The IRS ain't gonna get my money! My wife's, however...
January 3, 2008 1:22 AM Subscribe
TaxdodgeFilter: My wife is a US citizen, I'm a british citizen, and we both live in Switzerland. I pay my taxes here in Switzerland (and nothing to the UK), but what will she have to pay to the IRS?
Some background info: My wife and I got married end of May 2007. She entered Switzerland on a tourist visa mid-May 2007, and got a semi-permanent residency visa (valid for one year, but that just gets rubber-stamped as long as she's not nabbed for criminal activity or somesuch). The visa can be changed into a permanent residency visa after 5 years & no criminal activity.
From what we've been researching online, there's a flurry of different forms & regulations, under which she has to declare ALL her income for 2007 (both money earned while she was still in the US, as well as money earned here in Switzerland), or just the US income, or BOTH of our incomes (under which *I* will get taxed by the IRS as well... wtf!?), etc. etc.
Can anyone help us out of this beaurocratic maze?
Some background info: My wife and I got married end of May 2007. She entered Switzerland on a tourist visa mid-May 2007, and got a semi-permanent residency visa (valid for one year, but that just gets rubber-stamped as long as she's not nabbed for criminal activity or somesuch). The visa can be changed into a permanent residency visa after 5 years & no criminal activity.
From what we've been researching online, there's a flurry of different forms & regulations, under which she has to declare ALL her income for 2007 (both money earned while she was still in the US, as well as money earned here in Switzerland), or just the US income, or BOTH of our incomes (under which *I* will get taxed by the IRS as well... wtf!?), etc. etc.
Can anyone help us out of this beaurocratic maze?
Best answer: I'm an expat American, living in the UK. My taxes have grown so complicated that I pay an accountant to do them, but in general here is what I understand about the law:
She will have to pay on her worldwide income, but will have, presumably, a pro rata Section 911 exemption on earned income earned outside the US (once she completes bona fide residence / physical presence tests that show her to be resident outside the US for a year (335 out of 365 days, I think)). Her US-sourced income (including wage/salary, interest, dividends, capital gains) will be taxable in the US, as will her non-earned / passive income outside the US. She can claim standard exemptions and deductions.
She should have an option on whether you file jointly or separately, so you can keep yourself outside the scope of US tax by having her file separately - she will pay at a slightly higher rate and forgo standard deductions for you, but this is probably a sacrifice worth making.
I think you will have to wait until she has completed a year outside the US to file for the pro rata stuff (or file now, with the possibility of having to amend). People outside the US have an automatic two-month exemption to 15 June for the filing of a return, and additional extensions can be requested provided you file by 15 December.
She will have tax liability in the US as long as she remains a US citizen, regardless of her residence status in Switzerland. If she pays more tax in Switzerland than she would in the US, then tax treaties usually ensure that she won't actually wind up paying any US tax, taking into account the foreign earned income exclusion.
I would also advise that you take a long look at matters of property ownership when the time comes to buy property outside the US. Make sure your eyes are open as to what happens with regard to exchange rate driven capital gains.
(oh bugger, on preview Mutant's experiences are more or less consistent with my own)
posted by sagwalla at 1:43 AM on January 3, 2008 [2 favorites]
She will have to pay on her worldwide income, but will have, presumably, a pro rata Section 911 exemption on earned income earned outside the US (once she completes bona fide residence / physical presence tests that show her to be resident outside the US for a year (335 out of 365 days, I think)). Her US-sourced income (including wage/salary, interest, dividends, capital gains) will be taxable in the US, as will her non-earned / passive income outside the US. She can claim standard exemptions and deductions.
She should have an option on whether you file jointly or separately, so you can keep yourself outside the scope of US tax by having her file separately - she will pay at a slightly higher rate and forgo standard deductions for you, but this is probably a sacrifice worth making.
I think you will have to wait until she has completed a year outside the US to file for the pro rata stuff (or file now, with the possibility of having to amend). People outside the US have an automatic two-month exemption to 15 June for the filing of a return, and additional extensions can be requested provided you file by 15 December.
