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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Hey Jan,
Thank God for somebody like you! I’m here to ask you about form 3520. Last year, My wife and I went home to Asia, opened up a savings account. I understand I had to file a 114 since it is over $10.000. I did file 114. Now I look at the 3520.Nearly all about foreign trust and large gifts. What is a foreign trust? Is it the same as a savings account? Do I have to file this? Have not filed my 1040 yet. Have an extension. Please clarify.
Thanks!
John
Hi Jan,
My wife is from Bulgaria and has been living in the USA for almost three years (July, 2011) now as a PR. She has been in Bulgaria taking care of her mother and went into one of her banks today and was told that the there had been a request for information made about her bank account (from the US). This account has less than US$2000 in it, however she does have another account with another bank with more than US$250,000.
We were not aware of the information requirements of the US Government regarding foreign bank accounts and PR’s until now. We have never filled an FBAR or Form 8938. The money in her account was from the sale of her cafe before she moved to the US. To complicate matters even more her bank was recently closed (June 23rd) and is in the process of either being rescued by investors or nationalized if the investors cannot save the bank. Her account is insured up $100,000 euros and we are not sure what will happen to the amount over this. Could take up to another 5 months before they come up with a solution.
I almost had a heart attack when I started researching FBAR’s and form 8938 (possibles fines. etc.) and am not sure what to do. The money was made legally in Bulgaria, taxes paid in Bulgaria and we are not trying to hide anything, just did not know the law.
Please advise what steps we can take. Should we file delinquent FBAR’s for the past 3 years and form 8938? We are an average middle class couple and do not make a ton of money and cannot afford to pay hefty fines. Also, if we paid taxes on the interest she made would we be eligible for tax credits in the US? How far back are foreign banks required to go and what information are they required to provide the US under FATCA, which went into effect on July 1st? She also has 2 apartments under her name (not rented out), do these need to be reported on form 8938?
Any clarity and help you can give on this is greatly appreciated. I asked my account about this and he really did not know anything about it.
Thank you in advance.
Cheers,
Al
I have a 62 year old US citizen brother, who worked/lived overseas for 30yrs, but now lives with me in the US. He left his small retirement fund in the overseas bank and pulls out pocket change as needed. I claim him as a dependent on my tax return since he lives with me and has no earned income or unearned income > $1K from the overseas account. He does not file a US tax return because he doesn’t meet the minimum requirements. So the question is does he still need to disclose the existence of the overseas account to the IRS via FBAR or OVD?
Thanks Jan,
For the response number 239. The only follow up is why would IRS be interested in the case i mentioned above even if i get audited as i am showing interest accrued and paying taxes each year regardless of it showing in my statement.
I thought FBAR reporting is purely with treasury
Thank you so much Jan. I have you bookmarked because your explanations are dead on.
Hi Ajay,
No, you cannot report the currency fluctuation as a loss on your US tax return. If that were the case, then you’d also be required to report the currency fluctuations in your favor as income on your US tax return.
Every day I am asked about reporting currency fluctuation as a loss. Nobody has ever asked me if they have to report a gain.
Hi Shree,
I would say that you should report that balance the way it’s reported on the statement that you receive.
Think of it this way, let’s say you get audited (highly unlikely here, just giving this as an example.) If you were to be audited, the IRS would look at your bank statement. Does the statement say $10,000 or does it say $10,150? Put down what that paperwork says because you don’t want to have to explain why you didn’t put down the number on the statement.
Does that make sense?
Thanks a lot for the responses.
I have a question regarding FBAR. I have Fixed Deposit account $10000(CD) which matures in 10 years. I have filed FBAR but the question is when putting the Maximum value during the year do i need to put just $10000 or should i also calculate the accrued interest every year and add that to $10K + Accrued interest eac year for next 10 years for the Maximum value.
I understand on interest reporting in Schedule B accrued reporting every year for taxes but my question is purely regarding FBAR whether i should report $10k every year(assuming no other accounts) or should i incrementally add the Interest and report that in FBAR even though its not deposited till maturity(10 years from now)
Question
I have an account in India and it’s in rupees. I can convert that to dollars anytime. This account was opened last year. I got the statement from the time it was opened till December 31st which including the interest as well. I understand I need to report this interest as income on my 1040 schedule B. What about the currency fluctuation? I actually lost money due to fluctuation even after including the interest. Can I show those as my losses? Thanks
Hi Jan,
I saw a tax lawyer and got all my questions answered.
