Guide to Taxes in Switzerland – Reduce your taxes!

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Guide to Taxes in Switzerland - Reduce your taxes!

Taxes in Switzerland are quite complicated due to the multiple states. Each state has its own rules and even its own software to fill your taxes. Nevertheless, it is very important to know how the taxes work in order to be able to fill your tax declaration.

I want to go over the details of how the Swiss Taxes work. We are going to talk about the multiple levels of taxes in Switzerland, how is your income taxed and how is your wealth taxed. We are also going to see the things you can deduct from your income when you fill your tax declaration and how you can pay your taxes.

Of course, we cannot talk about taxes without talking about optimizing taxes. That is probably the only reason people want to learn about taxes! In this post, I am going to share all I know about optimizing taxes in Switzerland!

Stay tuned to learn all about the taxes system of Switzerland and how to reduce your taxes!

Multiple levels of taxes

Switzerland is a federal republic, it means that each of its 26 states has some powers. In this particular case, it also means that each state has a different way of collecting taxes.

This means that depending on where you live, you will pay a different amount of taxes. Some of the deductions will also be different. And they all use different forms and different software to fill your taxes.

There are four levels of taxes in Switzerland:

  • Federal Taxes: This tax is for the country itself.
  • State Taxes: This tax is for the state you are living in.
  • County Taxes: This tax is for the county you are living in.
  • Church Taxes: This tax is for the church you are declared with. If you are not officially part of a Church, you will not pay these taxes.

All the taxes are collected and managed by each state. Then, several different bills are issued based on the results of your tax declaration. This means the states are collaborating with the Swiss government and with the counties.

For the Church Taxes, it will depend on your state how they are calculated. In some cases, it is a percent of the amount of taxes you pay to the State. In some cases, the county is responsible for collecting them.

Income Tax

In Switzerland, you will pay taxes on the income you get. For most people, this is the income from their salary. But then, all other sources of income must be added on top of the salary:

  • Rental income
  • Side Hustles
  • Dividends from shares

The sum of your incomes gives you the gross income. Then, you can remove all the deductions from it and it will give you the taxable income. This taxable income is what matters in calculating your taxes. In most states, there is a scale of tax percentage based on yearly income.

You may have noticed that I did not mention capital gains. This is because they are not taxed as income! They are taxed as wealth since your net worth will increase. But this is great since wealth tax is not very high. On the other hand, if you live from your investments, you will be considered a professional investor. And as such, your capital gains will be taxed as income.

For a married couple, both incomes will be added together. And there is a different scale for them.

For instance, in Fribourg, for a taxable income of 100’000 CHF, a single person will pay 10.825% of it. A couple with the same income would pay 8.20% of the taxable income.

Wealth Tax

Contrary to some other countries, you will also pay a tax on your net worth in Switzerland. That means that you will pay a certain percentage of your net worth as a fee to the government, every single year!

Once again, this is not only your cash but the sum of your taxable wealth:

  • Your savings and checkings accounts
  • Your stocks and bonds
  • Life Insurance Policies
  • Real Estate

Your taxable wealth is the amount of these values. In some cases, you can also deduct some things, mainly your mortgage.

Once again, this will depend on which state you are living. But most states use a scale with a different tax percentage based on your wealth level.

For instance, in Fribourg, for a wealth of 1.2 million CHF, you will pay 0.33% every year. This is 3960 CHF of taxes for your net worth. This is not negligible, especially if you intend to retire early. However, this is significantly lower than the income tax.

Tax Withholding

Some of your income will be directly withheld by the Swiss Tax Service at a higher rate of tax than usual (35%):

  • Interest on cash accounts
  • Dividends from stocks and bonds
  • Lottery gains

This will be directly taken at the source. You will only receive 65% of these incomes. However, if you declare in your tax declaration as well as the assets that generated it, the amount paid can be reclaimed. This will go towards reducing the taxes that you need to pay. Therefore, it is very important to declare these assets.

In some cases, you can also get back the taxes that are paid to other countries. The most common case is the one from the United States. Switzerland and the U.S. have a tax treaty. Because of that, you will be able to reclaim the tax withholding on your dividends from U.S. companies.

Deductions

You are allowed to deduct many things from your taxable income and wealth. These will reduce your taxes. But they are not really ways to optimize your taxes since you cannot really act on them. But you should not forget to declare them to deduct them!

