2 - The Swiss-US Tax Mistakes Nobody Warns You About with Darlene Hart

Julia Tatje: Listen, this gentleman could have avoided a lot if he had his Swiss return done correctly first. and then given it to his US CPA, would have been able to determine what he should be filing and what he shouldn't be filing. Was he a green card holder? He was a green card holder, with regards to the client that we spoke about, ⁓ I would say that, first of all, if that individual would have gone and gotten good advice, paid for proper Swiss tax expert to help him do his Swiss return and then given a copy of that Swiss return to his US CPA. His US CPA would have seen very clearly that he was paying Social Security here in Switzerland. Because he told me that he never shared any Swiss return with his CPA. That's so wrong. The gentleman was a green card holder, so therefore he's subject to US tax worldwide, as long as he's got that green card. And he's working in California, so he's subject to California state income tax and federal income tax on all of his income, but only California state as a nonresident on his work days there. let's just say He screwed up all the way around. Yes, he did. And so did his advisors, because they weren't aware, and they didn't properly advise. Well, they were not talking to one another. And I think that is a position. This one's true for any Swiss individual moving into the United States or any American individual living abroad. You've got to have your advisors abroad talking to you, whoever is doing your US returns, whether it's US tax and financial or a local CPA in the United States. And to be honest with you, we do a lot of cleanup work for work that's been done by CPAs in the United States because they don't understand the foreign side of the US tax law. and they don't know enough to actually. look at a Swiss return. First of all, it's in German or French or Italian or whatever. It's not an English language. And they don't know enough about the law to understand what the elections they should be making on a US return or could make or the treaty claims that they could make to decrease the individual's overall tax liability. So it's a mistake for anybody who is cross border and subject to US tax. So what are the most common mistakes people make. ⁓ OK. All right, but like this individual, he thought his entire salary was going to be subject to US federal and California state. And I said, no, no, that's not true. Yes, at the federal level, but definitely not at the California level. I said, so your US ⁓ EPA should request a refund of the Social Security tax. that they paid to the US government and they should only pay California state non-resident tax on only a portion of his salary, not his entire salary. They just screwed up from 50 ways to fund it. What can I say? So luckily most people don't hit all the spots and they don't tick all the wrong boxes. But there are things that we see a lot that Americans here in Switzerland perceive wrongly or green card holders. can you tell a few things that like misconceptions? Misconceptions, major misconceptions are sometimes Americans believe that if they leave the country they're no longer subject to US tax. It's not something you learn in grade school or high school or even in college. unless you're taking tax courses or accounting courses. So it's not necessarily widely known. Your advisors should know this. But I have to tell you a story. had this client. He worked on the oil rigs in the North Sea. ⁓ So he's up in Aberdeen, up in Scotland. his accountant or his lawyer, who was it? A US tax lawyer in the United States wrote a little later. A tax lawyer, get this. Atlanta, Georgia. put in writing, black and white. I'm sorry, you're not in the United States. You don't have to file US returns anymore. I thought, oh my God. Did you send this guy a present like here's the law? No, I actually called the lawyer and I said, excuse me, I think you need to go back to law school. know, this is, Americans are subject to tax worldwide and here's the code section, here's the regs. And I says, you need to bring yourself up to date. But he found that oil worker found out. in Aberdeen, one of his workers that he was working with. Told him, says, no, no, you're subject to US tax. ⁓ So bottom line, if you have a US passport or a green card, no matter where you go on this planet, maybe if you go to the moon, I'm not sure about that. True. No, of course, it doesn't matter where you are. OK. So even if you go to the moon, you still have to file with the US. That's very true. Yeah. It's crazy. know. Another story for you, and this is a crazy story, but I would love to get it out there. I have a Italian lady who built up a very successful business here, and she's got businesses in seven different countries here in Europe. And then she decided to go and expand and go into the United States. And so she went to