412 thoughts on “How to Report Your Foreign Bank Interest on Your US Income Tax Return”

  1. Hi Srinivas,
    The Indian 16A form is not yet accepted by the IRS like the 1099 form is. The 1099s are submitted to the IRS by the companies issuing them. The IRS doesn’t have access to the 16A.

    So–while the 16A is a great document for you to report your Indian interest income–you can’t use it for your automatic foreign tax credit. (Which is so simple and easy and doesn’t require the 1116 and that’s why it worked so well in tax act.)

    So–you’re stuck with the 1116 and given what you wrote, I’m pretty sure you did it correctly. That $9 of tax on $28 interest is pretty high–it’s higher than what you’d pay in the US so you only get credit for what you’d pay in tax in the US on that interest. That’s why it’s limited.

    The thing is–you can carry forward that credit and if in the future you have foreign income that isn’t taxed as highly, you can use that credit in the future.

    (Fair warning–I have a client with a foreign tax credit that she’s been carrying forward for about 10 years. She may never get to use it.)

    So, do use the 1116. (Sorry, I know that’s an annoying form.)

    The other thing is, make sure that you check the box YES about having a foreign bank account. When you do that, it should generate the Schedule B. If you’ve done that, I’m not sure why it’s not generating the form.

  2. Hi Jan,

    Thanks for the info.

    It makes sense what you say that you don’t pay capital gains/loss on the foreign currency if the exchange rate goes up or down, but what about if you cash the foreign currency account back to dollars and the the difference in exchange rates is favorable and has made the original amount higher than it would be just from the interest alone?

    thank you!

    Bob

  3. Generally, you will not be able to claim currency depreciation as an investment loss. The are situations–such as when you buy and sell currency on a trading exchange where you would do that–but only upon the sale of the currency (kind of like trading stock.)
    You can’t claim a loss on your tax return just because the value of the currency went down. Think of it this way–if you did that, then you’d have to claim the income every time the currency went up–you wouldn’t want to do that would you?

  4. Hi Jan Roberg,

    Thanks a lot for this blog, your website answered most of my tax queries.
    My question is related to foreign interest income reporting and taking credit.
    For the year 2013, I earned interest income of
    – $696 from US Banks (received 1099-INT)
    – $4 from Indian bank (Not received 1099-INT/similar form and no tax deducted at source)
    – $28 from Indian bank (Form 16A received and $9 tax is deducted at source)

    All the foreign interest/tax paid is converted from INR to USD based on US treasury exchange rates.
    I do not qualify to file FBAR as my combined balance of all account never => $10K.

    Questions:
    1. I have experimented entering this details in taxAct Software, entered all the interest income 1099-INT separately per bank and for Indian bank I entered $9 “foreign tax withheld”. With this everything went fine and it generated 1040 and reported $9 as foreign tax credit, but NO Schedule B or Form 1116 generated.
    A) Now I read your blog, you said if foreign interest is involved, we have to file Schedule B even if interest is < $1500 and no FBAR required.
    As per IRS website http://www.irs.gov/uac/Schedule-B-%28Form-1040%29,-Interest-and-Ordinary-Dividends, Use of Schdule B applies:
    You had a financial interest in, or signature authority over, a financial account in a foreign country or you received a distribution from, or were a grantor of, or transferor to, a foreign trust. Part III of the schedule has questions about foreign accounts and trusts.
    Can you confirm is Schedule B required? TaxAct did not generate one?
    B) If Form 1116 is not filed, then IRS will not know what exchange rate I used. Is that okay?

    2. I tried other way also, I reported all interest income in 1099-INT section and Foreign tax credit as part of Form 1116, then based on my AGI, Form 1116 generated limited my credit to $4 and $5 as carry-over.

    3. As per http://www.irs.gov/publications/p514/ar02.html#en_US_2013_publink1000224483. There are 4 requirements to be met for "You will not be subject to this limit and will be able to claim the credit without using Form 1116" and one of them is "All of your gross foreign income and the foreign taxes are reported to you on a payee statement (such as a Form 1099-DIV or 1099-INT)."
    From one Indian bank I received Form-16A (payee statement) and another bank no statement.
    A) Then does that mean I have to file 1116?
    B) Is Form-16A from Indian bank treated similar to 1099-INT?

    Please guide, How to go about it?

    Regards
    Srinivas

  6. Hi John,
    Even though the currency has changed, you will report the interest that you earned at the rate of exchange from when you earned it. For example, let’s say that you earned $100 USD of interest on April 4, 2013. Now that interest might only be worth $80 today, but you use the exchange rate on the date you actually received the interest.

