FAQ: Expat's Guide to US Tax

Finance, Taxes, Banking, Insurance and Retirement
1
As US tax season is rapidly approaching, I thought I would take a few moments to share with others on EF the single-best resource on US taxes for expats that I've come across: The Expat's Guide to US Taxes

I came across the guide last year as I prepared my US taxes, and it really is the first guide I've come across that is specifically geared towards Americans living overseas. Despite a long trawl through the tax books available on Amazon, nothing else even comes close.

This guide has information on who is required to file (and what to do if you should have been filing but didn't), how to handle foreign earned income, deductions, foreign tax credits and lots of other topics that are of interest to expats. Most helpfully, it includes samples of completed tax returns, which I found greatly clarified the guidance I'd seen elsewhere.

I learned more in two hours spent reading this than in weeks of what I'd gleaned from the IRS publications, chats with my tax accountant, and what I learned from US-focused tax guides.

Hope it's as helpful to others here as it was to me.

2
Hello,

This recommendation is fantastic. Many thanks since the tax issue is so unclear. It is greatly appreciated!

Ingrid

3
Thanks so much for this invaluable resource...it's making a tough decision clearer.

Best regards,

Marc

4
Strange... but the link doesn't work anymore. Anyone else having this problem too?

5
Tested link just now and it works for me!

6
This is GREAT! Answers a lot of questions I have and now I don't have to bother asking my accountant back at home. THANK YOU!!

7
...I am considering a job offer in Geneva, Switzerland. Being a US citizen I am worried about US taxation. What is the net impact here? Is it 100% certain I end up paying tax in both countries? If yes, is the impact material or not?

8
Yes, worry. Whether the impact is material or not depends on how much money you will be earning. Read the guide mentioned above to get a general understanding. We haven't had to do a year of taxes yet, but this is what I've figured out by reading (lots of great info on this site if you dig around a little).

Your first $91K earned abroad will not be taxed and you can claim a credit for foreign taxes paid on the rest (i.e. you will not be taxed double). Housing in Geneva is outrageously expensive, but you will get a housing deduction specific to Geneva that may or may not make it worth it. If you end up owing the IRS, it tends to be the difference between what you paid the Swiss government and what you would have paid the US government if you had lived there (i.e. being in a "low tax" country doesn't help you). Your tax shelters are limited -- if you use the Swiss pension scheme ("pillars 2 and 3") to reduce your CH taxes, as the Swiss do, the US will tax the money you put in -- and then the Swiss will tax it when you take it out, resulting in double taxation of those CHF's. People in the financial world may have finagled some other way to shelter money (non-qualified deferred compensation plan in the States? I think there are some fancy and advantageous expat contracts out there, but we are local). You can still take the US deductions that you always have -- charity, mortgage, self-employment expenses, etc. Our tax advisor thought that it would "come out in the wash" based on the information we gave him. Your decision has to be based on a lot more than $$$ or you may be very unhappy. Whatever you do, don't post on EF "Can I survive in Geneva on 120,000 CHF/year".

9
In the end, it depends on how much money you make of course. I've done my taxes here the last three years and have found the exposure to US tax to be none or minimal. In fact, if you have paid AMT (alternative minimum tax) in the past, you might just get a refund of that. I have and I would have never gotten those refunds if I was still in the US.

From what I understand, you shouldn't be 'double' taxed (the US and Switzerland have a tax treaty to prevent this), but some claim there are situations where this can happen. I would think this is rare. Many people will tell you to definitely pay a professional to do your taxes, but at least in my case, the amount I would have to pay a professional to do my US taxes, would be quite a bit greater than the taxes themselves.

Generally I would say that the tax situation should not make any difference in your decision to take the job or not. Keep in mind, even if you have to pay US tax, you will most likely still be paying less overall tax than you would in the US. This situation doesn't happen in most European countries, as their taxes are higher than in the US and you get a credit against your potential US taxes. Switzerland happens to a be lower tax country, however.

Best of luck,

Dan

10
If you make more than the exemption and don't have deductions... then you're going to owe. That's my understanding anyway.

11
Well in my case I have no 'extra' deductions and I've never been subject to US tax. Keep in mind the US tax is only on the amount above the exemption, not your entire income. Also we are only talking about US federal since you don't have to pay state tax (maybe some expats might who are on a short term work assignment though).

I calculate my tax rate every year as a 'flat tax' and my overall rate is about 10% less than what it was in the US.

Regards,

Dan

12
As previously mentioned, if you earn more than the FEIE and have no exclusions you will end up paying your swiss taxes plus US taxes. Geneva is one of the highest taxing canton so the bite would not be as painful as if you were elsewhere in Switzerland but it can be substantial. It's difficult to give figures without knowing your situation but your US tax liability can go as high as several thousand USD...