New York, and she decided she was going to do business in the US instead of a business in New York. And I said, OK, that's fantastic, and this is what you need to do, et cetera, et cetera, and put her in touch with an accounting firm and all the rest of the stuff. But when it came down to doing her US tax return, she had all of these companies abroad, which were controlled foreign corporations because she was the majority shareholder. She was not subject, well, she was subject to the US guilty tax at the corporate level, at the federal level. she was able to get a deduction, take certain federal deductions to minimize her exposure to this guilty tax. But New York State doesn't allow the same deductions, does not allow the same deductions. So she ended up with a huge tax bill to New York State, which she didn't have to. So similar to Switzerland, we've got 26 cantons and you've got 50 states. Each state has different laws. For any foreign national who's going into the United States, really do have to get advice prior to going into the United States. So that's a big issue. And what we also see a lot is people living here in Switzerland then going back to the US for retirement and having the fun idea of withdrawing their Pillar 2 or Pillar 3 money. I mean, if they have Pillar 3, potentially it was a bad idea for them being Americans anyway. But let's assume they have it and now they want to withdraw it and they do that while sitting in taxes New York or LA. The IRS will say thanks. The state will as well. Yeah, so it's interesting. You have to understand the treaty and when it comes to pensions, that's a whole ball of wax. That is a complex area. We've got... Well, we've got many stories to tell, like you, with the Americans moving back to the States, we've got the Swiss who lived and worked in the United States, and they have these huge 401ks, and then they roll over to an IRA, and then they come back and say, yes, I want to retire back in Switzerland. And they decide they want to take that money out. And I'm there, oh my God, under the treaty, it's going to be subject to tax in Switzerland. This is what you're still going to have to file US returns and make a treaty claim every time you take money out of that. And you don't want to take it all out at once. Let it grow tax-free. It grows tax-free in both countries, both the US and Switzerland. So don't take it out of your US IRA. So the biggest you can for them is, okay, I don't live in dollars anymore. Yeah. And in the United States. I prefer Swiss francs. I prefer Swiss francs. There are brokers, you know, and they will manage your money, your IRA, which cannot leave the borders of the United States. but they will manage it in Swiss francs or euros or whatever investment portfolio you would like. So it's interesting, you've got to hunt and find those people, but both Julia and I are very familiar, we know a lot of these investment managers. Yes, so like bottom line, we can say most of the time there's a solution, but it's better to inform yourself before and act later, not the other way around, because we might just end up cleaning up a mess. And it might come with a bill. Not our bill, but as well. But a bill from Social Security or taxes, Swiss ones or US ones that you could have avoided. It could be a problem. Yes, it could be a problem. I think there's tons of stories to tell. what I see a lot is, I mean, is the pillar three in Switzerland and everybody's keen on saving taxes. And there's also Americans that heard from their coworkers, neighbors, Swiss friends, do this Pillar 3A, it's going to save you taxes. Putting money for an American living in Switzerland, putting money into a Pillar 3. Well, first of all, mandatory pension contributions employer and employee for pillar two, but when you come to pillar three, that's voluntary. It's voluntary. so it's up to you. And yes, you can decrease your Swiss tax, but at the end of the day you decrease your Swiss tax. It means you've got no foreign tax credit to offset your US tax. you have now there is a breaking point, you know, if you put money into an IRA and you put money a bit of money into a Swiss pillar three, then have your accountant, whoever's doing your US returns, They're all done on computer and they're all done on computer programs so we can all run analysis and say okay what happens if I put 15 grand into my IRA and I put 15 grand into a Pillar 2 or Pillar 3 pension. Does that decrease my overall Swiss and decrease my overall US? So there might be a way to actually save taxes but by just paying into a Pillar 3A Most US people will end up with a zero or with ⁓ a net zero. Exactly. It's not deductible in the United States. Okay, because it's a Swiss pension. a foreign pension. So you're not going to get that kind of a deduction. So it's interesting. Those are one of the big things. I think one of the big things that we see a