# US taxes on 2nd and 3rd pillar



## rwabel (Jun 24, 2014)

Hi all,

I am Swiss and just recently relocated to the US. I am wondering if I have to declare my 2nd and 3rd pillar accounts next year when I am filling my first tax form in the US.

What about the interest earned on my retirement accounts, are they subject to US income tax?

I was also told by someone that if I want to fill as jointly I would need to declare the whole year in the US, even though I entered the US on my L1B Visa end of April. Is that true?

Anyone in the same situation?

Thanks


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## BBCWatcher (Dec 28, 2012)

rwabel said:


> I am Swiss and just recently relocated to the US. I am wondering if I have to declare my 2nd and 3rd pillar accounts next year when I am filling my first tax form in the US.


OK, you'll have as many as three possible, separate declarations: FBAR (FinCEN Form 114), FATCA (IRS Form 8938), and IRS Form 1040 Schedule B (and possibly other tax-related forms -- see below for examples). FBAR and FATCA are for reporting the existence of the non-U.S. financial accounts, and Form 1040 (and its attachments and schedules) is for reporting the income from those accounts _whether or not that income is U.S. taxable_.

I don't see how you avoid reporting the income from those accounts as part of your tax filing (1040). (Taxability is a separate question.) So plan on that. Whether you also have to file FBAR and/or FATCA depends on how big the accounts are in aggregate.



> What about the interest earned on my retirement accounts, are they subject to US income tax?


In the general case, yes. The fact Switzerland might give those accounts Swiss tax preference is immaterial to the United States. Except...if there's a tax treaty that says otherwise, and there happens to be a tax treaty between the U.S. and Switzerland. So that's your first stop, to check the tax treaty to determine how the U.S. will treat those accounts. If you are eligible for a treaty benefit you would normally claim that benefit using IRS Form 8833.

Caution: You may be required to file IRS Form 8621 depending on how those funds are invested in your Swiss accounts and if the tax treaty offers no protection. It's always a good idea to be careful with tax filings, but be very careful there to get that part right.



> I was also told by someone that if I want to fill as jointly I would need to declare the whole year in the US, even though I entered the US on my L1B Visa end of April. Is that true?


Is that because your spouse is a U.S. person and subject to full year tax filing for 2014? If so, I think that advice is correct. I don't think it's possible for one spouse in a joint filing to be treated as a part year resident alien. Even so, it may still be to your mutual benefit to file jointly. You would presumably take the U.S. Foreign Tax Credit (FTC) to account for the income tax you've paid in Switzerland during 2014, so extending your 2014 tax year to the full year in the U.S. isn't necessarily a problem. It actually makes the filing simpler all around since there's only one joint tax return, and it's a full year. If the math works (in terms of your joint tax liability), fantastic.

Note that if the Swiss tax treaty offers little or no protection for your pillar accounts then you may wish to consider U.S. tax-advantaged retirement, educational, and/or medical expense savings accounts together with your spouse. That's especially true if Switzerland (or your future retirement country, if applicable) treats those U.S. accounts favorably. There's no such thing as a truly internationally tax-advantaged account, so expatriates have to be a little more careful about whether they use such accounts for savings. The U.S. tax-advantaged retirement accounts work for me, absent a surprise destination when I retire, but your mileage may certainly vary.


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## Bevdeforges (Nov 16, 2007)

If I'm not mistaken, the FATCA form (8938) is filed as part of your 1040 (regular income tax return) filing, not as a separate filing. (And not that it's relevant here, but if you don't have to file a 1040, then you don't have to file the 8938, no matter how much you have in the account.) So, basically two filings: Income tax returns and FBAR.
Cheers,
Bev


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## BBCWatcher (Dec 28, 2012)

Good point, Bev. FinCEN Form 114 is the one declaration that's separate (with a separate deadline and filing process) from the 1040-anchored forms and attachments.


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## rwabel (Jun 24, 2014)

@BBCWatcher
Thanks for your quick reply. No my wife is Swiss as well. I have paid my swiss taxes until the day I was no longer on Swiss payroll by my company. I left Switzerland by end of April, but was still on Swiss payroll by my company until end of May as I could only go on the US payroll after having received my SSN and get me transfered over internally. This was a relocation from my company.

