Taxes for Expats – The US – Sweden Tax Treaty
The US – Sweden tax treaty was signed in 1994, with an additional protocol added in 2005 covering dividends. The purpose of the treaty is to prevent double taxation for Americans living in Sweden and Swedes living in the US, however it doesn’t prevent US citizens living in Sweden from having to file US taxes.
US taxes for expats in Sweden
The US taxes based on citizenship, meaning that all US citizens and green card holders, including US expats living in Sweden, with worldwide income of over $12,400 a year (in 2020), or just $400 of self-employment income, or just $5 of income if they’re married filing separately with a foreigner, are required to file a US tax return each year.
Sweden on the other hand requires Americans to file Swedish taxes if their main home is in Sweden or if they spend a prolonged period in Sweden, typically meaning over 6 months in a year. Swedish tax returns are due by May 2nd.
These dual requirements leave many US expats living in Sweden having to file two tax returns, and also put them at risk of double taxation.
Expats receive an automatic filing extension for their US taxes until June 15th, and they can request a further extension until October 15th if they need to. Swedish tax returns are due by June 30th.
US expats in Sweden may also have to file a Foreign Bank Account Report (FBAR), if they have an aggregate total of over $10,000 in non-US based bank, investment, and other financial accounts at any time during the year (and including any accounts that they have signatory authority or control over, even if not registered in their name).
The United States – Sweden Tax Treaty
“Sweden is at the crossroads of germanic and Latin Europe, which is exemplified by its three national languages: Dutch, French, and German.” – Expat Arrivals
The United States – Sweden Tax Treaty covers double taxation with regards to income tax, corporation tax, and capital gains tax, however, a clause called a savings clause in Article 1 section 4 states that “the United States may tax its citizens as if the Convention had not come into effect.” This means that US expats still have to file US taxes on their global income.
However, the treaty allows US expats to avoid double taxation on their income earned in Sweden by letting them claim US tax credits when they file their US tax return to the same value as Swedish income taxes that they’ve already paid.
For income earned (and so taxed first) in the US, the treaty allows Americans in Sweden to claim Swedish credits to the value of the US tax paid on this income, although they may have to pay some extra Swedish tax on top, as Swedish tax rates being higher than US rates.
To claim US tax credits against Swedish taxes paid, expats must file Form 1116 when they file their US tax return. By doing this, the vast majority of US expats in Sweden won’t end up owing any US income tax, as Sweden has higher income tax rates than the US.
Alternatively, expats can claim another exemption called the Foreign Earned Income Exclusion by filing Form 2555, which simply allows them to exclude the first around $105,000 of their earned income from US taxation. Which exemption is most beneficial depends on each expat’s circumstances (e.g. their types of income, residency status, income levels, where their income originates, etc).
It is possible in some circumstances to claim both the Foreign Earned Income Exclusion and the Foreign Tax Credit, although they can’t both be applied to the same income.
The US – Sweden Tax Treaty also allows the Swedish government to share US expats’ Swedish tax information with the IRS, as well as their Swedish bank and investment account details and balances.
Some Americans in Sweden will benefit from the treaty though, for example students, teachers, trainees, researchers, entertainers, sportsmen, and expats receiving dividends, interest, royalties, pension income, alimony, social security income, and child support. Expats with these types of income should consult a US expat tax specialist to check. Expats who can claim a provision in the treaty should do so by filing IRS Form 8833.
The US-Sweden Totalization Agreement
A separate agreement called a Totalization Agreement prevents US expats in Sweden from paying social security taxes to both the US and Swedish governments. Expats’ contributions made while in Sweden can be credited to either system. Which country they pay depends on how long they will be living in Sweden for.
Expats in Sweden who are behind with their US tax filing because they were unaware that they had to file from abroad can catch up without facing penalties under an IRS amnesty program called the Streamlined Procedure, so long as they do so before the IRS contacts them about it.