There are also some automatic deductions in most cases. For instance, in most states, a wealth below 20’000 CHF will not be taxed. And very small income will not be taxed either due to automatic deductions.

Professional Fees

First of all, you can deduct all the meals that you have to take outside because when you work. This can make a big reduction overall.

You can also deduct transportation to your work. If you take public transportation, you can deduct the price of your fares. And if you take your own, you can deduct a price per kilometer to your work. You just have to justify that you have to take your own car. But this is pretty simple to justify generally.

If you have to spend days in other cities or countries for your work, you can also deduct that.

A very interesting deduction is the flat deduction of your professional fees. You can deduce 3% of your net income from your taxable income, no questions asked. There is a minimum of 2000 CHF and a maximum of 4000 CHF for this.

Health Fees

You can deduct some of your health fees from your taxes
You can deduct some of your health fees from your taxes

You can deduct your health insurances fees from your taxable income as well. However, there is a maximum that will be very easy to reach. For instance, in Fribourg, the maximum is 8760 CHF per couple. This is slightly less than what we pay. But this is still a very good deduction. You should not forget it!

Also, you can deduct your health fees from your income. However, there is a minimum of 5% of your income. I was never able to deduct any of my medical fees, unfortunately. But if you can, you should do it!

Other Deductions

If your children are in childcare, you can also deduct these fees this from your taxable income, up to a limit.

If both people in your couple are working, you can also get an extra reduction. This is a bit weird. Because adding your two incomes together will result in higher taxes.

Depending on where you live there may be extra deductions. For instance, in Fribourg, we can deduct some money for life insurance that is not tied to the third pillar. You need to study the taxes of your state in details in order to take advantage of as many things as possible.

Reduce taxes in Switzerland

Except for the basic deductions mentioned before, there is not a lot we can do to reduce taxes in Switzerland. However, there are a few things that you should know. These could be very helpful if you want to try to pay a smaller amount of taxes.

The third pillar

The first thing we can do is to invest in the third pillar. Whether you invest in a bank or in insurance, you can deduct these contributions from your taxable income. This can make a significant difference in how much taxes you are going to pay. There is no reason to not invest in the third pillar currently. I believe that everybody should invest as much as possible into it. The limit you can invest changes every year. In 2019, you can contribute 6826 CHF.

You cannot make a partial withdrawal of a third pillar account. It is mandatory to take the entire amount at once. However, you are allowed to have several third pillar accounts. That way, you will be able to withdraw one every year in the first five years of your retirement. These withdrawals are taxed based on a few levels. And the increase between levels is quite steep. Therefore, making smaller withdrawals each year can save you a lot of money!

The second pillar

On a related note, we can also contribute to the second pillar to reduce taxes. The extra contributions to the second pillar can also be removed from the taxable income. The problem with the second pillar is that the returns are not great. Most of the second pillars will pay about 1% interest. So most people prefer to invest in the stock market. However, it makes a very good short-term investment because of the tax reduction. And it is a safe investment and could be good to consolidate your portfolio.

While the second pillar sits in your pension company, you will not pay wealth taxes on it. So, you can delay its payment to lower your taxes for a few years. You are allowed to delay the payment for at most five years. Of course, you should only do that if you are comfortable living five years in retirement without your second pillar.

Once you receive the second pillar, you have two choices, an annuity or a lump sum. From a tax point of view, the lump sum is better than the annuity. Once again, there are other things to take into consideration. But you will save taxes if you take the lump sum because wealth taxes are lower than income taxes in Switzerland.

Mortgage

You can optimize your mortgage for taxes
You can optimize your mortgage for taxes

We have mentioned before that we can deduct mortgage payments from the taxable income. This is effectively reducing the taxes you are paying. Therefore, you should avoid paying off your debt in order to reduce your taxes. Of course, you need to be careful to still be able to pay your mortgage payments in retirement.

And, if you do not want to have debt, you should still pay it off. But it will increase your taxes! Almost nobody has a paid house in Switzerland, it is not really efficient!

In Switzerland, you have two ways to amortize your mortgage:

  • Direct Amortization: You will pay off your debt direct to your lender.
  • Indirect Amortization: You will pay off your debt by contributing to a third pillar. Once you retire, this amount will be used to pay off your debt.

