128 thoughts on “Ending U.S. Citizenship-Based Taxation”
@ND
That is how it should work but if the present treaty is overridden with TTFI and no other is negotiated to take it’s place there are no safeguards. I already had to do battle with my cantonal Swiss tax authority over my SS being double taxed until I found the Swiss/US tax treaty for NRA’s and pointed it out to them. Without a treaty you are at their mercy.
“While you were a USC, you had to file a US tax return in order to use USC tax breaks to reduce your US tax liability.”
No, I did not use any tax breaks. At my level of income, the amount of US tax was zero
Yes. As a citizen, you were entitled to file a return in order to pay tax at the rate prescribed for your income level, instead of paying the standard withholding rate. Now that you’re no longer a citizen, you’ve lost that benefit but you now are entitled to claim treaty rates, which you couldn’t do before.
Whether you’re better off with the USC benefits or the treaty benefits depends on your particular circumstances.
Heidi – there’s a bit of explanation on PWC’s website as to how Switzerland avoids double taxation:
As far as a DTT is applicable, irrecoverable foreign taxes on investment income (interest, dividends) are usually credited against and up to the respective actual Swiss tax on this income. Unused credits cannot be carried forward.
For all other income and assets, Switzerland applies the ‘exemption with progression’ method with regard to treaty countries to avoid double taxation. Therefore, Switzerland will not grant a credit for foreign taxes. The only exception applies with regard to the treaty rate on foreign source interest, royalties, and dividends.
ncome and wealth taxes levied in countries with which Switzerland has not concluded a DTT can neither be credited against Swiss taxes nor is the underlying income or assets exempt from Swiss taxation. However, the taxpayer may apply for a pre-tax deduction in the amount of irrecoverable foreign taxes.
Another website explains “exemption with progression:
Under the exemption-with-progression method, the state of residence provides an exemption from its tax for income earned in the state of source, but the residence state retains for itself the right to take the exempt income into account for the purposes of determining the marginal rate at which the taxpayer’s non-exempt income is subject to tax. The exemption with progression method prevents a taxpayer from taking advantage of a lower tax bracket in the state of residence by earning income abroad.
So it looks to me like you won’t be double-taxed, regardless of whether there is a treaty or not in future.
@Plaxy
OK, thanks for that, at the moment everything is working as it should but I will save your research for a future date should it be needed…but once bitten
I get my US private pension at a 0% withhold and it is taxed entirely in Switzerland at a rate of approx. 30%
For my US SS the US withhold is 15% but my Canton first wanted to tax the entire pension. I protested and they offered a ‘concession to tax the remaining 85% at the Swiss rate. Say the effective tax rate in Switzerland is 30% that would mean I would be taxed on my entire SS pension at an effective rate of 40.5%. Not double taxed but nasty nonetheless. Until I showed them the treaty they thought they were doing me a favour. I don’t fancy another fight if the treaties are voided.
“For my US SS the US withhold is 15% but my Canton first wanted to tax the entire pension. I protested and they offered a ‘concession to tax the remaining 85% at the Swiss rate. Say the effective tax rate in Switzerland is 30% that would mean I would be taxed on my entire SS pension at an effective rate of 40.5%. ”
Sounds similar in principle to what happens in the UK, except that the UK treaty provides for social security pensions to be taxed exclusively in the residence state. Consequently, the US does not withhold, and I pay my UK tax rate on the whole of the pension. Bad luck that the Swiss treaty is different; perhaps it will be revised at some point, to allow social security pensions to be taxed only in the residence state. That’s what happened with the UK treaty – around 2002 I believe.
If Switzerland has concluded a DTT with a peculiar country but the peculiar country uses its Last In Time rule to renege on the DTT, which provision does Switzerland enforce? Exemption-with-progression that would still make the total tax approximately correct, or the non-DTT version that would produce approximately (though not completely) double taxation?
According to the site I quoted above, if there’s no treaty the recipient of foreign income “may apply for a pre-tax deduction in the amount of irrecoverable foreign taxes.”
