US Expat Taxes for Americans Living in Sweden – What You Need to Know
It has been estimated that there are several thousand Americans living in Sweden.
Living in Sweden is an incredible experience for a number of reasons, including the friendly locals, the free, high-quality public services, the charming culture, and not to mention easy access to the rest of Europe. As an American expatriate living in Sweden though, what exactly do you need to know regarding filing US expat (and Swedish) taxes?
All US citizens and green card holders are required to file a US federal tax return and pay taxes to the IRS, regardless of where in the world they live or their income is generated.
The good news is if you are paying income tax in Sweden, there are various exclusions and exemptions available to prevent you paying tax on the same income to the IRS too.
US taxes – what you need to know
If your annual income is more than $12,400 (in 2020, or $12.550 in 2021), or just $400 for self-employed individuals, or just $5 for Americans married filing separately with a foreigner, then you have to file form 1040. While any tax owed is still due on April 15th, expats get an automatic filing extension up until June 15th. This can be extended further until October 15th.
If you have overseas assets worth over US$200,000 per person, excluding your home if it is owned in your own name, you also have to file form 8938 to declare them.
If you had a total of at least US$10,000 in one or more foreign bank and/or investment accounts at any time during the tax year, you also have to file FinCEN form 114, otherwise known as a Foreign Bank Account Report or FBAR.
Thankfully, there are several exemptions you can claim that allow you to pay less or no US income tax to the IRS.
“Employers pay Swedish employer social security contributions on compensation paid to employees who are covered by the Swedish social security system.” – PriceWaterhouse Coopers
The two primary ones are the Foreign Earned Income Exclusion, which allows you to exclude the first around US$110,000 from US income tax if you can demonstrate that you are resident in South Korea, and the Foreign Tax Credit, which gives you a dollar tax credit for every dollar of tax you’ve already paid in South Korea.
The Foreign Tax Credit is typically a better option if you pay more tax in South Korea than you would owe in the US, as you can carry the excess tax credits forward for future use.
The United States – Sweden Tax Treaty
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.
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.
Swedish taxes – what you need to know
Swedish residents are taxed on their worldwide income at a flat rate of 32%. Non-residents are taxed on Swedish income at a flat rate of 25%.
Foreigners living in Sweden are considered a resident for tax purposes if their home is in Sweden, or if they spend a prolonged period (typically over 6 months in a year) in Sweden.
The Swedish tax year is the same as the US, which is to say the calendar year. Tax returns are due by May 2nd. The Swedish tax authority is called the Skatteverket.
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.
We strongly recommend that if you have any doubts or questions about your tax situation as a US expat living in Sweden that you contact a US expat tax specialist.