Repatriating foreign Pensions and Taxes

[alarswilson]

My wife and I have been living in France for 7 years and will be returning to the US within the next year. During our time in Europe, my wife's employer has been paying into a pension fund, housed in Switzerland--not big money (non profit research)--but enough to significantly effect our marginal tax rate were it to be delivered to us as a lump sum. This has happened to a colleague, who reported having to pay up to 1/3 of it away in taxes (we currently pay zero US tax). Ouch. Once we leave Europe, we will be required to repatriate the account.

I'm unclear on the status of this account, since European law is different, and Swiss different still. The US terms as "qualified" or "non-qualified" don't really apply. But it's retirement money anyway, and seems like it should be able to come into the US as "qualified" (pre-tax). Can any fellow mustachians offer any advice on how to proceed? Thanks.

[SwissMe]

I've been skulking around the MMM site and forums for a long time, but your post on one of my "favorite" topics - US taxation of US expats - is bringing me out of the woodworks (though - spoiler alert - I don't have a silver bullet). I'm an American living and working in Switzerland and also receive employer contributions to my pension plan here. The tax advice I've received for my own situation is that the contributions need to be included in my US taxable income in the year of contribution (not when repatriated!) since the Swiss employer pension plan, unlike a 401k, is not a "qualified" retirement plan under US tax law. If not a "qualified" plan, then the special US tax treatment, i.e. "pre-tax" treatment of employer and employee contributions, does not apply (even if Swiss law allows pre-tax treatment in my Swiss tax return). The annual employer contributions are treated as normal income in my US return like my salary. For US tax purposes, the "qualified" vs. "non-qualified" characterization is very important whereas the treatment under Swiss (or French) tax law is irrelevant for the most part. Is there a specific reason why you said that the "qualified" vs. "non-qualified" terms don't apply to your case?

As a potential bright side, you mentioned that you currently don't pay any US tax, which leads me to believe that you pay so much tax in France that you're overflowing with Foreign Tax Credits (or under the FEIE threshold, though this sounds less likely if you care about your marginal tax rate). If this is the case, you may owe little or no tax even if you do ultimately have to declare the contributions as income. But more specifics about your tax situation are needed to determine this.

Unfortunately, the best advice I can give you is to check with a US CPA specialized in expat taxes. As is often the case with tax issues, the impact is heavily dependent on individual facts and circumstances, and there maybe more than one way to proceed.

[alarswilson]

Thanks very much for this response. Very much. My wife works for an institution that frequently repatriates people, so perhaps someone within knows something; she has a US pension with a partner organization, but I don't know if this amounts to anything legally.

We have certainly been well under the FEIE threshold for the whole time we've been here, but I know nothing of Foreign Tax Credits, since our US income has been so low as to not necessitate using them. Though because the employing foundation is domiciled in Switzerland, we've also paid little directly direct French income tax (the great majority of French don't pay any income tax, and the credits and deductions are shockingly generous)--though contributions to social security, health care (on the part of the employer) have been significant.

I read the IRS site http://www.irs.gov/Individuals/International-Taxpayers/Foreign-Tax-Credit---Choosing-To-Take-Credit-or-Deductionte, and its makes vague sense--could you perhaps help me out with an example, as the bureaucratize is a bit hard to put directly into practice.

In any case, we will try and get an accountant experienced in this sort of thing to take a look it it. If you know anyone, please let me know, as we're starting from zero.