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ACA Zurich Town Hall

To view this presentation in PDF format, click here.

Financial & Tax Planning Ideas for Americans in Switzerland

ACA Town Hall Evening – Zurich

Jonathan Lachowitz, Financial Planner | Investment Advisor

September 23, 2018

This presentation is not meant as legal, tax or financial advice to any individual. You are strongly recommended to seek the advice of a professional who understands your specific circumstances before relying on any of the information in this presentation. There may be mistakes and regulations may change or not apply in some circumstances. The presentation may be circulated but should be appropriately cited if used in a professional setting.

IRS Circular 230 Disclosure: Any tax advice in this communication is not intended or written by the author to be used, and cannot be used, by a client or any other person or entity for the purpose of avoiding penalties that may be imposed on any taxpayer.

Introduction

Jonathan Lachowitz

  • Board Member / Director ACA

  • Financial Planner & Investment Advisor

  • Certified Financial Planner™ – US & CH

  • Founder of White Lighthouse Investment Management in Lausanne & Lexington, MA

  • On the web at: www.white-lighthouse.com

  • Have written on personal finance for Wall Street Journal - Expat

Tax Planning

What can I legally do to reduce the total amount of taxes paid (in the US and Switzerland) while meeting my personal financial planning objectives?

  • Income Taxes – Earned & Unearned

  • Social Security Taxes

  • Gift and Estate Taxes

Concepts

  • Tax Deferral (or Acceleration)

  • Tax Free Income

  • Preferential Tax Rates

  • Advanced Techniques

  • Miscellaneous

    • Avoiding tax penalties

    • Avoiding interest rate charges

Retirement

Tax Deferral encouraged by Legislation

  • 2nd Pillar

  • 3rd Pillar

  • 401K, 403B

  • IRA, Roth, Traditional SEP, Rollover, Inherited

  • Other pension or deferred income plans

  • Theoretically lower taxes in retirement

    • Unknowns - Future tax rates, moving countries (different laws)

  • Tax deferred or tax-free growth on investments

Retirement: The Second Pillar

  • Basic level of contribution mandated by law

  • Company decides their contribution, payout ratio, and investment approach (not much employee flexibility)

  • Pension “buybacks” may be possible, probably not advisable

  • Great savings vehicle

  • Great at deferring Swiss taxes (not US taxes)

  • Terrible investment vehicle

    • Not choice to take more or less risk, everyone pooled

  • Track your US Tax Basis in your 2nd Pillar

  • Excess contributions can cause US tax problems or inefficiency

    • Generally lowers Swiss taxes only to increase US taxes

    • Technically may turn the 2nd pillar into a Foreign Trust for US tax reporting purposes (though most tax advisors won’t report that way)

    • More appropriate investment risk can be taken elsewhere

  • Inefficiency in US-Swiss tax treaty: US taxes in year earned (no deferral), Switzerland at time of distribution

  • Tax deferred in Switzerland, not for US purposes

Retirement: The Second Pillar - Distributions

  • Distributions taxable events in US

  • Movement to a “libre passage” account – taxable event in the US

  • Changing employers and 2nd pillar plans – taxable event in the US

  • Taking lump sum distributions – Can be a great tax planning event when done correctly: Track Basis

    • Moving through a low tax canton may not help Americans

  • Swiss taxes on lump sum may be refundable in some circumstances

Retirement: The Third Pillar

  • Generally not a good idea for US taxpayers

  • Contributions tend to lower Swiss taxes and increased US taxes

  • Investment choices tend to be treated as PFICs in the US

  • Investment choices are often costly (hidden) and don’t provide much flexibility

  • Investing outside of a tax deferred account for diversification is generally a better idea

US Retirement Accounts - Accumulations

  • Existing IRA Accounts: Generally tax deferred in the US and Switzerland and no wealth tax in Switzerland

  • Annual IRA contributions to lower US taxes – possible, to lower Swiss taxes – sometimes

  • Advantages of a US IRA

    • Flexibility in investments

    • Costs can be much lower

    • US tax benefits possible annually

    • Tax deferred growth

  • More sophisticated options available for self-employed and some business owners

US Retirement Accounts - Distributions

  • Required minimum distributions

  • Taxable in the US and Switzerland (but in the same year, so treaty does what it is supposed to do)

  • Lump sum taxation in Switzerland generally not available with periodic distributions, sometimes