Here’s a summary of the answers he provided me:
(1) SDOP is a new process and recommended over silently amending.
(2) Title 26 is applied based on the SINGLE year with highest balance. In my case, because I’m filing FBAR on time, it becomes the highest of the last 7 years.
(3) FBAR’s report maximum balance, while Title 26 uses end of year balances.
(4) My wife’s account does not appear on any FBAR’s, BUT, because interest was not reported, it is still included in Title 26 penalty.
(5a) The RRSP is reported on form 8891 which is actually filed with ALL 3 amended tax forms and future tax forms.
(5b) Yes, RRSP balance is subject to Title 26 penalty.
(6a) Personal condo is not reported anywhere.
(6b) Form 8938 is only required if I have balances > 50K
(7) 2013 FBAR was filed on time, not late, therefore I was not required to mention SDOP on it, only on the 6 prior amended ones.
(8) No need to mention that I am estimating higher.
(9) I decided not to report the other deductions, and did not ask my lawyer about them.
These are all the answers. Thank you for telling me about the SDOP procedure in the first place. It allowed me to find a lawyer who was specifically familiar with it.
Regards
Hi Cynthia W.
I’d report it just to cover your behind.
Hi Ramesh,
If you have less than $10,000 USD in a foreign bank account you will not need to file the FBAR form.
According to the IRS, you are supposed to report any interest earned from a bank account, but most banks do not report anything below $10. Most people do not report interest earned of less than $10. (I do because I’m an accountant.)
Hi Nitin,
In answer to your follow up question. You do not file anything with the FBAR, it’s a stand alone kind of form. Schedule B and form 1116 are both filed with your 1040 tax return.
You only file the form 1116 if you are reporting that that you paid to a foreign country. If India did not tax the interest earned, then you would only report the interest on the Schedule B. But I believe you are paying tax on that interest, so you would also need to file the 1116 form.
Dear Jan,
Hi Morning
I have another question , will appreciate your clarification:
1. Can the bank interest and income earned from rent both be shown in form 2555 as foreign earned income? Will it be allowed for exclusion ?
Or only the income/bonus derived from salary is allowed in exclusion.
Rgds
Sunny
Dear Jan,
Many thanks for your reply.
Much appreciated.
Rgds
Sunny
Hello Jan,
Thank you for your reply (yes, that would be 1116, oops). Please forgive me if I did not understand your reply correctly. I gather that unused domestic credits can be carried forward up to 10 years to offset future domestic tax liability/burden.
But can previously unused *domestic* (federal) tax credits/deductions be applied to offset *foreign* tax liability/burden? That is the point that I am not clear on.
Upon reviewing the instructions for form 1116, I found the following:
“Overall domestic loss defined. In a tax year in which you choose to claim the foreign tax credit, the overall domestic loss is the domestic loss for that tax year to the extent it *offsets foreign source taxable income* for that tax year or for any preceding tax year (in which you choose to claim the foreign tax credit) because of a carryback…
“Domestic loss. A domestic loss is the amount by which the U.S. source gross income for the tax year is exceeded by the sum of the expenses, losses, and other deductions properly allocated or apportioned to that income.”
Thanks again. I look forward to your reply.
Best regards,
Calvin
Hi Sunny,
Texas has no state tax so you will not be taxed on your overseas interest by the state of Texas. You would be taxed on overseas interest by the state of California. And of course, you’ll be taxed by the federal government.
Bank interest is taxed as “ordinary income” which is taxed under the regular progressive income tax rate.
Even though the bank deposit pays the principle and interest on maturity, doesn’t it accrue the interest annually? Basically, if you receive a statement showing how much interest you’ve earned for the year, then I’d report the interest annually. (Which is pretty much every body that I’ve looked at. I’ve had lots of people say they don’t receive “statements” but the documentation they receive does show the interest earned every year. So reporting annually is pretty much the norm.
Finally, if you’re working overseas, yes you can use the form 2555 to exclude some of your foreign earned income from tax. Now, here’s the tricky part, the remainder is taxed at the progressive tax rate and it’s based on your tax bracket as if you were taxed on the whole amount.