Article 19
“Under paragraph 4, the United States will limit its taxation of social security and other
public pensions paid to Swiss residents to 15 percent of the gross payment. Further, paragraph 1(d) of Article 23 (Relief from Double Taxation) provides that Swiss residents subject to U.S. taxation of benefits under paragraph 4 of this article will receive a deduction from Swiss taxable income of an amount equal to the tax levied in the United States on the benefits, plus an exemption of one-third of the net amount of such payment. Double taxation of the benefits will, thus, be mitigated. For example, a U.S. social security payment of $100 to a Swiss resident, not a U.S. citizen, will be subject to a U.S. tax of $15. Switzerland will tax only $56.70 of the benefits ($100 minus $15 minus $28.30 (one-third of $85.00)). Assuming a Swiss tax rate of 25%, the Swiss tax will be $14.80, for a total tax burden of $29.80.”
It does not bode well if a lay person has to point out an existing treaty and argue for their rights to a federal tax office.
Heidi – “It does not bode well if a lay person has to point out an existing treaty and argue for their rights to a federal tax office.”
I don’t know about Switzerland but if a UK taxpayer wants to claim a reduced tax rate it’s up to the taxpayer to make the claim.
@Plaxy
“I don’t know about Switzerland but if a UK taxpayer wants to claim a reduced tax rate it’s up to the taxpayer to make the claim.”
Surely it’s up to the tax authority to be cognizant of the rules governing taxation of foreign pensions. I explained the situation to them all they had to do was go look it up . It can’t be the first one they have dealt with. Their attitude seems to be take what you can get away with. That’s why I think many of us may have a fight on our hands if TTFI passes and tax treaties are overridden.
“Surely it’s up to the tax authority to be cognizant of the rules governing taxation of foreign pensions.”
I don’t know about Switzerland. In the UK, the taxpayer would need to invoke the treaty to claim treaty benefits.
If I were in your place I would seek advice from the Swiss tax agency. Or see if there’s instructions on their website.
@Plaxy
Right now all is as it should be, will have to wait to see if TTFI passes.
If things changed for the worse and the Swiss try to take a bigger cut, could you not deposit the SS payments to a US account (that won’t be reported due to lack of reciprocity) and use the money outside of Switzerland or on an ad hoc basis?
Plaxy
Ha,
I could,……
It’s both SS and private pension that would be affected
The Swiss expect me to get SS and also take a distribution from my private US pension every year, in fact I have to per the TIAA pension rules and if my reported income suddenly dropped precipitously I am sure there would be questions.
Heidi – I believe you’re responding to Nononymous, actually. 🙂
@nononymous
Sorry, I addressed plaxy rather than you !
“Surely it’s up to the tax authority to be cognizant of the rules governing taxation of foreign pensions.”
Shirley doesn’t work for a tax department.
Sorry my example isn’t Switzerland. IRS personnel aren’t cognizant of IRS rules governing taxation of US non-resident citizens, and things get worse when the DOJ and courts get involved.
@Norman
The IRS aren’t cognizant of IRS rules governing the taxation of NRA’s Social Security either.
They said I owed them 50% of my yearly SS payments, as though Switzerland didn’t have a tax treaty. After two years of my letters and their demands , it took a young German man who worked at the US Embassy in Frankfurt to sort it out, which he did overnight.
I suspect that as they use SZ as the code for Switzerland instead of CH, that they assumed I was living in Swaziland without a SS tax treaty.
Marco:
“Does anyone know when this is going to be voted on?”
“Ryan says tax cut 2.0 vote still planned, despite SALT hangups”
Bloomberg News reported Tuesday that largely because of the SALT cap dilemma, House Republicans were hitting the pause button on “Tax Reform 2.0” legislation, according to three GOP aides who requested anonymity to speak about the matter. The lawmakers had wanted to weigh the political benefits and risks of a vote.
…
Ryan’s comment signals House leaders believe using a second bill to highlight the tax cuts in the two months leading up to the midterms will do more good than harm, even though some Republicans have steered away from campaigning on the law. The tax law’s approval has consistently hovered below 40 percent in recent polls.