Indirect Amortization is better from a taxes point of view. Indeed, you will keep more debt for a longer time. During this time, your debt will stay constant and you will be able to deduce the same mortgage interests from your taxable income until your retirement. That means you will pay fewer taxes for a longer time.

Now, you need to be aware that most banks will not let you invest in any third pillar account. You will probably be locked with a bad third pillar in the bank that is lending you the money. Therefore, you have to consider the opportunity cost of not investing this money better. If you were to use the best third pillar in Switzerland, you could have great returns. However, if you invest in a bad one, it may give you very low returns.

Renovations

There is a second thing you can do with a home or apartment to reduce taxes. In most states, you are allowed to deduct renovation fees from your taxable income. But there is a maximum and a minimum to that.

Therefore, you should avoid making two big renovations the same year. You should spread them on several years. If you have small renovations to make, you should group them together in the same year to reach the minimum.

Donations

You can also donate some money away to reduce the taxes you pay. There are three ways for this. First of all, if you donate your money to charity, you can deduct this from your taxable income. Then, you can also donate money to a political party. In both cases, there is a maximum you can deduct.

In some states, you can also donate some money to your family, for instance, your children. And you can deduct this from your taxes. For instance, in the state of Vaud, you can donate 50’000 CHF each year to your children free of taxes. This will lower your net worth and therefore your taxes. However, you need to be careful about this. Make sure you are acting within the limits of the law!

Choose your county and state

If you are really serious about saving money on taxes, you may want to move to a new county or even a new state. It can make a huge difference.

In the state of Fribourg, the county taxes are indexed on the state taxes. You pay a percentage of your state taxes in county taxes. In 2017, the cheapest county was Greng with 32% and the most expensive was Jaun with 100%. If you paid 5000 CHF, you would pay 5000 CHF to Jaun and only 1600 CHF in Greng. This is a 3400 CHF difference just for moving county in the same state.

The differences between states are also huge. A single person in Nidwald with a gross income of 100’000 CHF would pay about 10’000 CHF in taxes per year. But the same person would pay 18’000 CHF per year in Neuchatel. This is a very significant difference. And sometimes, the differences are even larger!

Now, you also need to consider the cost of living in the states before you consider moving there. There may also be huge differences in costs.

And you also need to consider the people you know where you are living. I personally really like the place I am living right now. All my family and friends are close by! I would not want to move to another state just for taxes reasons. However, I could consider moving to another county. This is something we are going to consider if we buy a house.

Filling your Taxes

Now that you know all the basics about taxes, you are ready to fill your tax declaration. Unfortunately, since the taxes are different for each state, so are the tax declarations. And each state will provide different software as well to fill them. I cannot write a guide about all the different tax software in Switzerland, it would take me a year. I may do it for the state of Fribourg if there is enough demand for it.

But filling your taxes is not really difficult. You just need to be really serious about. You should check every number several times to be sure. I know people who made expensive mistakes with their tax declarations. For instance, a person I know did not deduct any transportation to his work. This made a difference of more than 1000 CHF.

If you are unsure of what you are doing, do it with somebody that does for a long time. The first time I did it, I did with my father. And I have helped a few people since then!

You will have to fill your taxes every year at the beginning of the year. Generally, you will have about three months to do it once you receive the tax declaration. You will always fill the declaration of the previous year. For instance, in 2019, you will fill your declarations for 2018. This makes sense since you do not yet know 2019!

There are two ways for this in most states. Either you fill the paper form or you use the software provided by your state tax office. I prefer the software because it allows copying the data from year to year. And it will give you an estimate taxes at the end. This also allows you to simulate some changes and see the changes. But some people prefer the paper version.

Once you are sure of everything you have entered, you can submit the tax declaration to your state tax office. If you use the software, you may be able to submit it electronically. At least, I can in Fribourg.

Payment of the taxes

During the year, you will pay taxes for the current year. However, you do yet know exactly how much you are going to pay since you did not fill your tax declaration yet. You will pay advance payments on it. These are based on the amount of the previous year. You have the choice of paying these advance payments at once or month after month. There is a very small interest if you pay them at once. But it is rarely worth it to do it.

