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Good advice for Swiss residents can be very harmful for a US citizen who lives in Switzerland. Contribution from Jonathan Lachowitz.
<<Make sure your Swiss asset manager understands your US tax obligations. Don’t make a pension-buy-back to reduce Swiss taxes while increasing your US taxes>>, etc. These tips have been given by an American expert living in Switzerland, Jonathan Lachowitz, with an MBA from New York University’s Stern School of Business, Jonathan is a Certified Financial Planner professional (CFP in Switzerland and the USA) and he has been living in the Western part of Switzerland for almost 15 years. Jonathan founded White Lighthouse Investment Management in Lausanne in 2006 and he provides comprehensive financial planning and investment management services to selected clients based on long-term relationships.
<<I want clients to get an education by working with me, something they can use when working with other professionals>>, claims Lachowitz, who advises clients to have accounts in their own name with their investment advisors having only a limited power of attorney. <<It is not only helping people to save and invest, sometimes clients need to feel comfortable spending their own money or discussing money matters with their spouse or their children.>> Lachowitz loves to read books on finance and investing and often recommends books to his clients. It’s worth opening <<The financially intelligent parent>> (by Eileen & Jon Gallo), <<The Wealthy Barber>> (David Chilton), <<Raising Money Smart Kids>> (Janet Bodnar), or <<How to Ruin your Financial Life>> (Ben Stein).
The following list of tips is not exhaustive and Jonathan emphasizes the following statement: <<Do not make any personal financial decisions based on this article without first consulting a US tax investment or legal professional>>. Many times advice that is traditionally <<good advice>> for a Swiss resident can be very harmful (expensive) for a US citizen who lives in Switzerland. Given that, there are some interesting pieces of advice for American citizens living overseas.
Pension buy-backs to reduce Swiss taxes are bad if it increases your US taxes, check this in advance to avoid double taxation.
Work with an experienced US tax advisor who is specialized in working with overseas Americans.
File your US tax return and FBARs annually, even if you don’t owe taxes.
Make sure your Swiss asset manager knows the US tax implications of PFICs (generally most non US investment funds). Income taxes on the gains can easily go over 50%. They should also understand income, capital gains, estate, gift, dividends, and interest taxes. If they don’t they can put you at risk for some very expensive surprises.
There are tax risks of taking non US dollar mortgages, especially when the dollar is weak.
Your employer contribution to 2nd pillar should be reported as income on annual your US tax statements.
If you have a non-US spouse, know the rules on inter-family gift limitations (for US tax purposes).
Report 3rd pillars and libre-passage on your FBARs.
Keep good records on 2nd pillar contributions reported on US tax returns; this tax basis can avoid double taxation in the US.
Starting a non US company has special US tax reporting requirements.
Don’t put money in non US investment funds (because of punitive US tax rates).
<<I want clients to get an education by working with me, something they can use with other professionals.>>
3rd Pillar is not attractive
It is well known that US Citizens face taxation on their worldwide income. It is not well known that <<good>> advice for residents of Switzerland can be counter-productive for US persons; 3rd Pillar contributions are a good example for three main reasons.
Contributing to a 3rd Pillar reduces Swiss taxes in the year it is is made. This savings as well as the growth will be tax deferred, and at the time of retirement withdrawals will likely have a lower tax rate than the year of contribution. For some US tax filers though, a reduction in Swiss Income tax (e.g. by making a 3rd pillar contribution) leads to an increase in US taxes. The result is that the income will likely be double taxed, first in the year of contribution by the US government and upon withdrawal by the Swiss and by the US again for any growth in value.
Most 3rd Pillar accounts have options to buy into different investment funds or keeping cash. If double income taxation is not a deterrent, then the US person should only leave the 3rd Pillar in cash; if they buy an investment fund, they have entered the world of the Passive Foreign Investment Corporation (PFICs). The PFIC is a nasty part of the US tax code that can under some circumstances have all its income (any growth in value) be taxed at punitive rates by the US government (well over 50% of the gains can be owed in penalties, interest and taxes). A proper discussion on PFICs is lengthy as are the tax calculations; you need professional tax advice. Now your income is double taxed, your growth will be mostly taxed away in the US and some in Switzerland, do you think it can get worse? Yes, it can. If you are not reporting your 3rd Pillar accounts (and income) on your US tax return and on your Foreign Bank Accounting Reports (FBARs), you can end up paying penalties for each year you don’t report the accounts. These will more than wipe out anything you have left and then some. The treaty notes on the Swiss-US treaty states <<…Individual savings plans, such as individual retirement accounts in the United States and contributory private savings plans in Switzerland are not pension plans or other retirement arrangements…>> and are subject to annual taxation, in this case, but the US government for income earned in the 3rd Pillar. Double Taxation on the income, punitively high taxation and penalty rates for the gains and the possibility for additional penalties for not filing 3rd pillars on your FBARs makes the 3rd Pillar an unattractive proposition under many circumstances for a US person in Switzerland. Saving early and often is the most important thing to do for a healthy retirement but choose another place to save and invest your money instead of making a big donation to the US Treasury.
Written by Jonathan Lachowitz CFP (Switzerland and USA) and founder of White Lighthouse Investment Management in Lausanne Switzerland.