Romney Opened a Swiss Bank Account. Should You?
Let's say you sell the business you built and come into quite a lot of money. Lucky you.
The flip side, however, is that you might find yourself in a higher tax bracket. Much higher.
You're not exactly looking for loopholes... but a Swiss bank account is sounding pretty good right about now. I mean, heck, Mitt Romney stashed millions in one. He's a savvy businessperson, having founded Bain Capital and amassed a personal fortune estimated to be worth approximately $250 million. And besides, it's not like you're planning to run for president. What's the harm?
The Allure of Switzerland
For generations, Switzerland has operated as one of the world's elite banking centers, historically offering clients a unique combination of stability and discretion. Actually, discretion is too mild a word to describe Swiss banking-- secrecy is more accurate. Since 1934 it has been a crime to name the owner of a Swiss bank account, establishing the small nation as a premier tax haven. If banks cannot name their clients, then how can foreign governments assess taxes on their citizens who bank there?
The Boston Consulting Group estimates that Switzerland holds more than $2 trillion dollars of wealth for non-Swiss citizens.
Before you pack your bags for Zurich, there are two critically important pieces of information to understand.
Not Quite the Tax Haven It Used to Be
First, the Internal Revenue Service understands the allure of banking secrecy and has spent years tracking down U.S. citizens who attempt to hide income from taxes. American citizens must pay taxes on all income earned anywhere in the world. Furthermore, the IRS requires you to provide annual disclosures of foreign holdings.
Specifically, the IRS requires a Report of Foreign Bank and Financial Accounts (FBAR) from "United States persons" if:
- The person had a financial interest in or signature authority over at least one financial account located outside of the United States; and
- The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year to be reported.
"United States person" refers to U.S. citizens; U.S. residents; entities, including but not limited to, corporations, partnerships, or limited liability companies created or organized in the U.S. or under the laws of the U.S.; and trusts or estates formed under the laws of the U.S.
The second barrier to your pursuit of a tax-free alpine bank account may come from Swiss financial institutions themselves. Starting in 2013, a new U.S. law called the Foreign Account Tax Compliance Act (FACTA) will require foreign financial institutions to report information about financial holdings of U.S. taxpayers directly to the IRS. The increased cost of compliance with this law makes U.S. customers less desirable to foreign banks. It may well become more difficult to simply open an overseas account.
So, don't think a Swiss bank account will help you avoid paying taxes. The IRS understands existing loopholes and the U.S. government has been active in pursuing tax cheats.
If you want to diversify outside the U.S., then you can certainly pursue accounts in other countries. Simply understand that Uncle Sam will expect you to report your holdings and pay your fair share of taxes.
And if you should decide to run for president, be sure you have a good explanation for your holdings in Switzerland and other traditional tax havens.
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