A few (or many) months later after you sent your tax declaration, you will receive the decision of taxation. This will contain the final amount you have to pay. If you did not pay enough advance payments, you will have to pay extra taxes this month. You need to be careful about that. This can be a significant amount to pay in a single month. If you think that your taxes will increase next year, you can also a voluntary advance payment in addition to the pre-calculated advance payments.

Since Switzerland has a multi-level tax system, you will also receive several bills for your taxes:

  • A bill for the federal taxes. This is generally the least of your taxes. You will generally receive a single bill.
  • A set of bills for the state taxes. You will receive one bill per month.
  • A set of bills for the county taxes. You will also receive one bill per month.

I would strongly advise you to pay these bills on time!

Taxes Calculators

If you want to estimate your taxes or run some simulations, there are a few tax calculator for Switzerland. Of course, they only provide an estimation. They will not contain all the possible deductions. And some are simply based on historical data and the current rules may have changed. Nevertheless, it can still be useful.

The best tax calculator, in my opinion, is the official tax calculator from the Swiss administration. You will find a calculator for the federal taxes there. And they also provide links to find calculators for some of the states.

Comparis also has a nice tax calculator. It is also quite complete but I find it more difficult to use. However, the results are quite interesting. The biggest advantage of this calculator is that you compare several counties with it. It can be useful if you plan to move to another county soon.

The last one I would like to mention is the tax calculator from UBS. It is the simplest of the comparator. It can be useful if you want to do some simple comparison. However, I am not entirely sure about the results. When I run the calculator for myself, it gets me higher results than what I pay.

Remember that this is just an estimation. The only real amount of tax you are going to pay is on your tax result that you will receive a few months after you filled your taxes.

Conclusion

You should now have a good understanding of how Taxes in Switzerland are working. Even though most people do not like this subject a lot, I believe it is very important. It is the only way to ensure that you are optimizing your taxes. You need to be careful when you fill your tax declaration.

As you can see, there are many things that you can deduct from your taxable income and from your taxable wealth. But there is not a lot you can do to increase these deductions.

However, there are some extra things you can do to decrease your taxes. The best way is to contribute to your second and third pillars. Another way is to optimize your mortgage for tax efficiency. If you have a house, you can also organize your renovations to increase your reductions.

If you are interested in reducing your taxes, you may want to read about contributing to the second pillar.

What about you? Do you have any tip to reduce taxes in Switzerland?

About the author

Mr. The Poor Swiss

Mr. The Poor Swiss is the main author behind thepoorswiss.com. In 2017, he realized that he was spending more and more every year, falling into the trap of lifestyle inflation. He decided to cut on his expenses and increase his income. This blog is relating his story and findings. In 2018, he saved more than 40% of his income. He made it a goal to reach Financial Independence. You can send Mr. The Poor Swiss a message here.

20 thoughts on “Guide to Taxes in Switzerland – Reduce your taxes!”

  1. Hello poor Swiss,

    great article, thanks!

    For the part about mortgage debt, I think you should flag that interests are paid to the bank based on the principal. Therefore, by delaying payment of your debt, instead of paying to the state you will pay to the bank. What do you think? Did I miss anything?

    My preference is always to pay to the state rather than banks :) as my taxes finance hospitals schools etc.

    Cheers,
    G

    1. Hi GB,

      Yes, taxes are more useful than banks indeed.

      In both cases, you will pay the same to the banks. If you use indirect amortization, you will just pay later.
      On the other hand, if you use direct amortization, you will pay money directly to the bank for the amortization but fewer interests later one and more taxes.

      It’s a tradeoff between taxes and interests. I am more in favor of direct amortization personally.

      Thanks for stopping by!

  2. “You will probably be locked with a bad third pillar in the bank that is lending you the money. Therefore, you have to consider the opportunity cost of not investing this money better.”

    The only alternative to indirect amortization is the direct one, where do you see opportunity costs?

    1. I suppose the Opportunity costs that are the lost costs of not being able to receive a better return by choosing your own 3rd Pillar.

    2. Hi Maurin,

      As Gavin said, I meant that you will have a bad third pillar instead of a good one.
      Of course, in both cases, your cash will be gone. In one case, it will go to the mortgage. In the other case, it will go the third pillar selected by the bank. In the first case, you are still free to invest money in a good third pillar and you get less debt. In the second case, you invest in a probably shitty third pillar but you pay fewer taxes.