She will have tax liability in the US as long as she remains a US citizen, regardless of her residence status in Switzerland. If she pays more tax in Switzerland than she would in the US, then tax treaties usually ensure that she won't actually wind up paying any US tax, taking into account the foreign earned income exclusion.
I would also advise that you take a long look at matters of property ownership when the time comes to buy property outside the US. Make sure your eyes are open as to what happens with regard to exchange rate driven capital gains.
(oh bugger, on preview Mutant's experiences are more or less consistent with my own)
posted by sagwalla at 1:43 AM on January 3, 2008 [2 favorites]
Response by poster: Thanks for those replies.
The wife tells me to mention that "the IRS requires non-resident aliens to apply for an individual taxpayer identification number which is called form W-7. This is because since you [meaning me, her husband] are not getting a SSN and not paying taxes...i still need to fill in some sort of identifying number for you [me]. when i file my taxes as married separately."
posted by slater at 1:56 AM on January 3, 2008
The wife tells me to mention that "the IRS requires non-resident aliens to apply for an individual taxpayer identification number which is called form W-7. This is because since you [meaning me, her husband] are not getting a SSN and not paying taxes...i still need to fill in some sort of identifying number for you [me]. when i file my taxes as married separately."
posted by slater at 1:56 AM on January 3, 2008
Slater - I'd suggest you folks sit down with a professional to get advise on the best approach regarding SSN numbers in general and tax filing specifically. Although I'm American (or perhaps because I am American) as a foreign national I'd be very cautious about submitting to the will of the IRS without full knowledge of all pluses and minuses. Also a professional can advise you folks on the best (i.e., cheapest) approach to managing your joint tax liabilities. Because you're effectively operating across two different tax systems, you've got an excellent opportunity to structure your joint affairs to minimise tax liabilities. Unfortunately, this is such an arcane and complicated area of expertise, no amount of googling or ask-metafilterring will provide advise optimal for your unique circumstances. I've recently married a Dutch national and we're undertaking this exercise at the moment. Sure, its costing some cash up front, but we're going to get the better of this situation.
Sagwalla - Excellent response, impressive citation on the Section 911 exemptions. Especially so on the part about "Make sure your eyes are open as to what happens with regard to exchange rate driven capital gains.". Lots of opportunity for strange things to happen when Americans purchase property outside the United States.
posted by Mutant at 2:17 AM on January 3, 2008
Sagwalla - Excellent response, impressive citation on the Section 911 exemptions. Especially so on the part about "Make sure your eyes are open as to what happens with regard to exchange rate driven capital gains.". Lots of opportunity for strange things to happen when Americans purchase property outside the United States.
posted by Mutant at 2:17 AM on January 3, 2008
If she is accepted for permanent residence in Switzerland then your wife would have the option of renouncing her US citizenship as a means of avoiding future US tax liabilities (but not current or previous ones) - quite a dramatic step to take admittedly.
posted by rongorongo at 4:05 AM on January 3, 2008
posted by rongorongo at 4:05 AM on January 3, 2008
Response by poster: That ain't gonna happen, rongorongo. We plan on moving back to the US sometime.
posted by slater at 4:42 AM on January 3, 2008
posted by slater at 4:42 AM on January 3, 2008
"If she is accepted for permanent residence in Switzerland then your wife would have the option of renouncing her US citizenship as a means of avoiding future US tax liabilities ...
Uhhhmmm, it's not as easy as that.
Not surpisingly, renouncing US Citizenship is viewed negatively by the United States in general, and the IRS specifically. After a lot of high profile cases in the 1980's, The Internal Revenue Service now assumes this is being done solely to evade taxes. Typically what the agency does in these cases is look back a decade and take your highest tax liability over that term.
