Tax at source has some disadvantages
If you're a foreigner living in Switzerland, you will be — at least initially — subject to the wage tax system, i.e. a tax at source deduction on the employment income. This system has significant advantages but also some downsides. In many situations, the situation is rectified by the requirement to also file an annual tax return, reporting actual income and deductions.
Who does not need to file a Swiss annual tax return?
If your annual employment income is below CHF 120,000 or if you are a resident abroad (e.g. working in Switzerland as a weekly commuter), filing a tax return is not mandatory. Often, the tax at source deducted is accepted as final tax burden in such a situation. This is not wrong per se, as standard tax deductions are incorporated in the tax at source tariff (e.g. insurance deduction, social tax deductions etc.), that is why only in certain circumstances an additional tax benefit can be claimed.
Such situations are, however, not as rare as you may think.
Which tax deductions do you need to request?
As mentioned, the standard tax deductions are incorporated in the tax at source tariff, there is no need to e.g. claim a tax refund because of the employee contributions to the OASDI system (Swiss social security system). On the other hand, there are expenses that only specific individuals occur which is why they cannot be considered in the tariff. The most common ones are:
pillar 3a contributions
childcare expenses or weekly commuting expenses (double housing, transportation)
debt interest expenses
other expenses (e.g. donations, education etc.)
If you contribute to Pillar 3a -- let's say you contribute about CHF 6,000/ year which can easily give you a tax benefit of CHF 1,000 -- you will only get the tax benefit when you inform the competent authorities. Otherwise, there is no automatic tax deduction. Even worse, you will likely suffer from a partial double taxation as this money is subject to tax (again) at withdrawal.
If there are such costs and they cannot be claimed via the tax at source withholding, it is important to inform the tax authorities pro-actively so that an annual tax return can be filed on a voluntary basis.
What needs to be considered when filing a voluntary tax return?
The aim of this procedure is to provide the taxpayer who is normally not obliged to file an annual tax return, the possibility to file one on a voluntary basis to benefit from additional tax deductions.
Most cantons provide on their homepage an overview of the process to be followed and what documentation is required. As an example, the Zurich tax administration provides an online form to request that the voluntary tax forms to be issued so that a tax return can be filed.
It is important to note that once you have requested to file a voluntary tax return in one year, you are required to file tax returns in subsequent years as well even if you do not have any additional tax deductions to claim. Though this rule does not apply if you are a resident abroad. In this case you must file a request every year to file a tax return. Additional restrictions need to be considered when you are not a tax resident of Switzerland as you may not be allowed to claim certain tax deductions depending on your tax situation.
How does this voluntary tax return filing work exactly?
If it is clear to you that some expenses may be deducted, the request to file a voluntary tax return has to be filed before 31 March of the year following the tax year (e.g. 31 March 2022 for the 2021 tax year). This deadline cannot be extended (very few exceptions in specific cantons).
To claim the tax benefits, you need to send the completed tax return form to the tax administration enclosing the required documents. The authorities will then assess the tax return. It may be that additional information is required, and if that's the case, the authorities will send a written request. At some point (the process may take up to two years), the authorities will issue an assessment.
What are the disadvantages of the voluntary tax return procedure?
Filing a voluntary tax return not only comes with the benefit of claiming additional tax deductions but when you are a Swiss tax resident, you are also required to declare your income other than your employment income as well as your global assets/wealth.
Whereas the tax deductions may help you to decrease your taxes, the obligation to report your other income and wealth might increase your overall Swiss tax liability. If you are married, your spouse’s income and assets also need to be included in the voluntary tax return which may lead to an increase of the applicable tax rate.
As you can see, the decision of whether to file a voluntary tax return or not is not so easy.
Also, the tax return forms are only available in the official languages of the cantons, which is difficult for foreigners preparing the tax return without the help of a tax expert. Also, there might be some additional tax burden hidden if you file a tax return as the tax at source system oftentimes does not consider the specific situation of the taxpayer but takes into consideration general assumptions.
«When you move to Switzerland, you may have a lot of questions and concerns relating to your personal tax, social security and pension situation. The Exactio team can support you with these complex matters and work with you in a personal and flexible manner. My name is Karin and I'll be your first contact at Exactio for any tax, social security, pension and payroll related questions.»
If you don't file a Swiss annual tax return you may miss out on some tax benefits. But before filing a tax return, it is important to verify if you are really going to benefit from the tax deductions.
Don't miss out on the opportunity but make sure that there is a benefit in the first place! Here's some excellent tax humour to get you in the mood for your tax declaration:
"Next to being shot at and missed, nothing is really quite as satisfying as an income tax refund" ( F.J. Raymond)
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