lot are you have Americans married to non-Americans. So let's say we have an American woman married to a Swiss gentleman. And of course, Swiss, none of this income that the Swiss gentleman earns is going to be subject to U.S. income tax, only what the wife earns. Now, if she's not working, she doesn't necessarily have to file a return. But when you start looking at what the husband has made and what he's earning and where he's put that money, into a brokerage account, into a bank account, where is the investments? And does she have an ownership interest? If she has no ownership interest, no problem. She doesn't even have to file an F bar. But a lot of people misunderstand that. If the husband gives his wife a credit card on his Swiss bank account, she has a financial interest in that account and so therefore she has to file an FBAR, reported foreign bank account. US tax law is really interesting. And like, it's to us Swiss, it sounds like crazy ideas. like we are not asking who does the credit card belong to? Is it the husband or the wife or the nationalities also don't matter for Swiss taxes, but they do for US taxes. Yes, they do. And yes, because with this passport or the green card, you can't get away from that. So it's important to look at both sides and not optimize on Swiss taxes blindly. I would never advise a US person the same way I do for any other nationality. That's very true. The US nationalities are totally different. So I would say those are the pension issues and the F bar, the report of foreign bank accounts, who needs to file and who doesn't. And ⁓ our daily issues comes up with many, many, many people. And it's so human because most of our clients are not like... on doing anything wrong on purpose. They are trying their best not to make a mess, but sometimes it ends in the other way. There's one other thing that I'd really like to bring up because I don't know who your audience is, but when you have foreign nationals, Swiss, anybody who is not an American. who is investing in the stock market, and you're talking about wealthy people would have 20, 30, 40 % of their entire portfolio, investment portfolio, invested in the US stock market. At least 30, 20, 30%. Those individuals are subject to state tax when they die. Because they own those shares in their own name. And after all of the problems that the Swiss banks went through, under the deferred prosecution agreement a few years ago, about what, must be 10 years ago now. Approximately, potentially, yeah. the banks are very wary about when someone dies taking a client with a US portfolio and saying, okay, here's the distribution to the heirs. They say, no, no, no, no, can't distribute until such time as we get a letter. from the IRS that says that you have an estate tax return that is due and should be filed because of your ownership interest in a U.S. portfolio. That stuff can be avoided. It's very easy to avoid that. Those U.S. portfolios should be owned or owned by a foreign corp, Swiss corp, I don't care what the foreign corp is. Yes, and you mentioned it, I mean this affects people that... maybe never ever set a single foot on US ground and they have no idea. the thing is, if I see something like this in a Swiss tax return, I will point it out to the client and tell them, listen, there might be an issue. But if your Swiss tax advisor isn't aware of that, he will not point it out and then there might be a not so nice surprise later. is very true. But it's not just the Swiss. Now there is a state tax treaty. The US only has a state tax treaty with 13 different countries. And there is a state tax treaty between the United States and Switzerland. And we had this one gentleman, one client who passed away, who passed $600 million to his daughter. And his daughter, American citizen. So she's quite wealthy now. That was not the major issue. The major issue was he had a huge amount invested in the United States, all in his own name. So we had to do an estate tax return, a US estate tax return, and he paid under the US-Swiss estate tax treaty, he only ended up paying a million or two, which wasn't bad compared to the 40 million that he had invested in the United States. But still, he could have avoided it if he had put a wrap or done some estate planning, proper estate planning? Yes. So like it's not only about the yearly tax return, but it is also about estate planning and investment planning. And we could potentially talk about it for like three or four hours in a row. So you need to come back, Darlene. You need to come back. So for me, I like the benefit of working with you. is that I can offer a full service. I'm not a big four with hundreds of employees and Swiss and US tax experts and you don't have Swiss tax experts in your company, but we can both offer a full service to our clients by cooperating. And I really love that because we actually speak with each other. We