    The fact that your whole investment has gone down in value is not relevant to the recording of the interest earned (as far as the IRS is concerned. It’s very relevant to you because it’s your money!)

  7. Hi,

    I have a deposit account of USD $30K and i received an interest income of 8.50% but because of currency depreciation my 30K is only $26k worth. How should I show the interest income.

  8. Hi Jan

    In fact my total foreign tax is under $200 ( this amount is calculated based on the agreement between USA and that foreign country)

    anyway in that foreign country I paid full taxes which is higher than 200 ( $300)
    can I claim credit foreign taxes in amount $300

    thanks
    Mary

  9. Hi Jan
    I am confusing with filling 1116

    -financial year for this foreign country is ended in feb 2014
    ( I must check for taxes the box (i)- accrued for capital gains)
    -taxes on this income in this foreign country are not withheld at source and must be paid in may 2014
    -I understood dividends and capital gains fall in passive category income
    and capital gains can be interpreted as dividends
    I know I have to fill only one form for each category income
    What do I have to do

    Which boxes must be checked and how many forms must be filling

    Sincerely
    Mary

  10. Hi Bob,
    I’m sorry I missed the question about the currency exchange. I’ve actually called the IRS about that question. You don’t pay capital gains rates on the change in the currency in your foreign investment because you’re paying tax on the interest income but you’re keeping the currency in the other country.

    Now, there are investments in currencies where you do pay tax on those gains, but that’s a whole different thing and it’s set up that way. For just normal fluctuations in currency though, you would not be dealing with capital gains.

  12. Hi Jan,

    Thanks for your advise
    I was thinking the capital gain from brokerage account should be reported on Part V,

    Mary

  13. Hi Mary,
    On the 1116, you’ll check box A for passive category income.

    I’m not sure which box you’re asking about on the 8938. You’re dealing with an “other foreign financial asset” and you’ll be reporting it in part 6.

  14. I have income from a brokerage account that was opened in a foreign country this income is a capital gain, right
    my questions are is: 1) which box must be checked on 8938 to show my brokerage account
    2) which box must be checked on 1116 to show my income like capital gain

    Thanks
    Mary

  15. Thanks Jan,

    I have one last question if I have not worn out my welcome yet. 🙂

    If you have a foreign account in a foreign currency, and put in deposits over time, is there some kind of capital gains or loss when you take the money out?

    This can get extremely confusing, because the exchange rate is always different.

    For example, if you have a Canadian account, and you make the following transactions:

    2006 Deposit 10,000 US converted to Canadian at USD/CAD = 1.10

    2008 Deposit 10,000 US converted to Canadian at USD/CAD = 1.20

    2010 Deposit 10,000 US converted to Canadian at USD/CAD = 0.95

    and then you make a withdrawal of Say 15,000 Canadian in 2012, when USD/CAD = 1.15 and convert back to dollars.

    What is the relevant first conversion rate for the withdrawal of the 15,000 to determine if there was a gain or loss? The first 15,000 deposited? Later deposits? In other words, which of the total deposits is the withdrawal actually coming from in order to determine if there was a loss or gain based on the fluctuating rates??

    This seems almost impossible to figure out!

    thank you

    Bob

  16. Hi Bob,
    You’re right, you do report the expense of the income on the 1112, my bad. Thanks for pointing that out. And then you do that calculation and you get the tiny number–yes, you did that correctly. Frustrating isn’t it? Welcome to my world.

  17. Hello Jan,

    I opened a $100K CD in Costa Rica in June 2013.
    It is a Colone denominated 5 yr CD that pays interest interest into a seperate account.

    I figured that if I look at the secondary account balance as of 1/1/2014 that would show me the interest which I would then convert to dollars & claim as income. for 2013.

    If I don’t bring the money back to US, would it be acceptable to calculate interest income for 2014 by looking at the balance on 1/1/2015 converting to dollars and use the difference from 1/1/2014 ?

  18. Hi again and thanks Jan,

    I did some more research.

    The odd thing is that if I want to claim credit for the taxes I paid oversees, and I use Form 1116, on line 2 I can deduct expenses related to the account from the interest earned.

    Then it gets even more bizarre, because then on line 15, I enter my income earned from overseas (interest – expenses), and then end up with a NET foreign source income on line 17. In my case, $30

    BUT! then I have to divide this number by my total income, line 41 on 1040, in my case $71,000 (married filing jointly) and get a tiny number which I then multiply by the total taxes owed on line 20, which leaves me a maximum credit of only about $2, much less than the $15 withheld by the bank.

