Taxation of Foreign Social Security Benefits

[tb]

I am trying to understand how U.S. tax laws work with regards to
foreign social security benefits. I am not a tax professional, so
please excuse any possible omission of details. Please let me know
what other information is needed, if any.

These are the facts: I am a U.S. citizen residing in Texas for the
past 30+ years and working in the USA for a U.S. company. I have dual
US/Swiss citizenship. For the past 30+ years I have contributed into
the U.S. Social Security System; at the same time I have (voluntarily!)
also contributed into the Swiss Social Security System.

In essence, I have made _full_ social security contributions to the
retirement systems of two different countries based on my U.S. earned
income for the past 30+ years.

I was taking a look at art. 19.4 of the tax convention between the USA
and Switzerland for the avoidance of double taxation
<http://www.irs.gov/Businesses/International-Businesses/Switzerland---Ta
x-Treaty-Documents> which basically says that Swiss Social Security
benefits are taxed by the U.S. government (I reside in the USA) and
also by Switzerland (max. tax rate of 15%).

So, once I will start receiving Social Security benefits from both
countries, will I combine both payments, report the total on line 20a
of my 1040, complete the Social Security Benefits Worksheet for line
20b, and then take a foreign tax credit?

Is that how it will work?
--
tb

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[Alan]

On 3/1/15 7:49 PM, tb wrote:
> I am trying to understand how U.S. tax laws work with regards to
> foreign social security benefits. I am not a tax professional, so
> please excuse any possible omission of details. Please let me know
> what other information is needed, if any.
>
> These are the facts: I am a U.S. citizen residing in Texas for the
> past 30+ years and working in the USA for a U.S. company. I have dual
> US/Swiss citizenship. For the past 30+ years I have contributed into
> the U.S. Social Security System; at the same time I have (voluntarily!)
> also contributed into the Swiss Social Security System.
>
> In essence, I have made _full_ social security contributions to the
> retirement systems of two different countries based on my U.S. earned
> income for the past 30+ years.
>
> I was taking a look at art. 19.4 of the tax convention between the USA
> and Switzerland for the avoidance of double taxation
> <http://www.irs.gov/Businesses/International-Businesses/Switzerland---Ta
> x-Treaty-Documents> which basically says that Swiss Social Security
> benefits are taxed by the U.S. government (I reside in the USA) and
> also by Switzerland (max. tax rate of 15%).
>
> So, once I will start receiving Social Security benefits from both
> countries, will I combine both payments, report the total on line 20a
> of my 1040, complete the Social Security Benefits Worksheet for line
> 20b, and then take a foreign tax credit?
>
> Is that how it will work?
>

No. That is not how it will work. Your payments from the Swiss system
are not US social security benefits and the treaty does not provide a
clause that allows you to treat them as US social security benefits for
tax purposes. See the treaty with Canada and Germany that does allow a
US resident/citizen to treat those country's benefits as US social
security. These are payments are coming from a nonqualified plan. You
may not add those payments to your US social security benefits.
Therefore, you must treat those payments as other income for US tax
purposes (Line 21 of the Form 1040). If Switzerland taxes those payments
(note that the treaty allows Switzerland to tax them but does not say
whether they are taxed) then you would be able to either deduct those
Swiss taxes on Form 1040 Schedule A or compute a foreign tax credit on
Form 1116 to avoid double taxation.

Over and above the previous paragraph there is another issue as you
appear to have been employed in the US while either a US citizen or
resident of the US. You state that you were making contributions to the
Swiss plan. If you were employed in the US by a Swiss employer who was
making employer contributions on your behalf to the Swiss plan, then
those amounts should have been included on your W-2 as wages. If they
weren't, then you were obligated to report them as taxable gross income
on your tax return.