13
To anyone who says that the difference in tax rates is not material, or may only be a 'few hundred' or 'few thousand' francs, it's worth remembering that there are a number of variables that contribute to how much you'll need to pay in US tax. This includes:

1) Whether you're under or over the FEIE limit

2) The tax rates in your canton

3) The size of your salary

If you're under the FEIE limit, it's pretty clear that you're not going to end up with an additional US tax liability.

But this is Switzerland, so it's dangerous to assume that everyone automatically earns CHF120'000 a year. Yes, if you're Mr. Average EFer, living in Baselstadt (with a relatively high tax rate) and earning CHF120'000 a year (just a smidge over the FEIE limit), you'll probably only have a small additional US tax liability.

But if you've taken a job as a Supply Chain director for a multinational who have based themselves in Zug for tax reasons, and you're on a salary of CHF250'000 with a further annual bonus of CHF100'000, a CHF50'000 relocation allowance and private school tuition for your 3 kids (not an entirely unlikely situation for some on here), you'll find that the combination of your salary (call it close to CHF500'000 when you factor in the benefits-in-kind) and the very low rates of personal tax in Canton Zug mean that you're likely to end up writing a pretty large check to Uncle Sam each year with quite a few zeros at the end.

This has two implications -- first, it means that you need to be aware of what your likely liability is going to be. Second, it means that you may make different choices than a Swiss person would: for example, it costs a fortune to live in Canton Zug. You might choose to forgo the tax benefit of living in Zug and move to a higher tax canton where rents are cheaper. For a Swiss person, this is a zero-sum game (the reduced rent is countered by higher taxes) but for a US person, who will end up paying the difference between their Swiss tax liability and their US tax liability, this will save money overall.

This is definitely a case of one-size-doesn't-fit-all. Do your sums, and particularly if you earn well above the FEIE limit, consider your tax position before making commitments.

14
I see your point, and agree, if you're making that kind of money, then the stakes are different. However, it seems to me that you are saying that one should purposely pay more Swiss tax just to avoid US tax? My question would be wouldn't you'd want to pay less tax overall, regardless of who you pay it to? Wouldn't it make sense to live in a low tax canton and still pay US tax, if the total tax paid was less than living in a high tax canton? But maybe that's not the case?

Regards,

Dan

15
He is saying that the cantons have very different tax rates and the low tax cantons have significantly higher rents . Significantly. We chose to live in a higher tax canton with lower rents knowing that saving those extra francs in tax but paying it in rent would work against us -- better for us to pay lower rent (ours is at least half of what it would be in Zurich or Zug) and higher Swiss taxes. A low CH tax liability will raise your US tax liability, so you'll never be able to justify the higher rent. YMMV depending on how much you earn and how big an abode you will need. Is this as clear as mud?

16
Thanks for this.

I've got a question: What do you have to fill out if you are investing in a mutual fund? I've tried finding the appropriate forms on the irs website, but it's just a nightmare.

I don't plan on investing a lot of money at the moment, I'm still a student and my income is limited so I don't want to consult an expert.

17
I would heavily advise against it.

Foreign mutual funds are not very US friendly and fall under PFIC rules.

But, Form 8621 is what you need. Let me know if you want to discuss further

18
I am American, my husband is EU, we are in Basel on his expat position. We are thinking of buying a house in the US and renting it out. Can anyone speak from experience on how this would work toward my US taxes? Would I be able to deduct the mortgage payments against my tax liability? Will having us income (rent payments) ruin the expat benefits for me? Iäm sorry if this is the wrong thread and I'm sure I will need to get a professional tax advisor but wonder if someone who is in a similar situation (owning a home in teh US and collecting rent income while living abroad) could weigh in on the pros and cons. Thanks.

19
You can definitely deduct the mortgage payments against the tax liability.

The question is whether you can actually get a mortgage. The rules are

much more stringent than a few years ago.

I have now invested in my third house.

Rental income will not ruin any tax benefits of you being abroad.

Pro's: You are receiving equity and perhaps income for a house

that you do not live in.

Con's: 1. Losses cannot be deducted against your ordinary income, but income generated on the property will be subject to taxes.

2. Who is going to manage your property? If you get a company

to manage it, get a lot of references. I had a company that

was absolutely terrible and cost me a couple of thousand dollars.

Good luck!

HollidayG

20
The situation has changed. Whereas you used to be taxed on the amount by which you exceeded the exemption, you now 'go to the head of the class' on the tax table, which puts you in a much higher tax bracket. I have paid several thousand dollars in US tax over the last few years, but previously went many years without having to pay anything extra.

The next hook is the foreign accounts. They are being unbelievably draconian with these accounts. You really need to be 100% truthful about every little account you own or they can actually confiscate the whole thing.