    I know these numbers are tiny, but I am just trying to make sense of this all.

    Am I messing something up on the form 1116, because it doesnt seem to make sense all those calculations to find the NET foreign income just to lower the credit that can be taken?

    thanks again

    Bob

  20. Hi Ave,
    You’re all good. You answered the questions correctly. Since you had less than $10,000 USD in a foreign bank account, you don’t need to fill out any forms that have the dollar amounts on them.

    For 50 cents interest, I wouldn’t even bother putting it down. But if you did have enough interest to report, I would put it on the Schedule B even if you don’t have to use it. Turbo Tax will actually place it for you in the software. It asks the question about bank interest.

  21. Thank you Jan

    I guess that means if I just take the standard deduction and do not itemize, than I cannot get any credit for any bank fees. Is that correct?

    thanks again

    Bob

  22. hi Jan I just submitted on tax return. I used turbotax and it ask me if I have foreign bank account I answered yes but It didnt ask me how much is it. then it provide me a schedule B did I do right thing?

    7a
    At any time during 2013, 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 . . . . . . . . . . . . . . . . . . . . . . . .(I answered YES)
    If “Yes,” are you required to file FinCEN Form 114, Report of Foreign Bank and Financial
    Accounts (FBAR), formerly TD F 90-22.1, to report that financial interest or signature authority?
    See FinCEN Form 114 and its instructions for filing requirements and exceptions to those
    requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . .(answered NO)
    b If you are required to file FinCEN Form 114, enter the name of the foreign country where the
    financial account is located ▶
    8
    During 2013, did you receive a distribution from, or were you the grantor of, or transferor to, a
    foreign trust? If “Yes,” you may have to file Form 3520. See instructions on back . . . . . (answered NO)

    I only have less than $5000 on savings and it didnt even earn more than $0.50 interest. Then I used turbotax so It didnt provide me to answer part 1 and part 2 so it its blank or no numbers at all. do I need to declare that $0.50 interest? do I need to amend my tax return to fill out part 1 and part 2 now I submitted it? how about what part of 1040 will put the interest if ever? thank you

  23. Hi Bob,
    That’s a really good question. You would put $40 for the interest that you earned on Schedule B.

    A penalty, would go on line 30 on the front page of your 1040 tax return–it’s the “Adjusted Gross Income” section. Those are things that reduce your AGI. But your fees on your account aren’t penalties, they’re fees so that would go in a different place.

    Your bank fee is actually an investment expense, it would go on line 23 of Schedule A. Fair warning–it might not do you any good. Items in that section of the Schedule A have to add up to more than 2% of your AGI for them to start being counted. But, if you have other investment expenses or employee business expenses, then it would make sense to report it.

  24. Hi there Jan, and thanks for all of your advice,

    I have a foreign account that earns very little interest, about $40 interest per year (in dollar equivalent). I also pay about $10 in bank fees per year for this account.

    I understand this still has to be reported on the Schedule B,

    I also noticed that if you have a CD and pay a penalty for example for early withdrawal, you can take subtract this penalty.

    Do I report $40 interest on Schedule B, or $30? ($40 interest – $10 fees)

    thank you

    Bob

  25. @ Vijay again,
    About filing the FBAR for the first time causing trouble– I really don’t know. I do know that if you don’t file and get caught–it’s very serious. Some people have faced criminal penalties.
    If someone needs to file FBARS and hasn’t been, the best thing to do is first request permission to be allowed into the Offshore Voluntary Disclosure program. They will wind up paying back taxes on unreported interest and there will be fines and penalties on the balances–but it will be lower than if they get caught by the IRS first.

  26. Hi Vijay,
    The official rule is that you report all interest no matter what. But bank interest isn’t reported to the IRS if the amount is under $10. Generally, many people don’t bother to report amounts for under $10.

    That said, because of all the fuss associated with foreign bank accounts–I’d go ahead and report the $4 anyway. Better to be safe than sorry with this one.