The Swiss taxes are lower than the US taxes. Even though there is a threaty between Switzerland and US I would still end up paying a part to the US (difference). Question is indeed if I would need to pay taxes in the US for the whole 2014 or only from the time on I entered the US on my VISA (or what is the date that counts to be taxable in he US?).

In term of my accounts, if I would cash out tha money of my 3rd pillar this year. Would I still need to report that account as I would not have it anymore when I do report my taxes.

I was trying to find out if these accounts are taxable or not and was not able to find clear answers so far. Hopefully some Swiss person livin in the US might know this.


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## BBCWatcher (Dec 28, 2012)

OK, I think your start date for U.S. taxes is the date you entered the U.S. So you shouldn't have any particular joint/separate filing complications. You can just decide what makes sense (joint or separate tax returns) for that part year of 2014 and in future tax years. Usually a joint tax return.

No, you have the accounts now (after arriving), so they're reportable. You probably don't want to liquidate those accounts. Reporting and tax owed (if any) are separate concepts. Reporting doesn't cost anything.


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## rwabel (Jun 24, 2014)

Thanks for your answer. Seems indeed that I need to report everything and it's another question if they are taxable. As far as I found out 2nd and 3rd pillar interest earnings are taxable.

But maybe there are some foreign tax credits that can be applied?


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## BBCWatcher (Dec 28, 2012)

rwabel said:


> But maybe there are some foreign tax credits that can be applied?


Absolutely. Any Swiss tax you pay will likely be a U.S. Foreign Tax Credit. The same is likely true when (if) you move back to Switzerland.

I assume you checked the U.S.-Switzerland tax treaty. Did you find out if your second and/or third pillar accounts run afoul of the PFIC rules?

To expand on my earlier comment, liquidation of those accounts is _probably_ not a good idea because they'd then presumably be subject to U.S. tax on the gains (less any Swiss tax via the Foreign Tax Credit) unless a tax treaty says otherwise. The cost basis would be your original purchase price(s) -- how much you put in -- and you might even have some not-so-wonderful taxation of deferred income from your employer's contributions. The Swiss franc has appreciated in recent years, so that doesn't help either when translated to U.S. dollars. (The currency appreciation would be factored into the net gains.) And you'd presumably lose any Swiss tax advantages, maybe even paying a penalty. (I'm not exactly sure how they work, but that's a guess.) On top of all that, they might be PFICs, and then you'd get to pay a higher tax rate on the gains than the typical long-term capital gains tax rate.

Unless you really badly need that money now, or unless I'm very wrong, I'd leave those funds right where they are. As a general rule, _stationary_ money tends not to get taxed.


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## emr (Feb 10, 2016)

Hi rwabel,

I know this is an old post, but I am in the same situation (I moved to the US in January 2015) and I would be interested to know what you did for your US taxes last year. Did you fill the FBAR and FATCA forms in addition to the 1040? What about the 2nd and 3rd pillar?

Thanks!


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## elkm36a (Feb 19, 2016)

*Swiss first pillar taxes*

Hi, we worked in Switzerland a while back and now reside in the US. In 2015 my wife, who is 6 months older than me, first received the Swiss social security (first pillar) benefits in 2015. When I turned 65, I began to receive the first pillar benefits, and my wife was automatically paid a "lump sum" benefit. Are the Swiss first pillar benefits reportable and/or taxable in the US?

A tax treaty is posted on the IRS web site but it is difficult to understand.

Thanks


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## elkm36a (Feb 19, 2016)

*Swiss 1st pillar taxes*

Hi, we worked in Switzerland a while back and now live in the US. In 2015 my wife, who is 6 months older than me, first received the Swiss social security (AHV) benefits in 2015. When I turned 65, I began to receive the first pillar benefits, and my wife was automatically paid a "lump sum" benefit. Are the first pillar benefits reportable and/or taxable in the US?

A tax treaty is posted on the IRS web site but it is difficult to understand.

Thanks









rwabel said:


> Hi all,
> 
> I am Swiss and just recently relocated to the US. I am wondering if I have to declare my 2nd and 3rd pillar accounts next year when I am filling my first tax form in the US.
> 
> ...


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## Bevdeforges (Nov 16, 2007)

The trick with the tax treaties is that what you really want to read is the "Technical Explanation" - usually far more readable than the treaty itself.

