Taxes for Expats – The US – Switzerland Tax Treaty
The US – Switzerland tax treaty was signed in 1996, with an additional protocol added in 2009. The purpose of the treaty is to prevent double taxation for Americans living in Switzerland and Swiss living in the US, however it doesn’t prevent US citizens living in Switzerland from having to file US taxes.
US taxes for expats in Switzerland
The US taxes based on citizenship, meaning that all US citizens and green card holders, including US expats living in Switzerland, with worldwide income of over $12,200 a year (in 2019), 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.
Switzerland on the other hand requires Americans to file Swiss taxes if they spend at least 30 days working, or 90 days overall, in Switzerland in a year, or if their permanent home or the center of their interests is in Switzerland.
This leaves many US expats living in Switzerland having to file two tax returns, and also puts them at risk of double taxation.
Expats receive an automatic filing extension for their US taxes until June 15th (July 15th in 2020), and they can request a further extension until October 15th if they need to. Swiss tax returns are due by March 31st.
US expats in Switzerland may also have to file a Foreign Bank Account Report (FBAR), if they have a 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 – Switzerland Tax Treaty
“From its pristine and punctual public transportation to the abundance of clean drinking water, Switzerland brims with the feeling of well-being that goes hand-in-hand with wealth.” – Business Insider
The United States – Switzerland 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 (2) states that “the United States may tax its citizens (including its former citizens) as if this Convention had not come into effect.” This means that US expats are still liable to file US taxes on their global income.
However, the treaty allows US expats to avoid double taxation on their income taxed in Switzerland by letting them claim US tax credits when they file their US tax return to the same value as Swiss income taxes that they’ve already paid, when they file their US tax return.
For income arising in the US, Americans in Switzerland can claim Swiss tax credits against income US taxes paid to the IRS.
To claim US tax credits against Swiss taxes paid, expats must file Form 1116 when they file their federal tax return. By doing this, the vast majority of US expats in Switzerland won’t end up owing any US income tax.
Alternatively, expats can claim another exemption called the Foreign Earned Income Exclusion by filing Form 2555, which allows them to simply exclude the first around $100,000 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 – Switzerland Tax Treaty also allows the Swiss government to share US expats’ Swiss tax information with the IRS, as well as their Swiss bank and investment account details and balances.
Some Americans in Switzerland, for example students and retired expats, may be able to claim a provision in the United States – Switzerland Tax Treaty (besides claiming US tax credits). Expats should consult a US expat tax specialist to check. Expats who can claim a provision in the treaty can do so by filing IRS Form 8833.
The US-Switzerland Totalization Agreement
A separate agreement called a Totalization Agreement helps US expats in Switzerland not to pay social security taxes to both the US and Swiss governments. Expats’ contributions made while in Switzerland can be credited to either system. Which country they pay depends on how long they will be living in Switzerland.
Expats in Switzerland 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.