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jaybeez · Apr 11, 2009, 01:10 AM

Hi, I am a US citizen living and working in the US for a company in Switzerland. My husband was working and living in Switzerland for most of 2008 and has filed our taxes jointly in Switzerland. Now I am filing my US taxes (married filing separately) and want to get credit for Swiss taxes paid on my Swiss income.

Some questions...

1) Since we filed jointly in Switzerland (our income and taxes are combined), do I just calculate the proportion of the joint tax that was on my income? For example, if he made 75,000 and I made 25,000 and we paid 12,000 in taxes, then I would have paid 1/4 of that (3,000).

2) I have an income statement (w-2 type) but it doesn't show taxes withheld. Do I need to show some proof of what taxes were owed or paid? Form 1116 doesn't ask for anything, but I assume they would want it.

Thanks!

MukatA · Apr 11, 2009, 08:20 AM

"I am a US citizen living and working in the US for a company in Switzerland."

I really do not understand why is your income taxable in Switzerland. Any income earned in a country, from what ever source, in earned income of that country.
You will not get any credit on the U.S. tax return. You are not eligible to file Form 1116 as you did not have foreign income; you had U.S. income paid by a foreign country.

jaybeez · Apr 15, 2009, 03:13 PM

Thanks for the response. I had been living in Switzerland for some years working for the same company. I have since moved back to the U.S. and have been cyber commuting this past year.

I had read somewhere that it would be taxed at the "source" and I thought that meant where the money came from. My husband has already paid our taxes (including Swiss social security) on both of our incomes in Switzerland. I will have to see if we can get that back!

So I have a Swiss income statement that shows the total income minus Swiss social security taken out. How do I treat this on my U.S. return. Since there is no U.S. social security taken out, do I have to treat it as self employed/independent contractor and pay SE tax then?

AtlantaTaxExpert · Apr 16, 2009, 11:08 AM

You do NOT treat it as self-employed income, but rather a foreign earned income.

I STRONGLY suggest you get professional help, because you should have filed Form 1116 to claim the Foreign Tax Credit for the Swiss income taxs paid, and apparently you did not claim that credit.

jaybeez · Apr 16, 2009, 12:45 PM

Hi Atlanta, thanks for your input. I filed an extension so I can get this sorted out. I will go see a professional about this.

In the meantime, you and MukatA have conflicting opinions. If I earned the money (performed the work) while in the U.S. but was paid in Switzerland by a Swiss company, can I claim the credit or not?

If I can claim 1116 credit, how do I figure the taxes paid in Switzerland if my husband has filed jointly for us there (so the taxes were figured on our combined income). These taxes are not shown on my "w2" but were paid. Can I get credit for them too or just the Swiss Social Security that shows on the form?

If I cannot claim 1116, and it is not in fact foreign earned income, then how do I report it?

Thanks

Five Rings · Apr 18, 2009, 07:10 AM

There is a simple rule for the source of personal services income; income is sourced where the services are performed.

Thus, income paid to you by a Swiss company for services performed in the U.S. is taxable in the U.S.

Since the income is not sourced in Switzerland I see no way that you can claim a credit for it since that credit requires that the income be sourced in a foreign country. I believe you may take a deduction for those taxes on schedule A.

Your situation is complicated by the fact that by filing jointly in Switzerland you are resident there under Swiss law and your US income may come under their taxing power: I leave that to another Swiss professional to determine.

For those interested in such things I refer you to the source rules in IRC secs. 861: Sec. 861. Income from sources within the United States

And 862:
Sec. 862. Income from sources without the United States

MukatA · Apr 19, 2009, 11:17 PM

Section 862(a)(3) -- Gross income from sources without United States -- compensation for labor or personal services performed without the United States.

Section 861(a)(3) -- The following items of gross income shall be treated as income from sources within the United States:
Personal services
Compensation for labor or personal services performed in the United States; except that compensation for labor or services performed in the United States shall not be deemed to be income from sources within the United States if - the compensation is for labor or services performed as an employee of or under a contract with a nonresident alien, foreign partnership, or foreign corporation, not engaged in trade or business within the United States.

So it appears that under sec 861, you may be able treat your Switzerland income as foreign income and claim foreign tax credit using Form 1116.

Five Rings · Apr 20, 2009, 01:38 AM

I hate to disagree but I believe you are misreading the statute.

861 specifically sources income from PS performed in the US as US source income. It only releases that grip under very tightly controlled circumstances, to wit:
1. The income is earned by a nonresident and,
2. The amount may not exceed $3,000 and,
3. The compensation results from employee or contractual status and is attributable to an employer who is nonresident alien, foreign partnership or foreign corp. or,
An individual who is a citizen or resident of the United States, a domestic partnership, or a domestic corporation, if such labor or services are performed for an office or place of business maintained in a foreign country or in a possession of the United States by such individual, partnership, or corporation.

The taxpayer here does not fulfill the exemption requirement. Her US income is US sourced and she may not take the 1116 credit because that credit demands that the credited income be foreign sourced. Sorry.

Five Rings · Apr 20, 2009, 07:42 AM

I will go one step further;
Depending entirely upon the nature of the work performed by this lady, her Swiss company may have created a permanent establishment in the U.S. by virtue of her having a fixed base.

AtlantaTaxExpert · Apr 21, 2009, 08:14 AM

Five Rings raises some points I had not properly considered.

I concur with his contention that you CANNOT claim the Foreign Tax Credit (Form 1116) because the income is NOT sourced in Switzerland, but rather in the U.S.

You CAN claim a deduction for the Swiss income taxes paid on Schedule A, but that is an itemized deduction which is diluted by the standard deduction floor. It may not be worth the effort to amend your 2008 return to claim the deduction.

I believe that your best course of action would be to try to get a refund of the 2008 Swiss taxes paid, under the contention that Switzerland has no legal standing to tax income sourced from the U.S.