      I hope it makes more sense now?

      Thanks for stopping by!

      1. I’m not sure… the only advantage of the third pillar is the tax discount, as an investment it is always worst then investing directly.
        With indirect amortization I have the 3a tax advantage + some (small) interest, extra money can go to ETF.
        If I go for direct ammortization instead, I would need to invest the extra money sub-optimally in a 3a just to have the tax advantage.

        1. Hi Mauro,

          If you use a really good 3a account like VIAC, you can expect good returns. I agree that it is still worse than investing directly. But good returns coupled with tax discount is not something we should avoid!

          Now, let me do the example once again. Let’s say you invest 15’000 CHF per year and you have to amortize 5000 CHF per year.

          1. Direct Amortization. You are sending 5000 CHF per year to your bank. This will reduce your interests but increase your taxes. You are also sending 6826 CHF to VIAC (tax discount and good returns). You are investing the rest (3174 CHF) into your broker account.
          2. Indirect Amortization. You are sending 6826 CHF (5000 amortization and 1826 to fill the gap) per year to a bad first pillar (low returns, high fees, tax discount). This will keep your taxes at the same level. You are investing the rest (8174) into your broker account.

          The advantage of the first one is that you will have a full VIAC account with good returns and low fees. On the other hand, you will have to pay a bit more taxes. For the second one, you will pay fewer taxes and can invest more money into your broker account. But you will have a bad third pillar account.

          Now, I would say there is no better option. It will especially depend on your tax bracket. If your tax is high, you probably want to go with option 2 to reduce your taxes. But if your taxes are low, you may want to go with option 1.

          But that is only my point of view :)

  3. What do you mean by “costly mistakes” while doing tax declaration? Are there any huge penalties if mistake is made?

    Thanks

    1. Hi Thomas,

      Sorry, it was not really clear in the article. I will try to rephrase it better.

      I meant for instance if you forget some big reduction. One person in my family didn’t deduct all the transportation fees. That made a difference of more than 1000 CHF in tax.

      If you make a mistake like a wrong number, there is no penalty to my knowledge as long as it’s an honest mistake and not an attempt to fraud.

      Thanks for stopping by!

  4. Greetings!
    You will not be classed as a professional investor solely by living off your investments. As a passive investor there’s almost no chance you’ll be classed as a professional.

  5. Hello Poor Swiss !
    Regarding this quote : “You can deduct your health insurances fees from your taxable income as well. However, there is a maximum that will be very easy to reach. For instance, in Fribourg, the maximum is 3500 CHF per couple.”
    The 2018 instructions for the Fribourg state shows that you can deduct CHF 8760 for a couple for health insurance. This is on page 23 of this document : https://www.fr.ch/sites/default/files/2019-01/Instructions_2018_F.pdf
    Unless I missed something as last year was the first year I had to make my tax declaration ?

    1. Hi Bsam,

      You are absolutely right! I mixed my numbers. The 3500 CHF is for the Direct Federal Tax and not for the state taxes. They have different deductions.

      Thanks a lot for letting me know, I will update the article accordingly!

  6. Nice and useful article.
    But please do not call Switzerland a “federal republic”. It hurts my heart… We’re a confederation or a federal state.
    All the best & keep it up

    1. Hi ThePoorThurgovian ;)

      Thanks :)

      Then, you will have to edit Wikipedia’s page about Switzerland where it is described as a federal republic. And a federal republic (I agree it sounds bad) is described as a federation of states with a republican form of government. And republic simply means that there are representatives and a president. I think it makes sense to call Switzerland like that, no?

      Thanks for stopping by :)

  7. Hello my friend
    I want to live in a few years in Campione d’Italia (early retirement)
    I would be very happy if you could write an article about this place … I am a citizen of the European Union and would like to be a resident there to use existing tax benefits
    Because it is an enclave within Switzerland then it becomes a more complex story
    I obviously intend to consult in the future with a professional but right now I’m doing an initial check
    many thanks
    Bob

    1. Hi bob,

      I didn’t even know Campione D’Italia. It’s really interesting. I didn’t even know we had enclaves within Switzerland!

      Since I didn’t even know that place and I have no knowledge of Italy, I would not be the best person suited to this task. I will put a note about that in my blog list, but I do not think I could write an article about that. Sorry!

      Thanks for stopping by!

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