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ACA Town Hall Evening Lausanne & Zurich
Financial & Tax Planning Ideas for Americans in Switzerland
Zurich & Lausanne, 26 & 27 September 2023
Disclosure
The information contained within this presentation is general information and cannot be relied upon for your specific and unique situation.
This presentation is not meant as legal, tax, or financial advice to any individual. There are general explanations of cross-border issues between the US and Switzerland. 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.
Advice requires consideration of your individual circumstances and needs, none of which can be done within this presentation.
Please consult a professional tax advisor/accountant/return preparer when addressing your person tax matters.
Jonathan Lachowitz
Board Member, Director & Volunteer at American Citizens Abroad for over 15 years
Financial Planner & Investment Manager >$550m
Certified Financial Planner™ – US & CH
Founder of White Lighthouse Investment Management,
in Lausanne & Massachusetts, est. 2006
Strong local and cross-border planning expertise
Working with hundreds of Americans/multi-national families on cross-border planning & investments. >200 American families/clients in Switzerland
Has written many articles on personal finance for the Wall Street Journal and Bloomberg
Registered /Licensed with SEC and FINMA
More at white-lighthouse.com/jonathan-lachowitz
Financial Advice & Investing
Top 10 Personal Financial Challenges for Americans in Switzerland and How to Address Them
US Tax Compliance – Keeping up with ever more complex rules and practices
US Tax Planning – Using the rules in your favor – Why are my taxes so high?
Retirement Savings and Planning
Estate Planning
Making informed choices
Investment Management / Services
Finding Professional & Trustworthy Services – Also at a reasonable price
Managing Currency Risk – Is the CHF Strong or the Dollar weak?
Real Estate
Feeling Powerless to “Change the System” to be more fair
Investment Planning
Investments - Types
Public Equity – Stocks / Shares in companies traded on public market
Bonds
Cash
Real Estate
Private Equity – Shares in companies that are privately held
Metals
Misc: Hedge Funds / Options / Derivatives /Collectables etc.
All Investments have advantages and disadvantages, risks and rewards, cost and complexity.
Investment Planning
Investments – Accounts (Custodian) & Vehicles
Bank
Brokerage
Direct Investment (funds, share certificates, physical ownership)
Shares
Mutual Funds
Exchange Traded Funds
Investment Planning
Investment Accounts - Planning
• Investment allocation (not taxes) most important decision driving risk/return.
Investment Horizon
Goals: Retirement, Education, Home Purchase
Risk Profile / Cash needs
Fees
Advisor, trading, custody, funds
Ease of Management
Investment Planning
Investment Principles
Market Timing – does not work reliably
Diversification – Key to lowering risk
The longer your time horizon the more risk you can afford
Invest for a purpose /goal
Rebalancing – Re-adjusts risk, but costs in capital gains taxes
Investment location (type of account) matters of tax efficiency
Investment vehicles matter: Are you buying a product or is it being sold to you.
Very few variables you can control in risk management/ retirement planning: - Risk level is one, spending levels is another.
Inflation, investment return, interest rates, exchange rates, tax rates in the future are best guesses – history is a guide, but an imperfect one
Investment Planning
Taxes – Income, Capital Gains, Social Security, Wealth, VAT, Stamp
Will I be taxed this year or another year or both?
Tax Loss Harvesting (realized capital gains)
Gains/Losses timing can help todefer 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 (US)
Qualified Dividends are better than non-qualified Dividends – in the US
Tax-free in the US is generally not tax-free in Switzerland (Roth, 529)
Location of investment type between tax-deferred and taxable accounts
Potential gifting to non-citizen spouse to avoid some capital gains
Investment Planning
Checking out your Advisor / Firm
US – Federal and State Level Registration
SEC Advisor Search: https://adviserinfo.sec.gov/
Switzerland
FINMA – Firms licensed
https://www.finma.ch/en/finma-public/authorised-institutions-individuals-andproducts/
Swiss Advisor Registry – 3 Registers (not all individuals required to be registered)
ARIF - https://registre.arif.ch/en/registre/
Reg Services - https://www.regservices.ch/en/client-advisor-search/
Reg Fix - https://www.reg-fix.ch/en/advisers-search
FINMA Public info: https://www.finma.ch/en/finma-public/
FINMA – Ombudsman - https://www.efd.admin.ch/efd/en/home/thefdf/ombudsmanfinsa.html
Investment Planning
Investments – Accounts Currency / Cash
Cash is great as a short-term store of value, in the currency it will be spent
Safe keeping – account stability
Physical cash
Loses purchasing power to inflation
Fluctuates against other currencies
Investment Planning
Investments – Accounts Currency
50 years – USD Depreciation against the CHF
Last 10 years – Relatively stable range mostly .90 to 1.0
Investments in US Stocks, Long Term – Generally make sense in any currency
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
It is mostly about making lots of small decisions correctly and avoiding big mistakes.
Tax Planning
Concepts
Tax Deferral (or acceleration)
Tax Free Income
Preferential Tax Rates
Advanced Techniques
Miscellaneous
Avoiding Tax Penalties
Avoiding Interest Rate Charges
Tax Planning
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
Tax Planning
Retirement - US Retirement Accounts – Accumulations
Existing IRA Accounts: Generally, tax deferred in the US and Switzerland and no wealth tax in Switzerland (traditional)
Annual IRA Contributions to lower US taxes – Possible, to lower Swiss taxes – Sometimes, consider a tax ruling
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
Tax Planning
Retirement - US Retirement Accounts – Distributions
Mismatch on Required distribution age: Switzerland (70), US (73)
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
Tax Planning
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 for US taxpayers or younger employes who are comfortable investing
Great savings vehicle
Great at deferring Swiss taxes (not US taxes)
Not a great investment vehicle (especially for younger employees)
No choice to take more or less risk, everyone pooled
Tax Planning
Retirement - The Second Pillar
Track your US Tax Basis in your Second 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
Tax Planning
Retirement - The Second Pillar – Distributions
Distributions Taxable Events in US, (minus US tax basis)
Movement to “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 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
Tax Planning
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
Tax Planning
Education - 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 US
Lots of flexibility in terms of owners and beneficiaries
Planning should be done carefully for Americans in Switzerland
Tax Planning
Gifting
US – $17k per year to annual individual (2023)
Switzerland – Depends on the Canton
Vaud has a gift tax when giving to children, Geneva does not
Lifetime exemption $12.92m (will sunset in 2025)
Gifting to Non-Citizen Spouse, $175,000 (2023)
Receiving a gift or inheritance from a non-US source
If over $100k from one person in one year, even a spouse, reportable on Form 3520
Be aware of Cantonal Rules in Switzerland on gifting
Tax Planning
Estate
US Estate Tax Exemption $12.92m 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
Tax Planning
Miscellaneous
Choice of Tax Preparer is important – though most don’t provide tax planning services 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.
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 & Switzerland have an Income Tax Treaty from 1996
US & Switzerland have a Totalization Agreement – Social Security Treaty from August 2014
Tax Planning
Small Business Owners
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
Tax Planning
Compliance Accuracy
Using the wrong F/X to convert income or account balances from CHF to 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 FBAR or FBAR filing errors
Failure to file Form 8938, the FATCA form 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
Making 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 attribution from a Swiss spouse (or any other foreign nationality) who is not a US citizen
Failure to report certain gifts or inheritances from foreign relatives
Failure to report certain Swiss income, such as family allocations, unemployment benefits, or reporting the incorrect amount of income