US citizens and residents are required to report their worldwide income on their US tax returns.
Maybe you’ve heard the stories in the news. The IRS is cracking down on persons with foreign bank accounts who don’t report their income. The penalties for not reporting can be severe. So how do you report your foreign bank account income anyway? Surprisingly, it’s not really all that hard.
The first thing to do is to take a look at your foreign bank statement. Did you earn any interest on the account? How much?
Okay, but I’m guessing your statement is in a foreign currency. So you’re going to have to use a currency conversion rate. While there are several currency exchange websites, I like to use the US Department of Treasury exchange. That’s the one the IRS links to, so when I’m working on tax forms I like to use that rate. Here’s the link: http://fms.treas.gov/intn.html#rates
When you go to the exchange site, you’ll notice that the list is by country name, in alphabetical order. So let’s say that your foreign bank account deals in rupees; we’ll scroll down until we find India-Rupee. The exchange rate for rupees on December 31, 2011 was 52.25 rupees to one US dollar. So if you had earned interest of 1000 rupees in an Indian bank, that would be the equivalent of $19.14 USD. (Because you would take 1000 and divide by 52.25. That equals 19.13876, which you’d round to $19.14.)
You’d report that interest on Schedule B of your US income tax return.
At the bottom of the Schedule B form there is a question:
At any time during 2011, did you have a financial interest in or signature authority over a financial account (such as a bank account, securities, account, or brokerage account) located in a foreign country? See instructions.
It’s a yes or no answer. If you read the instructions, you’ll find that you don’t have to say “yes” unless your foreign bank account has had the equivalent of $10,000 USD or more in it. If your foreign bank or securities accounts do have more than $10,000 in them, you will be required to complete the FBAR form, also known as the TD F 90-22.1. (I’ll make another post about that later this week.) The FBAR is not sent with the 1040 so you can do that separately from your tax return.
If you are using tax software, you may find the questions to be a little different. They may specifically ask–did you have a foreign bank account and did you have over $10,000 in that bank account. Just answer the questions honestly and your software will guide you.
If you are filing an FBAR, the IRS wants you to list the name of the country that your bank account is in on your 1040. There’s a little blank space right after the question about foreign accounts.
And don’t forget to answer the last question about foreign trusts. To be honest, I don’t do foreign trusts, so I’ve never had to say yes. If you’re involved with a foreign trust, you’re going to want to look elsewhere to get more information. But, if you don’t have a foreign trust, you just have to remember to mark the box “no”.
Now that you see how easy it is to report your foreign interest income, you don’t have to worry about the IRS coming to call over your foreign bank account.
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Hi Baba,
Let me answer your question with a question. Are you paying tax on the gain in the value of the currency every year when there is a gain? You can’t have it both ways.
Hi Nabakishorahu,
Yes, pretty much. Basically, the IRS wants to know about your foreign income and holdings.
Can we calculate foreign interest the way I am suggesting. Taxable interest income is interest earned minus interest expenses. Why we can not consider loss in value of principle due to currency fluctuation as interest expenses.
If you own a foreign bank account, brokerage account, mutual fund, unit trust, or other financial account, then you may be required to report the account yearly to the Internal Revenue Service.
Hi Nag,
To be honest, it’s tax season so I’m too busy to dig into it. You’ve done your research, you have a plausible explanation. You know the old joke – what do you get when you ask three accountants the same question? Four different answers!
Jan
I really appreciate your answer, but I still have to disagree with you on the nature of a loss on a foreign CD. I think it should be a Section 988 ordinary loss. From reading Section 988, and the CFR, I see there are 2 criteria for a loss in a foreign CD to be considered a Section 988 loss:
1) The asset should be a Section 988 asset. A CD is clearly a Section 988 asset (it’s a debt instrument, as specified in the law).
2) The transaction should not be a personal transaction. A personal transaction is defined in the code:
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)For purposes of this subsection, the term “personal transaction” means any transaction entered into by an individual, except that such term shall not include any transaction to the extent that expenses properly allocable to such transaction meet the requirements of— (A)section 162 (other than traveling expenses described in subsection (a)(2) thereof), or (B)section 212 (other than that part of section 212 dealing with expenses incurred in connection with taxes).
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Now if one holds a foreign CD purely as an investment, it clearly falls under section 212 and is hence NOT a personal transaction. A ‘personal’ transaction would be something like converting money and using it for a vacation or household expenses abroad and then converting it back.
So I have to save I respectfully disagree, but still welcome your comments.
Nag
Hi Bill,
If you have income of less than 50 cents, you would round down and would not need to report the income. If you have less than 10 grand in a foreign account, you are not required to file an FBAR. But do report that you have a foreign bank account on your tax return and file the Schedule B. That way you’re being 100% above board about it.
Hi Nag,
I think you would report the loss in value – once the CD as matured, as a long term capital loss on 8949. That’s my opinion.
Jan,
I happen to have some CDs in a foreign currency with a foreign subsidiary of Citibank. Citi sends 1099s to American persons who have accounts with them. For CDs with a term of 365 days or lower, they sent 1099s only on maturity. For a CD of 366 days or more, they send 1099-OIDs. So their accountants seem to think that accrured interest is taxable.
My question is about losses on some of these foreign currency CDs. My CDs were created by directly wiring $$ frrom the US, and I paid taxes every year on interest. On maturity (sometimes after a few autorenewals), the CDs were converted back to $ and wired directly back to the US.
So (for example). the CD was originally $100, and I paid taxes on internest of $10 in Year 1, $12 in Year 2 (total basis of $100 +$10 + .$12 = $122) I then wire the money back to the US, and as a result of foreign currency fluctuations, it is now worth $85. So my total loss is $85 – $122 = $37.
It seems to me that this should be a normal loss under section 988. A foreign CD is an investment, not a personal account, and is no different from a foreign bond (a zero coupon foreign currency bond if interest is accrued) or a forex instrument. But I gather you think this should be considered a capital loss and reported on Form 8949 as a long term capital loss ?
Thanks for your responses and your very useful site,
Nag
Hi AK,
File the FBAR on the joint account with your mother. You have signatory authority, but you do not receive the income. The income should be taxable to your mother only.
About the accrued interest. I keep getting mixed answers. (That’s why my responses seem mixed, it all depends upon who I’m talking to at the time.) But – as I understand things right now, if you have access to those funds – the interest, then you must report it as having been received. If you have not received the income – if you can’t touch that interest without paying a penalty, then you do not report the interest.
It used to be that you needed to file form 8891 for your Canadian RRSP. But the IRS eliminated that, so you only need to file your FBAR (and the 8938 if you’re required to do that.)
Thanks for all the information that you have shared and for taking time to answer question.
1.I have a joint account with my mom in India,but the money deposited in the account was used by her.I know since I had signatory authority I have to file FBAR,My question is do I need to pay taxes on this joint savings account for US tax returns (filed jointly with my spouse),even though I have not used/ received money from this account with my mom.
2. Just to confirm if I have not understood it wrong ( follow up on question7&8).We have to report interest accrued on Fixed deposits every year on Tax returns even though you get the interest earned at the maturity of fixed deposit.
3.Which form has to be filled for Canadian RESP.
Really appreciate all your help
Hi Jag,
I don’t thing you can report if the value changes every day. Also, if you don’t actually receive the income, I don’t think you can report it. I would wait until you actually receive the dividend to report on your 2019 tax return.