They then assume this will be your annual liability going forward, and send you a bill for the next decade. (I believe this called "The Ten Year Attribution Rule", but I'm not near a text that could clarify). Pay that bill and IRS won't contest your renounciation. Don't pay it and a US Citizen you shall remain. You could probably go to court at that point and extricate yourself out of US Citizenship (costing $$), but the IRS is a remarkably goal oriented agency, therefore I suspect that bill will follow the erstwhile US patriot about until resolved one way or another. Governments do cooperate with each other, and a wide array of MLAT (Mutual Legal Assistance Treaties) and TIEA (Tax Information Exchange Agreements) will allow the IRS to seize any real property maintained in all but the most lawless of nations. I've known American ex-pats who have had property threathened by the IRS in Nigeria of all places. Seizing property in Switzerland would not be a problem at all.
And other US agencies? Well, living abroad for well over a decade I have heard of folks (but never known anyone myself) who renounced US citizenship. The people at the US border have been known to hassle and even refuse entrance to prior citizens traveling on other passports and reportedly visas, if necessary, as very, very tough almost impossible to obtain.
I tend to believe these stories myself, as I've always been advised to only enter the United States on an American passport.
the yahoo! question linked was from someone who wants to "resign" from US Citizenship, but "doesn't have the resources to move to another country?" Germane to this query, even Resident Aliens in the US have to pay US taxes.
posted by Mutant at 5:43 AM on January 3, 2008
Uhhhmmm, it's not as easy as that.
Not surpisingly, renouncing US Citizenship is viewed negatively by the United States in general, and the IRS specifically. After a lot of high profile cases in the 1980's, The Internal Revenue Service now assumes this is being done solely to evade taxes. Typically what the agency does in these cases is look back a decade and take your highest tax liability over that term.
They then assume this will be your annual liability going forward, and send you a bill for the next decade. (I believe this called "The Ten Year Attribution Rule", but I'm not near a text that could clarify). Pay that bill and IRS won't contest your renounciation. Don't pay it and a US Citizen you shall remain. You could probably go to court at that point and extricate yourself out of US Citizenship (costing $$), but the IRS is a remarkably goal oriented agency, therefore I suspect that bill will follow the erstwhile US patriot about until resolved one way or another. Governments do cooperate with each other, and a wide array of MLAT (Mutual Legal Assistance Treaties) and TIEA (Tax Information Exchange Agreements) will allow the IRS to seize any real property maintained in all but the most lawless of nations. I've known American ex-pats who have had property threathened by the IRS in Nigeria of all places. Seizing property in Switzerland would not be a problem at all.
And other US agencies? Well, living abroad for well over a decade I have heard of folks (but never known anyone myself) who renounced US citizenship. The people at the US border have been known to hassle and even refuse entrance to prior citizens traveling on other passports and reportedly visas, if necessary, as very, very tough almost impossible to obtain.
I tend to believe these stories myself, as I've always been advised to only enter the United States on an American passport.
the yahoo! question linked was from someone who wants to "resign" from US Citizenship, but "doesn't have the resources to move to another country?" Germane to this query, even Resident Aliens in the US have to pay US taxes.
posted by Mutant at 5:43 AM on January 3, 2008
Take advice, but consider that it *may* or *may not* be advantageous / possible for you to elect to file as if you were American citizen.
Why might you want to (if indeed you can)? You may find you can deduct mortgage interest and stuff on your primary residence - but definitely take advice. Some of the things that are permissible in the US tax code are not actually all *in* the US tax code.
You also need to track like a hawk the days you each spend in any tax jurisdiction. These records come in handy when your accountant does your taxes.
Since your wife in particular will be claiming credit based on her overseas location, you need to document how many days in any one year she (and maybe you) are: not in the US, in the US, if in the US in which state (and for municipal taxing jurisdictions, which city). If you do end up having to pay tax in a state due to a slight overstay, you need to limit the damage. You need to include days you travel through a state, so if you visit the US, via JFK and go stay in Connecticut, you need to remember you were in NY state and NY city for a part of a day.
When we first came to the US as non-resident aliens, I had to do this, because I wasn't taxed on CT or Federal tax when I was out of the country, but had to pay NY state tax on days when I went through JFK.
