residents on worldwide income and requires reporting of foreign assets, the tax returns of Swiss citizens living in the USA can be quite complex. Swiss income and assets need to be classified under US tax rules and their value converted to USD. Most US tax professionals work mostly with domestic taxpayers who do not have international tax elements, and therefore they do not necessarily will have the experience and competence to prepare the forms correctly. The risk of error can be high and the penalties for mistakes can be severe. For example, the penalty for failure to report a foreign inheritance can be as high as 25% of the value of the inherited asset. The average domestic US tax professional will not be familiar with offshore reporting rules, therefore it is important to retain the services of an experienced international tax professional, and ideally one with US-Swiss crossborder tax experience.
Many people think they have a simple situation when coming to the US and think they can handle filing their taxes themselves. This can be a big mistake! Because of the foreign income reporting requirements every year, simple situations can become complicated very quickly and errors can be costly.
If you intend to prepare your own tax return as a Swiss citizen living in the USA, be sure to, at a minimum, become very familiar with Publication 17: the federal income tax guide, and Publication 519: federal tax guide for aliens. Side note: the USA uses the word alien to refer to anyone who is not a US citizen. Proceed with utmost caution.
5. Do pre-immigration tax planning!
Pre-immigration planning is tax planning that takes place before moving between countries. There are two types of pre-immigration tax planning: inbound planning (before moving to the USA) and outbound planning (before moving back to Switzerland).
Pre-immigration planning can avoid or reduce unnecessary taxes, like the capital gains tax we discussed earlier, and it can also avoid bringing into the US tax system certain foreign assets that are taxed punitively under US tax rules. One example of this are Swiss investment funds like mutual funds and ETFs. Swiss funds are taxed under punitive tax rules known as PFIC rules: Passive Foreign Investment Company
Pre-immigration planning allows you identify assets that will be problematic under US tax rules, which may need to be sold or restructured before becoming a US tax resident to prevent double taxation, avoid complex and costly reporting or the application of punitive tax provisions.
On the return to Switzerland, planning allows to identify opportunities to minimize taxes, identify risks (such as the expatriation tax) and to plan for taking advantage of US-Swiss tax treaty benefits.
6. Time your tax residency start date
It is critical to understand tax residency start dates. Federal and state tax residency start dates are not necessarily the same. Special rules apply to US citizens, green card holders, or other types of visas holders who move to the USA. Knowing when you become a tax resident for federal and state tax purposes can help you plan your affairs to avoid unnecessary taxes and complexity.
You will be subject to two sets of tax laws as a resident of the US, one at the federal level and another at the state level. The USA has a federal income tax and 36 out of the 50 US states have a state income tax that is assessed in addition to the US federal income tax. Both the state and the US federal government tax their residents on worldwide income.
If you move to a state with an income tax, you will need to file two separate tax returns: one to the state and one to the IRS (Internal Revenue Service – the federal tax agency.) This means if you sell an investment at a gain, (think previous example) you will have to pay federal capital gains AND state capital gains
The tax residency rules are different at the federal level than they are at the state level. You do not necessarily become a tax resident for federal purposes and for state purposes at the same time. Understanding the different state tax residency rules and how they differ from the federal tax residency rules provides opportunities for tax minimization.
Keep in mind that if, in addition to being a Swiss citizen, you are a US citizen, you are always a resident for federal tax purposes, even if live abroad. For US citizens, the start date for their federal tax residency is their date of birth, but for state income tax purposes, it will depend on the rules established by the particular state. Some states tax based on days of physical presence, others based on domicile and others based on a combination of both.
If you have a green card, just like a citizen, you are taxed for US federal income tax purposes on worldwide income even if you live outside the USA.
In summary, US federal and state tax residency rules are different. You may need to pay income taxes at the state level, in addition to the federal level, if you move to one of the 36 states that has an income tax. Understanding tax residency rules can help you keep your taxes to a minimum.
7. Take advantage of tax treaties
There are three different tax treaties between the USA and Switzerland, and each provides different benefits. Being aware of these tax treaties can help you claim any benefit that you may be eligible for.
Income tax treaty: purpose of this treaty is to avoid double taxation when both the USA and Switzerland tax the same income. The treaty provides rules to determine which country has the exclusive or first right of taxation and provides double taxation remedies such as reduced tax withholding rates and tax credits.
Gifts and Estate tax treaty (Donations in Switzerland): this treaty provides rules aimed at avoiding double taxation when an inheritance is taxed both by Switzerland and the USA. Remedies provided by this treaty include providing tax exemptions and tax credits that would not otherwise be available.
Social Security treaty or Totalization Agreement: this treaty covers social security taxes and has two main goals: to avoid double taxation of wages and compensation for social insurance purposes and to coordinate social security taxes paid in both the USA and Switzerland to determine eligibility for social security benefits when an individual has worked both in Switzerland and the USA.
8. Be prepared to file taxes in more than one country
While you are a US tax resident, you will need to file tax returns in the USA, this is quite intuitive. But you may still need to file a tax return in Switzerland also if you have Swiss income and assets.
Examples of Swiss income are dividends from a Swiss stock investment held in a Swiss brokerage account or rental income on a property located in Switzerland. Switzerland will continue to tax the dividends from the Swiss stock and then Swiss rental income even after moving to the USA. Switzerland will also continue to tax for wealth tax purposes the value of the Swiss stock investment and of the rental home.
Remember our earlier example of the French rental property? A Swiss citizen who is a tax resident of the USA, holds Swiss stocks and owns a French rental property may need to file three different tax returns: one in the USA on their worldwide income, one in Switzerland for the Swiss stock investment and one in France for the rental property.
9. Don’t expect a formal US tax assessment
Unlike Swiss tax authorities, the IRS does not issue formal tax assessments. In the USA, you file your tax returns and hope to never hear from the IRS. No news is good news for a US taxpayer!
If you receive a letter from the IRS, it is because there is a problem with your tax return. NEVER ignore a letter from the IRS. If you are unsure how to respond, you may need to ask a tax professional for assistance. Other differences between the IRS and the Swiss tax authorities?
You shouldn’t call the IRS for tax advice. The IRS can help you resolve tax issues (responding to a tax notice) but their customer service representatives are not trained to provide tax advice and help you understand how to report one thing or another. If you have any questions about a particular tax matter, you should research the answer on the IRS website, which is extremely helpful, or retain the services of a tax professional. You may receive erroneous information from the IRS customer service representative and relying on it can result in penalties and additional taxes.
10. Beware of tax myths
When you move to the USA, you are likely to have a lot of tax questions. There is a lot of “information” online about taxes, but some of it misleading, incomplete or even flat out wrong. Falling for these tax myths can be very costly. Whenever you research a tax matter, pay attention to the sources! Messaging boards and online discussions can be dangerous. What are good sources of US tax information?
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- The IRS website: https://www.irs.gov/
- The Cornell Tax Code Library: https://www.law.cornell.edu/uscode/text/26
- State Department of Revenue or Finance websites (all fifty of them!)
- The Taxpayer Advocate website: https://www.taxpayeradvocate.irs.gov/
- The Tax Foundation: https://taxfoundation.org/
Reach out to info@swissamericanwealth.com with any questions.
Marina Hernandez is an Investment Advisor Representative with Dynamic Wealth Advisors dba Swiss American Wealth Advisors. All investment advisory services are offered through Dynamic Wealth Advisors. Marina Hernandez also offers tax preparation services under MHTax. This is considered an outside business activity from Dynamic Wealth Advisors and is separate from Ms. Hernandez’s activities as an investment advisor representative of Dynamic Wealth Advisors.
