Can I report my Swiss Social Security benefits on my U.S. tax return?
The treatment of Social Security and other public pension benefits in the Convention between the United States of America and the Swiss Confederation for the avoidance of double taxation with respect to taxes on income, differs from the U.S. model, under which the source State retains exclusive taxation rights.
This treatment is necessary in order to avoid the double taxation of U.S. Social Security benefits and other public pension benefits received by Swiss residents that would otherwise be taxed by both countries. The United States, as the source country in this situation, taxes 85 percent of the benefits that U.S. citizens and nonresident aliens living in Switzerland receive. Switzerland, as the country of residence, taxes the U.S. benefits received by those individuals and does not provide any tax credits to offset the taxes paid on the same benefits in the U.S.
Because Switzerland is unable to offer tax credits for people in these circumstances even by treaty, these individuals are subject to a substantial double tax burden. (No special double taxation relief rule is required in the reverse situation where Swiss Social Security benefits are paid to U.S. residents because Switzerland does not tax benefits in situation where it is the source country. If Switzerland were to impose a tax on such payments in the future, a U.S. foreign tax credit would be available under the general provisions of paragraph 2 of Article 23.