“We’re not resting on our laurels,” said House Majority Whip Steve Scalise. “We’re seeing this great economic growth and so we’re starting to put together Tax Cuts 2.0.”
House Republicans have enough members to pass the bill without the support of the 11 lawmakers from high-tax states who voted no on the 2017 tax overhaul, and are likely to do so again. The legislation isn’t expected to win over any Democrats, who unanimously opposed last year’s tax bill. And it has slim chances of passing the Senate, where it would need Democratic support — which is why the effort has largely been viewed as a political messaging tool for Republicans.
@ND
That is how it should work but if the present treaty is overridden with TTFI and no other is negotiated to take it’s place there are no safeguards. I already had to do battle with my cantonal Swiss tax authority over my SS being double taxed until I found the Swiss/US tax treaty for NRA’s and pointed it out to them. Without a treaty you are at their mercy.
Yes. As a citizen, you were entitled to file a return in order to pay tax at the rate prescribed for your income level, instead of paying the standard withholding rate. Now that you’re no longer a citizen, you’ve lost that benefit but you now are entitled to claim treaty rates, which you couldn’t do before.
Whether you’re better off with the USC benefits or the treaty benefits depends on your particular circumstances.
Heidi – there’s a bit of explanation on PWC’s website as to how Switzerland avoids double taxation:
http://taxsummaries.pwc.com/ID/Switzerland-Individual-Foreign-tax-relief-and-tax-treaties
Another website explains “exemption with progression:
https://www.irwinlaw.com/cold/exemption_with_progression
So it looks to me like you won’t be double-taxed, regardless of whether there is a treaty or not in future.
@Plaxy
OK, thanks for that, at the moment everything is working as it should but I will save your research for a future date should it be needed…but once bitten
I get my US private pension at a 0% withhold and it is taxed entirely in Switzerland at a rate of approx. 30%
For my US SS the US withhold is 15% but my Canton first wanted to tax the entire pension. I protested and they offered a ‘concession to tax the remaining 85% at the Swiss rate. Say the effective tax rate in Switzerland is 30% that would mean I would be taxed on my entire SS pension at an effective rate of 40.5%. Not double taxed but nasty nonetheless. Until I showed them the treaty they thought they were doing me a favour. I don’t fancy another fight if the treaties are voided.
“For my US SS the US withhold is 15% but my Canton first wanted to tax the entire pension. I protested and they offered a ‘concession to tax the remaining 85% at the Swiss rate. Say the effective tax rate in Switzerland is 30% that would mean I would be taxed on my entire SS pension at an effective rate of 40.5%. ”
Sounds similar in principle to what happens in the UK, except that the UK treaty provides for social security pensions to be taxed exclusively in the residence state. Consequently, the US does not withhold, and I pay my UK tax rate on the whole of the pension. Bad luck that the Swiss treaty is different; perhaps it will be revised at some point, to allow social security pensions to be taxed only in the residence state. That’s what happened with the UK treaty – around 2002 I believe.
If Switzerland has concluded a DTT with a peculiar country but the peculiar country uses its Last In Time rule to renege on the DTT, which provision does Switzerland enforce? Exemption-with-progression that would still make the total tax approximately correct, or the non-DTT version that would produce approximately (though not completely) double taxation?
According to the site I quoted above, if there’s no treaty the recipient of foreign income “may apply for a pre-tax deduction in the amount of irrecoverable foreign taxes.”
@Plaxy
The tax treaty gives me a better deal than the one they were offering.