Assuming that there is no issue with employer contributions, the next
question to ask is whether you have a cost basis in the Swiss plan. It
is a nonqualified plan. Assuming that your earnings used as the basis
for your contribution were US sourced and taxed, it is my opinion that
you created a cost basis in the plan with these after-tax contributions.
The rules in Internal Revenue Code Section 72 would be applicable. If
you can substantiate the amount of your employee contributions to the
Swiss plan, you can use the General Rule (See IRS Pub 939) to compute
the amount of each periodic payment that can be excluded from US tax.

--
Alan
http://taxtopics.net

[tb]

Thanks, Alan.
There is no issue whatsoever with a Swiss employer. I made the
contributions to the Swiss Social Security System on a voluntary basis
with money earned from a job located in the USA.
I'll get Publication 939.
--
tb

[tb]

On 3/1/2015 at 11:51:19 PM Alan wrote:

> On 3/1/15 7:49 PM, tb wrote:
> > I am trying to understand how U.S. tax laws work with regards to
> > foreign social security benefits. I am not a tax professional, so
> > please excuse any possible omission of details. Please let me know
> > what other information is needed, if any.
> >
> > These are the facts: I am a U.S. citizen residing in Texas for the
> > past 30+ years and working in the USA for a U.S. company. I have
> > dual US/Swiss citizenship. For the past 30+ years I have
> > contributed into the U.S. Social Security System; at the same time
> > I have (voluntarily!) also contributed into the Swiss Social
> > Security System.
> >

> > In essence, I have made full social security contributions to the

Where would I find currency conversion tables for the 80s and 90s?
I tried Yahoo!Finance but their currency converter gets stuck on
loading whenever I select a date that far back.
--
tb

[tar...@google.com]

On Tuesday, March 10, 2015 at 12:01:51 PM UTC-7, tb wrote:
>
> Where would I find currency conversion tables for the 80s and 90s?
> I tried Yahoo!Finance but their currency converter gets stuck on
> loading whenever I select a date that far back.

Well, it seems http://www.oanda.com/currency/historical-rates/ goes back to January 1990.

http://fxtop.com/en/historical-exchange-rates.php?MA=1 seems to go back to 1953.

[tb]

On 3/10/2015 at 2:34:12 AM tar...@google.com wrote:

> On Tuesday, March 10, 2015 at 12:01:51 PM UTC-7, tb wrote:
> >
> > Where would I find currency conversion tables for the 80s and 90s?
> > I tried Yahoo!Finance but their currency converter gets stuck on
> > loading whenever I select a date that far back.
>
> Well, it seems http://www.oanda.com/currency/historical-rates/ goes
> back to January 1990.
>
> http://fxtop.com/en/historical-exchange-rates.php?MA=1 seems to go
> back to 1953.

Thanks!!
Am I free to choose the most advantageous exchange rate (i.e. in my
favor!), or does the IRS have guidelines to follow?

--
tb

[Alan]

On 3/11/15 6:13 PM, tb wrote:
> On 3/10/2015 at 2:34:12 AM tar...@google.com wrote:
>
>> On Tuesday, March 10, 2015 at 12:01:51 PM UTC-7, tb wrote:
>>>
>>> Where would I find currency conversion tables for the 80s and 90s?
>>> I tried Yahoo!Finance but their currency converter gets stuck on
>>> loading whenever I select a date that far back.
>>
>> Well, it seems http://www.oanda.com/currency/historical-rates/ goes
>> back to January 1990.
>>
>> http://fxtop.com/en/historical-exchange-rates.php?MA=1 seems to go
>> back to 1953.
>
> Thanks!!
> Am I free to choose the most advantageous exchange rate (i.e. in my
> favor!), or does the IRS have guidelines to follow?
>

Yes there are guidelines. 1. There is no official IRS exchange rate. 2.
You need to apply a rate in a consistent manner. 3. You must use a rate
that applies to your specific facts and circumstances without distorting
your income.

In the way of an example....

If you receive your income somewhat equally throughout the year, the IRS
would not object to you using the yearly average FX rate. They would
object to you using that same rate for a 10,000 Euro capital gain on one
specific day. For that, they would want to see you use the day rate.

--
Alan
http://taxtopics.net