  27. One more question Jan – There is some misconception that filing FBAR for first time is inviting trouble for yourself by disclosing accts to irs. will Fiing fbar for first time trigger any unwanted problems? Whats your opinion or advice on this? Thanks

  28. Thanks Jan. One of my indian saving acct has $4 (rs 240) interest – Do I need to list that in sch b along with my other nre/savings acct? Is there any min threshold for listing interest like > $10 ? – Thanks

  30. Hi Jan, One question on Filing Schedule B. Do I need to file Schedule B even though the total interests from my foreign bank accounts is < 400$. I read online that I have to file schedule b only if my total exceeds $1500. In case if I don't have to file schedule B since my total < 1500 then 1) I assume still I have to report tht income in 1040 and pay tax 2) what about part 3 – So i can go ahead and file FBAR even though I didn't file sch B. my acct balance exceeds $10000 in 2013 Thanks in advance. Vijay

  31. Jan,

    Thanks for your response. Actually i had lost the link to this website and could not check before. Your are right better save than sorry.

    Thanks
    SAM

  33. Jan, thanks for your help. With regards to my question on property earlier; the property was bought in my name when I was minor and was resident of India then. I am not sure if I would classify it as inherited property. Would sale of it now (in US now as a citizen) initiate tax implications in US?? What happens if it was an inherited property??

    Regards/Vin

  34. Thanks for the answering my question Jan. Yes I am here on a H1 visa and my assignment is more than 6 months. Thanks

  35. Hi Vinoth,
    Wow, you just blew me away! That’s American slang for you really surprised me. I looked at the Pub 17 and it does say US citizen. That is different from the documents that I have been referring to which use the term “US person”–that’s different. A US person is defined as:

    United States person means U.S. citizens; U.S. residents; entities, including but not limited to, corporations, partnerships, or limited liability companies, created or organized in the United States or under the laws of the United States; and trusts or estates formed under the laws of the United States.

    I copied that right out of the IRS website.

    I’m still going with, a US person–which includes both citizens and resident aliens would need to file an FBAR and report foreign bank accounts.

    Now you say that you are here on a temporary work visa–my question to you is, how temporary? Generally, a person is considered to be a US resident if he is here for over 6 months on a work Visa. There are some exceptions but that’s a general guideline. (Students here on an F,J,M or Q Visa are considered non-residents. I’m guessing you’re here on an H1 Visa, right? So if your temporary assignment is more than 6 months, I would say that you need to report.)

    But thank you for pointing out that it says “citizen” in the pub 17. Seriously. You may have helped some people. That’s a good find.

  36. Hi, Reporting foreign interest on Schedule B is applicable only for US citizens or for any foreign nationals working here. I am here in US on a temporary work visa. Do I need to report my foreign bank interest(no 1099 ints). Based on the irs guide(http://www.irs.gov/pub/irs-pdf/p17.pdf – Page 56) for 2013 only US citizens should report interest income. Could you please advice. Thanks in Advance

  37. Hi Vin,
    About your state tax question–generally, the states follow the IRS rules and regulations about income. If the federal government taxes something, then usually the state does too.

    Now, about state tax credits for foreign taxes–generally that’s a “no”. You can’t “double dip” so if you use taxes paid to a foreign country to offset your federal income tax, you can’t use that same tax to offset your state income tax. Sorry.

  38. Hi Vin,
    You’re right, the whole foreign income reporting is complex and confusing.

    Remember, that the US taxes world wide income–so there will be capital gains tax on the same of the land in India. While here in the US, we have something called a “like kind exchange”–which sounds like what you may have done in India–I’m guessing that because it was handled in India, there won’t be any of the documentation what would have gone with a US “like kind exchange” so it won’t fly—

    Do remember that you will receive a credit for any taxes on the transaction that you paid to India.

    I’m attaching a link to information about like kind exchanges–but my gut reaction is that your land transaction in India was a completely taxable transacation. But here’s the link anyway: http://www.irs.gov/uac/Like-Kind-Exchanges-Under-IRC-Code-Section-1031

    Remember, not all of the profit is yours–it’s split between you and your brother. You are only responsible for tax on your share of the profit. Also–your transaction is a long term capital gain–which is at a lower tax rate.

  39. Jan,
    getting involved with foreign income has become complex and confusing. What are the implication of foreign income with respect to state. Does a state gives any provision for tax credit; especially in state of CT where I am the resident now.

    Tx/Vin

  40. Jan, Tx for your response. I have another question related to the foreign tax, say if my father bought a piece of land in name of my bro and I (when we were minor), way before I came to US; now it is sold to separate share for two of us. I use money to buy couple of properties following rules in India. All the capital gains was used up and on top added more capital from US. What are my implications for US tax??