But *take* advice - this is the hardest part of US taxes for individuals IMHO. And there may be opportunities to divide the year up in imaginative but legal ways, so that you are not in any one tax jurisdiction long enough for them to care.
posted by blue_wardrobe at 5:56 AM on January 3, 2008
Why might you want to (if indeed you can)? You may find you can deduct mortgage interest and stuff on your primary residence - but definitely take advice. Some of the things that are permissible in the US tax code are not actually all *in* the US tax code.
You also need to track like a hawk the days you each spend in any tax jurisdiction. These records come in handy when your accountant does your taxes.
Since your wife in particular will be claiming credit based on her overseas location, you need to document how many days in any one year she (and maybe you) are: not in the US, in the US, if in the US in which state (and for municipal taxing jurisdictions, which city). If you do end up having to pay tax in a state due to a slight overstay, you need to limit the damage. You need to include days you travel through a state, so if you visit the US, via JFK and go stay in Connecticut, you need to remember you were in NY state and NY city for a part of a day.
When we first came to the US as non-resident aliens, I had to do this, because I wasn't taxed on CT or Federal tax when I was out of the country, but had to pay NY state tax on days when I went through JFK.
But *take* advice - this is the hardest part of US taxes for individuals IMHO. And there may be opportunities to divide the year up in imaginative but legal ways, so that you are not in any one tax jurisdiction long enough for them to care.
posted by blue_wardrobe at 5:56 AM on January 3, 2008
She'll also have to specify on her return "Married but filing separately". I don't think the IRS can require you (as a foreign national) to file a return.I've always wondered about when it might be useful NOT to file jointly... now I have an example.
posted by Jahaza at 7:06 AM on January 3, 2008
I've always been advised to only enter the United States on an American passport.
This is not optional. U.S. citizens are required to enter the U.S. on their U.S. passports, regardless of other citizenships they may have.
blue_wardrobe is presenting a lot of misinformation about keeping track of taxing jurisdictions. Unless you reside or earn money/do work in New York City or New York State in a given tax year, simply traveling through JFK (or anywhere else in New York) doesn't subject you to any tax liability you didn't already have.
posted by oaf at 9:17 AM on January 8, 2008
This is not optional. U.S. citizens are required to enter the U.S. on their U.S. passports, regardless of other citizenships they may have.
blue_wardrobe is presenting a lot of misinformation about keeping track of taxing jurisdictions. Unless you reside or earn money/do work in New York City or New York State in a given tax year, simply traveling through JFK (or anywhere else in New York) doesn't subject you to any tax liability you didn't already have.
posted by oaf at 9:17 AM on January 8, 2008
Umm. Yes. Oaf is right. I did work in NYC. Hence my hassle, but not yours.
posted by blue_wardrobe at 10:00 PM on January 10, 2008
posted by blue_wardrobe at 10:00 PM on January 10, 2008
This thread is closed to new comments.
Yes, Americans pay taxes on citizenship not residency. She'll have to file both a Swiss and US tax returns and (on the US side at least) pay taxes on global income. But the first $95K on the US return (or so, would have to look at one of my returns for the exact cut-off) that she earns outside the US will not attract US tax.
Also she'll get tax credits for any income earned that she paid foreign taxes on. Net / net, she won't be double taxed and in fact $95K (or so) will be tax free, but depending upon her specifics there may be large sums of moneywhizzing about as she gets big bills from The Swiss and large credits from the US side. It sucks but it's just the way it is.
This assumes that she's got taxable income outside the US as you seem to have indicated she does. She'll also have to specify on her return "Married but filing separately". I don't think the IRS can require you (as a foreign national) to file a return.
Sidenote: I work in banking, have a Masters in Finance as well as an MBA, am a partially qualified CIMA accountant, and even so I pay someone else to prepare my UK and US returns. I'm not the only banker who does this.
posted by Mutant at 1:35 AM on January 3, 2008 [3 favorites]