  • Distributions from US retirement accounts for non-US taxpayers can be complicated. Treaty rules may apply

  • US custodians will follow beneficiary elections – May be inconsistent with Swiss inheritance law

US Education Accounts

  • 529 Plans not exactly recognized in Switzerland; should be considered as a normal “investment account”

  • Tax-free growth if used for qualified education

  • Over 300 institutions outside the US

  • Lots of flexibility in terms of owners and beneficiaries

  • Planning should be done carefully for Americans in Switzerland

Kids Accounts

  • From 2018 - Not really clear

  • Kiddie tax going away

  • Children will be taxed like “trusts”

  • Filing threshold not clear

  • Wish we could say more, one of the problems with hastily written legislation

Investment Accounts

  • Investment Allocation (not taxes) most important decision

  • Tax loss harvesting

    • Gains/losses timing can help to defer taxes

    • Lower current year income taxes

    • Investment advisor should know about US tax optimization

    • Much more efficient on low cost trading platforms (generally in the US)

  • ETFs tend to be more tax efficient than Mutual Funds

  • Qualified Dividends are better than non-qualified Dividends

  • Tax-free in the US is generally not tax-free in Switzerland

  • Location of investment type between tax-deferred and taxable accounts

  • Potential gifting to non-citizen spouse to avoid some capital gains

Gifting

  • US - $15k per year to annual individual

  • Switzerland - depends on Canton - Vaud has a gift tax when giving to children, Geneva does not

  • Lifetime exemptions $11.2m (will sunset in 2025)

  • Gifting to non-citizen spouse, $152,000

  • Receiving a gift or inheritance from a non-US source

    • If over $100k from one person in one year, reportable on form 3520

  • Be aware of cantonal rules in Switzerland on gifting

Estate

  • US estate tax exemption $11.2m per person (at least until 2025)

  • Real property in the US may be subject to state level estate taxes

  • If you have a US trust, you may consider getting a review in Switzerland to make sure the estate won’t be taxed punitively in Switzerland

Misc

  • Choice of tax preparer is important – Though most don’t provide tax planning service unless paid for as an extra service

  • Selling a home – Is it a primary residence, are owners all US citizens, is there a mortgage in non-USD? Is it in a US state?

  • US income tax is owed on Swiss Social Security, you pay into as an employee

    • This works the same way as in the US

  • Swiss wealth tax is no longer deductible on US tax return

  • Various treaties may impact taxes on income, estates and social security

    • US & Switzerland have an Estate Tax Treaty from 1951/2 – favorable for non-Americans owning US assets

    • US and Switzerland have an Income Tax Treaty from 1996

    • US and Switzerland have a Totalization Agreement – Social Security Treaty from August 2014

Small Business Owner

  • If you and/or your foreign spouse own a Foreign Corporation, your tax situation may be very complicated…and costly…

  • Check the box election

  • Swiss Entity Selection for New Businesses – Sarl/gmbh has more flexibility for the US

  • Optimizing salary versus dividends

Compliance Accuracy

  • Using the wrong F/X to convert income or account balances from CHF or other currencies to USD

  • Failure to report income that is not taxable in Switzerland but that is US taxable

  • Failure to report employer contributions to Pillar 2 Swiss occupational pensions as taxable compensation in the year the contribution is made

  • Failure to exclude the above contributions in the Foreign Earned Income Exclusion (FEIE) calculations because these contributions are not eligible for FEIE

  • Failure to file the FBAR or FNAR filing errors

  • Failure to file Form 8938, the FATCA for that was introduced in 2011 that requires filing foreign accounts including Swiss pensions

  • Failure to report Swiss fund investments as PFICs (Passive Foreign Investment Companies)

  • Failure to report Pillar 3s or incorrect reporting of Pillar 3s

  • Failure to report taxable distributions from Pillar 2s to a new administrator every time the Swiss tax resident changes jobs

  • Failure to keep track of US cost basis in Pillar 2 accounts

  • Make voluntary buy backs to Pillar 2s that cause the Pillar to be treated as a foreign grantor trust and failing to report the foreign grantor trust

  • Overstating foreign tax credits

  • Failure to file corporate reports required by ownership attributions from a Swiss spouse (or any other foreign nationality) who is not a US citizen

  • Failure to report certain gifts or inheritance from foreign relatives

  • Failure to report certain Swiss income, such as family allocations, unemployment benefits, or reporting the incorrect amount of income

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