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Questions About US/Swiss Income Taxes on Social Security Benefits

I have dual US/Swiss citizenship. I am planning on retiring in Switzerland and I will be eligible for U.S. Social Security benefits. Article 19.4 (Government Service and Social Security) of the Convention Between the United States of America and the Swiss Confederation For the Avoidance of Double Taxation With Respect to Taxes On Income (effective Jan. 1, 1998) reads: 4. Notwithstanding paragraph 2, social security payments and other public pensions paid by a Contracting State to an individual who is a resident of the other Contracting State may be taxed in that other State. However, such payments may also be taxed in the first Contracting State according to the laws of that State, but the tax so charged shall not exceed 15 percent of the gross amount of the payment.

I interpret this to mean that both Switzerland and the US will be able to tax me on my U.S. Social Security benefits, and that the U.S. cannot apply a tax rate greater than 15% to such benefits. Questions:

a) Is my interpretation correct?

b) If so, how do I apply the benefit of the 15% ceiling on my U.S. income tax return? (Form 1040) As far as I can tell, there is no worksheet in the 1040 instructions booklet that addresses this issue when computing the tax on Line 44 of the income tax return. Thanks.

-- tb

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tb
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No. You overlooked an important section of any tax treaty, the "savings clause". This is located in Article 1, Paragraph 2 of the US- Switzerland treaty. Under the savings clause, the US can tax its citizens as if the treaty were not in effect, except for the particular items listed in Article 1, paragraph 3. Since you are a US citizen, you are still subject to US tax on your social security income (as a US citizen, you are generally subject to US tax on your worldwide income, including the social security income). As a US citizen, however, you might find that a large part of your social security income is not taxable--it depends on your income levels.

If you were not a US citizen, but were collecting social security while living in Switzerland, you would file a W-8BEN form with the Social Secutity Administration indicating that you are eligible for a reduced withholding tax (the withholding tax for social security benefits payed to noncitizens is normally 30%). If there were a provision in the treaty that you were eligible to take advantage of, you would disclose that on Form 8833, which you would attach to your tax return.

--Chris

Reply to
cballard

Thanks, Chris, for pointing out the provisions of the savings clause. Please allow me to ask a couple of follow-up questions. Let's assume the scenario that at retirement, my income level will be such that I must file a U.S. income tax return and pay taxes. Let's furthermore assume that I must also file a Swiss income tax return and pay taxes on the same sources of income. Do you know if I am entitled to filing Form 1116 (Foreign Tax Credit) with my 1040 and get credit for whatever taxes I pay to the Swiss tax authorities? If this is not possible --and purely from the standpoint of U.S. income tax laws-- is there a way to legally mitigate double taxation for a person in my situation? I am also trying to decipher Article 23.1.(d) of the Convention: The way I interpret it, Switzerland must allow me to deduct whatever taxes I pay to the USA (with regards to Social Security only) and grant an income deduction of

1/3 of the net Social Security payments. Is my interpretation correct? Thanks.

-- tb

Reply to
tb

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