Losing your job is stressful enough without the added worry of tax complications. But if you’re a U.S. citizen or green card holder living in Switzerland, your severance, pension transfer, and unemployment benefits can all trigger U.S. tax consequences that are easy to overlook.

What to Watch For: How Each Payment Type Is Treated Under U.S. Tax Rules

1. Severance is taxable when you receive it and may even be taxable even before you receive it. 

That lump-sum severance is taxable by the IRS as soon as it hits your account. Even if it doesn’t hit your account, for example, salary continuation payments received in future months or years may be taxable the year you accept the severance package. Because it’s taxable in the year you severed, it can push you into a higher tax bracket and may require you to make estimated tax payments to avoid underpayment penalties.

2. Swiss unemployment benefits are fully taxable in the U.S.

Swiss unemployment payments aren’t eligible for the Foreign Earned Income Exclusion (FEIE). They must be reported as taxable income on your U.S. return. You may be able to offset double taxation using the Foreign Tax Credit (Form 1116) but coordinating the Swiss and U.S. treatment of these benefits can be tricky.

3. Your pension transfer to a vested benefits account is a reportable and potentially taxable event for U.S. purposes.

When you lose your job in Switzerland, your Pillar 2 pension typically transfers into a vested benefits account (Compte de libre passage / Freizügigkeitskonto). In Switzerland, this is routine and tax neutral. 

However, the IRS treats this transfer as a distribution, even though you didn't take any money out and can't access it. Many US taxpayers are caught off guard by this.

4. Your U.S. tax basis can significantly reduce what you owe, but you must be able to prove it

Here’s the key point: you don’t owe U.S. tax on the portion of your pension that has already been included on your US tax returns in prior years. 

Your U.S. tax basis represents the portion of your pension that has already been taxed, usually from after-tax contributions or amounts previously reported on your U.S. returns. The IRS allows you to exclude this basis from income, but only if you can substantiate it. Without proof, the IRS assumes the entire transfer is taxable, which can mean paying thousands more than necessary.

FAQ- U.S. Tax Rules for Severance, Unemployment, and Pension Transfers

1. Is Swiss unemployment income exempt under the Foreign Earned Income Exclusion (FEIE)? No. Unemployment income is not considered “earned income,” so it doesn’t qualify for the FEIE. It must be reported as taxable income on your U.S. return.
2. Do I owe U.S. tax on my Swiss severance if it’s paid over several months? Yes. The IRS generally considers severance taxable in the year you become entitled to it, even if payments continue in later years.
3. Why does the IRS treat my pension transfer as a distribution? Because from the IRS’s perspective, moving funds out of your employer’s plan is a distribution event, even if it’s tax neutral in Switzerland. Proper documentation and a tax basis calculation can help minimize the impact.
4. How can I prove my U.S. tax basis in my pension? By reviewing past Swiss salary statements, employer pension records, and U.S. returns that included prior pension contributions and income.
5. What’s the best timing for my severance or pension withdrawal to minimize U.S. tax? It depends on your total income, residency status, and available credits. Strategic timing can help you stay in a lower bracket or qualify for credits that offset double taxation.

We can help. We specialize in U.S. tax compliance for cross-border professionals. Whether you’ve just been laid off or are transitioning between jobs in Switzerland, our team can help you:

• Reconstruct your U.S. tax basis and minimize double taxation
• Navigate the timing and reporting of severance and pension events
• Plan proactively to avoid costly surprises