Here is the US/Swiss treaty
https://www.irs.gov/pub/irs-trty/swistech.pdf
Article 19
“Under paragraph 4, the United States will limit its taxation of social security and other
public pensions paid to Swiss residents to 15 percent of the gross payment. Further, paragraph 1(d) of Article 23 (Relief from Double Taxation) provides that Swiss residents subject to U.S. taxation of benefits under paragraph 4 of this article will receive a deduction from Swiss taxable income of an amount equal to the tax levied in the United States on the benefits, plus an exemption of one-third of the net amount of such payment. Double taxation of the benefits will, thus, be mitigated. For example, a U.S. social security payment of $100 to a Swiss resident, not a U.S. citizen, will be subject to a U.S. tax of $15. Switzerland will tax only $56.70 of the benefits ($100 minus $15 minus $28.30 (one-third of $85.00)). Assuming a Swiss tax rate of 25%, the Swiss tax will be $14.80, for a total tax burden of $29.80.”
It does not bode well if a lay person has to point out an existing treaty and argue for their rights to a federal tax office.
Heidi – “It does not bode well if a lay person has to point out an existing treaty and argue for their rights to a federal tax office.”
I don’t know about Switzerland but if a UK taxpayer wants to claim a reduced tax rate it’s up to the taxpayer to make the claim.
@Plaxy
“I don’t know about Switzerland but if a UK taxpayer wants to claim a reduced tax rate it’s up to the taxpayer to make the claim.”
Surely it’s up to the tax authority to be cognizant of the rules governing taxation of foreign pensions. I explained the situation to them all they had to do was go look it up . It can’t be the first one they have dealt with. Their attitude seems to be take what you can get away with. That’s why I think many of us may have a fight on our hands if TTFI passes and tax treaties are overridden.
“Surely it’s up to the tax authority to be cognizant of the rules governing taxation of foreign pensions.”
I don’t know about Switzerland. In the UK, the taxpayer would need to invoke the treaty to claim treaty benefits.
If I were in your place I would seek advice from the Swiss tax agency. Or see if there’s instructions on their website.
@Plaxy
Right now all is as it should be, will have to wait to see if TTFI passes.
If things changed for the worse and the Swiss try to take a bigger cut, could you not deposit the SS payments to a US account (that won’t be reported due to lack of reciprocity) and use the money outside of Switzerland or on an ad hoc basis?
Plaxy
Ha,
I could,……
It’s both SS and private pension that would be affected
The Swiss expect me to get SS and also take a distribution from my private US pension every year, in fact I have to per the TIAA pension rules and if my reported income suddenly dropped precipitously I am sure there would be questions.
Heidi – I believe you’re responding to Nononymous, actually. 🙂
@nononymous
Sorry, I addressed plaxy rather than you !
“Surely it’s up to the tax authority to be cognizant of the rules governing taxation of foreign pensions.”
Shirley doesn’t work for a tax department.
Sorry my example isn’t Switzerland. IRS personnel aren’t cognizant of IRS rules governing taxation of US non-resident citizens, and things get worse when the DOJ and courts get involved.
@Norman
The IRS aren’t cognizant of IRS rules governing the taxation of NRA’s Social Security either.
They said I owed them 50% of my yearly SS payments, as though Switzerland didn’t have a tax treaty. After two years of my letters and their demands , it took a young German man who worked at the US Embassy in Frankfurt to sort it out, which he did overnight.
I suspect that as they use SZ as the code for Switzerland instead of CH, that they assumed I was living in Swaziland without a SS tax treaty.
Marco:
“Does anyone know when this is going to be voted on?”
Grover Norquist tweeted yesterday:
“Tax Reform 2.0 moving forward” (three proposed measures)
and
“I am working to include tax fairness for Americans abroad”
https://mobile.twitter.com/GroverNorquist/status/1038106865513717760
According to “Accounting Today” (https://www.accountingtoday.com/articles/ryan-says-tax-cut-20-vote-still-planned-despite-salt-hangups, 05 September):
“Ryan says tax cut 2.0 vote still planned, despite SALT hangups”
Any word on this? Any updates?
Has this been voted on yet?
Press report (9 Sept):
http://americanexpatfinance.com/news/tax/item/17-george-holding-s-bill-what-we-know-so-far
I don’t know if there may have been further developments since then.
I had heard this was supposed to be voted on by the end of September. It is now October, any word on this???
Presumed dead, or perhaps merely suspended until after the elections.
Only Holding knows what he actually intends to propose, if anything.