  41. Hi Sourabh,
    That’s a very good question. When you have a year where the exchange rate fluctuates highly, I recommend using the rate from the date the interest was paid. It doesn’t matter which exchange service you use, as long as you are consistent with using the same service for each exchange. The IRS uses the US treasury rates. Here’s a link to them: http://www.fms.treas.gov/intn.html#rates The US Treasury updates the exchange rates quarterly.

    If you want daily exchange rates, XE has a free historical currency converter at: http://www.xe.com/currencytables/

  42. Sorry Vin,
    I didn’t realize you had more there. You are going to want to use form 1116. Here’s a link: http://www.irs.gov/pub/irs-pdf/f1116.pdf

    Interest income is passive so you’re going to check box a. You’ll report the income earned in part 1 and the taxes paid in part 2.

    Your tax software should walk you through it — the hard part is getting to the form, that’s why you need to know you need the 1116.

  43. Hi Vin,
    It certainly does sound confusing. You’re going to want to report the total interest and the Tax Deducted at Source separately. That’s going to be the bottom line to my answer here. This is why:

    Let’s say your interest earned on the bank account is $100 and the TDS was $25 (just making up numbers.) But it’s reported on your statement as you receiving $75–even though you know that the income was 100 and the tax was 25.

    Now, come back to the US–you’re better off claiming the full $100 income and the $25 tax credit. Here’s an example: let’s say your tax rate in the US is 25% (the same as what I put the foreign tax in the example.)

    By claiming the $100 income the tax would be 25$ right? But you’ll get a $25 tax credit so it completely balances. All good.

    But, what if you tried claiming the $75 instead and not claim the tax credit? You’ll still pay tax on the $75 amounting to $18.75 but you wouldn’t get that off-setting credit. (Plus, it would technically be wrong.)

    So you’re going to want to go through the effort of figuring out the TDS and making sure you claim it. Sorry.

  44. Hi,
    I have a specific question on foreign interest income. I deposited $20,000 in a CD in India at the beginning of the year when the conversion rate was around $1 = 52 Rupees (let’s just use this as an example) for 3 years at 8.5% compounded quarterly. This equates to 10,40,000 Rupees as an initial deposit. The total interest for this year is 91,258 Rupees and the ending account value is 11,31,258 Rupees. Now, the conversion rate is $1 = 62 Rupees. Using this rate, the interest for this year is $1,471 and the ending account value is $18,246.
    For the tax purposes, do I report an interest income of $1,471 even though the total account value is less than the initial amount?

    Thanks, Sourabh

  46. I am not sure when to fill what forms for reporting foreign income. Could you please help me with that. Most of my income I have is from bank interest or bond interest in india.
    Tx

  47. TDS when added together for March and September does not match with amount of of interest i.e, TDS should be ~30% of interest??
    Not sure!
    Tx

  48. Jan,
    I have a question regarding calculation of interest income from bank statements from a foreign bank which reports int from March to April twice in year, once in March and then in September and reporting TDS (Tax Deducted at Source) deducted by bank in India .From Q&A posted here, I understand that for year say 2013, interest can be added for March and September, 2013. How about TDS? Also I have CDs with the bank, it seems the bank paid interest with TDS already deducted. Normally, bank reports total interest with no deduction and then reports amount deducted as TDS. Creating lot of confusion for me to report. How do I handle this??
    Tx

  49. Hi Vijay,
    That’s a good question, whether to put two items from the same bank on one line or two. To be honest, the answer is: I don’t know. I’ve done it both ways and had issues both times. I separated the numbers out for one client and she got an IRS notice saying she didn’t report income–the IRS document matching had the numbers combined and the computer spit it out. For another client–I had combined the numbers from one bank and she got a notice saying the same thing–except the numbers were separated.

    Fortunately–little problems like that are easily handled over the phone.

    In your case, the banks won’t have IRS document matching to deal with so I don’t think it really makes a difference. So long as you can document your numbers, that’s the important part.

    What triggers an audit? The number on factor is the IRS document matching program. Make sure that what you report to the IRS on your tax return matches the documents that they are receiving about you. And just report everything honestly. Quite frankly, if you’ve done everything right, even if you do get audited it shouldn’t matter.

    Here’s a Kiplinger article on audit red flags that you might find helpful: http://www.kiplinger.com/slideshow/taxes/T056-S001-irs-audit-red-flags-the-dirty-dozen-slide-show/index.html

  50. Thanks for the reply. Even if the accounts (NRE and savings) are from same bank do I need to report in separate line item or combine the interests together? One more general question – What are the common factors that can possibly trigger an audit on your tax return ?

    Thanks

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