exchange the information we receive from the client. I don't know. I'm sure you probably have seen it in a lot of your clients and stuff, or possibly you have, but. A lot of times, because we always, bar none, every single one of our clients who live here in Switzerland, we get a copy of the Swiss return. If they live in Germany, we get a copy of the German return. Same thing in France, whatever, doesn't care, I don't care where they live. We get a copy of the return and we also make sure we talk personally to whoever is preparing that return and go over the issues because there's so many issues. We are blessed. I know, you guys are major blessed. That discussion back and forth is paramount. The gentleman that we spoke to earlier in our podcast here, ⁓ if he would just had those two people talking together, they would have both found out the problems and the issues. Yes. Because they weren't stupid people. the person who did the Swiss return knew was a good Swiss expert, but just didn't know or deal with the treaty, the Social Security. a totalization agreement between the two countries. So it's all about communication. And I think it's important. And what we both offer is ⁓ a little fun along the way. taxes are sad enough, especially if you're subject to Swiss and US taxes. It's like a chess game. I love it. You know, the complexity. It really is interesting when you start you know, messing around with different legislation and ⁓ you've got assets and businesses in multiple locations and you've got to deal with multiple jurisdictions. I mean, I know you do the same. You know, you're not just dealing with American expatriates living here in Switzerland. Switzerland is full of foreign nationals. Yes. And you're doing a darn good job. Thank you. Working with them. So it's good. And I really love that we can take off like this metal burden of people because A lot of people are afraid of the IRS for a reason. This is true. also don't want to mess with the Swiss tax authorities. know, but least the Swiss tax authorities, there's a whole body at the end of the phone. Actually, yes, there's humans working there. are humans working for the Swiss tax authorities. Whereas in the States, you have a huge computer in the sky who spits out all of these ⁓ computer generated letters and then You sit hours on the phone trying to get a warm body at the other end of the phone. Most of the time you can't. And your letters go unanswered or they will be answered and said, excuse me, but we have not had time. know, there letters from the IRS will say that computer generated letters saying that we do not have time to talk to you right now. Please give us another 60 days or 90 days. No, that's really different here. And that's not true here in Switzerland. But you do need somebody to deal with that. Now, I've got another ⁓ client who is ⁓ two Americans, believe it or not. And one is trying to obtain his Swiss citizenship. Yes. And they're getting a divorce. And so they have assets in three different countries. trying to deal with divorce laws. And the laws of why he's claiming tax residency in Switzerland when he's actually spending more time in the United States, beyond me. the divorce lawyer said, excuse me, darling, why is this? What's happening? Why are they doing this? And I said, yeah, no, I don't know. You need to get somebody from Lugano, the tax authorities, who is familiar with the tax authorities in Lugano, who can actually talk to them to find out what's going on, why he's ending up paying $2 $3 million. worth of Swiss tax. And I thought, ⁓ Lord Almighty, where's Julia? I need Julia. So unfortunately, I'm not doing Lugano because my Italian is very limited to the menu. Such is life. Yes, such is life. But when it comes to the German speaking cantons, I'm happy to help and to step in. Perfect. So Darlene, thank you so much for joining me. I think we could honestly go on for hours. Yes. And ⁓ I already would invite you again. You do? Thank you. Yeah, because I want you to call me young lady on being recorded again. No, I'm just kidding. It's really very, very valuable for my clients and your clients. And I think ⁓ we should tell a few other stories. I think you know what I'd love to do, I mean, because there are so many problems on the pension side, you know, that it affects all of the clients here. It affects your clients going into the US, and it affects the Americans coming here. And understanding the complexities of the whole pension issue, I really think that would be. then estate, oh my god, the estate side. So you've got plenty. Yes, there's plenty of topics. There's going to be plenty more episodes of Tax and the City. So thanks for joining me and we can close it like Carrie does, just like that. All the contact details you could possibly need ⁓ are waiting for you in the show notes. Thanks for tuning in and see you next time on Tax and the City.