In the Swiss treaty/explanation, go to Article 18. It looks to me like your Swiss pension is taxable in your state of residence - which means the US. Have the Swiss taken any sort of taxes or withholdings out of the amounts you or your wife have been paid so far?
Cheers,
Bev


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## elkm36a (Feb 19, 2016)

*Swiss 1st pillar taxes in US*

The Swiss did not take any taxes out from the 1st pillar monthly pension payments. So I guess it would be taxable in the US where we reside. 
The Swiss lump sum payment seems to be unique. For a couple, once the second partner starts receiving the pension, the first partner receives a lump sum payment and no longer a monthly pension. One monthly pension then is sent and probably intended for the couple. Although much appreciated, this lump sum payment appears to be mandatory based on my reading of the Swiss AHV instructions. 

I wonder how best to treat the lump sum payment for US tax purposes, since the payout was mandatory. Can it be stretched out, is there a cost basis, etc.?

PS: Although my wife was only a stay-at-home mom during our stay in Switzerland (+5 yrs), mothers are entitled to their own 1st pillar pension there. We did not initially realize this and the Swiss AHV wrote us a letter asking why she hadn't applied, which we then proceeded to do. How kind! 

Thanks





Bevdeforges said:


> The trick with the tax treaties is that what you really want to read is the "Technical Explanation" - usually far more readable than the treaty itself.
> 
> In the Swiss treaty/explanation, go to Article 18. It looks to me like your Swiss pension is taxable in your state of residence - which means the US. Have the Swiss taken any sort of taxes or withholdings out of the amounts you or your wife have been paid so far?
> Cheers,
> Bev


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## BBCWatcher (Dec 28, 2012)

elkm36a said:


> I wonder how best to treat the lump sum payment for US tax purposes, since the payout was mandatory. Can it be stretched out, is there a cost basis, etc.?


Stretched out, no, it doesn't seem so. The U.S. generally has a "constructively received" standard when considering income flows, and a lump sum payout is that. Otherwise it wouldn't be called "lump sum," probably.  There is a provision that allows rolling over pension lump sum payouts into an Individual Retirement Account (IRA), but unfortunately that provision only applies to U.S. pensions, not to foreign pensions, so that's unfortunate.

Regarding the cost basis, my understanding, after reading some IRS publications perhaps too quickly, is that you cannot include any amount in your cost basis unless Switzerland taxed that amount already when you (and/or your employer) contributed that amount. If it was all pre-tax money that went in then the cost basis is zero. Obviously you should double or triple check that, but that's what it looks like to me. (The IRS's language on this point is a bit confusing to me -- at least the language I found.) For example, if you put in 10 francs per month, and your employer put in 20 francs per month, and there was no Swiss income tax on either your or your employer's contributions, then none of that can be counted as cost basis. You thus have what amount to tax deferred income, Switzerland still won't tax it, but the U.S. now does as these never taxed funds are distributed, at ordinary income tax rates.


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## elkm36a (Feb 19, 2016)

*Swiss 1st pillar taxed in US*

The US taxes from the Swiss 1st pillar pension payments for US residents is quite significant, about 30% (25% federal + 5% state). 



BBCWatcher said:


> Stretched out, no, it doesn't seem so. The U.S. generally has a "constructively received" standard when considering income flows, and a lump sum payout is that. Otherwise it wouldn't be called "lump sum," probably.  There is a provision that allows rolling over pension lump sum payouts into an Individual Retirement Account (IRA), but unfortunately that provision only applies to U.S. pensions, not to foreign pensions, so that's unfortunate.
> 
> Regarding the cost basis, my understanding, after reading some IRS publications perhaps too quickly, is that you cannot include any amount in your cost basis unless Switzerland taxed that amount already when you (and/or your employer) contributed that amount. If it was all pre-tax money that went in then the cost basis is zero. Obviously you should double or triple check that, but that's what it looks like to me. (The IRS's language on this point is a bit confusing to me -- at least the language I found.) For example, if you put in 10 francs per month, and your employer put in 20 francs per month, and there was no Swiss income tax on either your or your employer's contributions, then none of that can be counted as cost basis. You thus have what amount to tax deferred income, Switzerland still won't tax it, but the U.S. now does as these never taxed funds are distributed, at ordinary income tax rates.


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