Maybe a stupid question but couldn’t find an answer.
Permit B holder. Paying taxes at source.
Pillar 2 AVC (additional voluntary contribution) helps you to reduce marginal tax rate as I understand it.
But what if in that given tax year I don’t need to pay taxes because I have already paid enough at source and I still go ahead and do a pillar 2 AVC?
Would I get a tax credit? Or I would just be told I don’t need to pay taxes for this given year.
(Context: in 2020 I paid quite some tax so in 2021 I did some AVC resulting to pay almost zero taxes. In 2022, so many parameters changed and I would need some help to properly calculate taxes. I am not going to do this now. I have spare cash to do some AVC, however if there is a risk that I don’t get a tax credit, then I may hesitant as it lowers the benefit I wish to get)
I am not sure if I completely understand your situation, but it doesn’t make much sense to pay a huge amount into 2nd pillar once, many small contributions are better.
Such contribution allows you to request ordinary taxation instead of taxation at source. Your tax will be calculated “ordinary” according to your tax declaration with all input data: deductions including 2nd and 3rd pillars contribution, commune of residence etc. And here is a caveat: if you are taxed at source, some “average over canton” tax rate is applied for taxation at source. If your commune of residence has a significantly higher tax rate than average, you may end up paying more taxes with ordinary tax after deductions than with source tax before deductions. Zürich city is being mentioned in this respect.
Once your ordinary tax is calculated, that’s what you own. If you had already paid more at source, you get the difference back or it can be transferred to the next year. If less, you pay some more.
So, once you have requested ordinary taxation, the fact that you have already paid taxes at source doesn’t affect the amount of taxes you own.
Do you mean a difference between tax own and paid at source or indeed the whole tax amount ?
I know that AVCs are not going to give me highest return, however in years when I get extra bonuses (above and beyond usual), then I plan to allocate a small part to AVC. Objective to reduce taxation for that given year (I really hate to pay taxes 2-3 years later and see money being sucked from my account) and to diversify (pillar 2 acting as bond allocation - instead of myself investing in bonds directly - I only invest into stocks in taxable account).
I understand it is also recommended to delay AVC as later in life as possible because you get lowest return gap vs stock (you avoid paying taxes so immediate gain, very close to retirement so return delta vs stocks is likely to be very small) plus highest tax reduction as in theory closer to retirement you are likely to have higher salary so higher marginal tax bracket. So I understand this but I have a large gap to fill in my pillar 2
Although not relevant regarding the tax at the source situation, I still wanted to link @thepoorswissarticle on second pillar contribution which is a great resource on this topic.
Regarding tax at the source and having over paid taxes, let me write about my experience in Zürich city (just in case things might be different in other locations). I am also on B permit.
If you earn more than 120k per year, you need to do a normal tax declaration. If they withheld more taxes than they should (you paid more), you will eventually get the difference back on your bank account. In any case, at least in Zurich you will get the money back, not as tax credit.
Now I say eventually because Zürich’s processing is very slow and in my case it’s taking between 2 to 3 years to get the money back. Zürich will pay you back with some interests but very low (lower than 1% but I don’t recall the exact rate).
Because of that, I recommend taking reimbursement delays into account when making the decision. For example, say you buy back 10k on the 2nd Pillar with a 40% marginal tax rate. What are you intending to do with the 4K you should be getting back? Whatever it is you wanted to do, does it still make sense if you have to wait up to 3 years for that? If you intend to invest it, one possibility would be to invest it under margin so you stay invested during the processing delay, though at this point you are likely to pay more interest to your broker than you will get from the tax office. Of course that might be offset by the return of your investment though.
Since you mention bonds, it might also be a sound option to just consider the 4K you will receive back eventually as a bond allocation on your portfolio.