So, let’s say you are single the $150K puts you in the 28% tax bracket. You’re going to skip all of the progressive 10%, 15%, and 25% tax rates on the lower income and jump right to that 28%. (Of course you are benefiting from that nice 0% bracket but it’s a bit of a shock when you’re doing your tax return.)
So, do remember to withhold some federal tax while you’re working overseas.
Hi Calvin,
I think you mean the 1116 form? Yes, those tax credits do carry forward. Isn’t that nice?
Hi Will,
Sorry I didn’t respond sooner but I was buried in FBARs!
You’ve got a lot of questions there and I don’t think I can give you the best advice in a forum like this. I think you need to sit down with your accountant and go over everything with the IRS.
Hi Jan,
Will appreciate if you can guide me with the following:
1. I have a substantial bank interest income (from fixed deposits) from overseas banks accounts.
2. Will I get taxed on the above bank interest income if I am a resident of Texas? Does California also tax overseas Bank Interest income?
3. I understand that one has to pay federal taxes on bank interest? Are these taxed on normal progressive tax rates or a fixed rate?
4. Banks Fixed Deposits pay principal + interest on maturity. So do I need to pay tax every year on interest income or will I pay on maturity?
5. If I am employed overseas (out of USA) , and lets say my income is USD 150 K. I was reading that up to US $ 96500 of foreign income is tax exempt. So balance USD 54500 will be taxable? Question is : on this balance USD 54500 taxable income will the federal tax be on progressive rate or a flat rate? If flat rate what will be the rate applicable.
Thanks for your response.
Rgds
Sunny
Hi Jan,
I just realized something while preparing for my forms to use the streamlined process. My highest end of year balances for the last 7 years was in 2013 as each year had a higher balance than the prior. However I am filing an FBAR for 2013 since I still have 5 days left… to be followed by the amended returns soon after.
Since 2013 has the highest end of year balance of all prior years, this means that the Title 26 penalty is only applied to each account I held in 2013 for which the FBAR was not reported or the FBAR was reported but the interest had to be amended. In my case the FBAR will be reported for all accounts – so only those accounts that earned interest will be liable for the Title 26 penalty. If I understand correctly, that is, no penalty for the Canadian RRSP since it gives no reportable income, and no penalty for a Checking account which earned exactly 0 interest. I also have a US savings account which earned zero interest because the balance was under the bank’s minimum threshold. My other savings account earned $0.12 – so I guess that account may be liable for the Title 26 penalty because of that mere 12 cents? The bank only reports end of year interest if an account earned more than $25 Canadian – so I arrived at the 0.12 cents by manually adding up the 0.01 cents earned each month.
I really appreciate the help and advice you’ve provided.
Thanks again, and sorry for the many questions!
Hi Jan,
First, thank you very much for your quick and detailed replies. It was very helpful!
I have a few followup questions.
My tax lawyer did not tell me about the streamlined domestic offshore procedure, so I need to ask him next time I call him… but based on the link you provided, the streamlined process would facilitate filing, both in terms of number of years to go back, especially that I do not have statements for years farther back and amending 3 years is far easier than amending 7.
(1) Is there any reason one would prefer to simply file amended 1040X’s and FBAR’s over following the streamlined procedure as my tax accountant had originally recommended me?
(2) Is the Title 26 penalty applied to all 6 years (i.e. 6 x 5 = 30%), just the last 3 years (i.e. 3 x 5 = 15%), or is it simply just 5% of the one year with the highest end of year balances?
(3) Just making sure I understand correctly, FBAR’s are the highest balance during the specified year – while Title 26 uses end of year balances.
(4) My wife maintained a personal account that was always below $10K. She is the only owner of that account and we have no joint accounts. It seems that her account would not appear on any FBAR’s and hence not liable to the Title 26 penalty, but the interest needs to be reported on the amended 1040X. Is that correct?
(5a) I have a Canadian Tax Sheltered RRSP, I will report it on the FBARs and file form 8891 with the earliest of the 3 years going back for the streamlined process (i.e. 2011). Since it is tax-sheltered it probably does not matter which of the 3 years I put it in, anyways?
(5b) More importantly, however, is if the balance in my retirement RRSP plan also subject to the Title 26 penalty – or is it treated differently?
(6a) If I have a condo (personal place of residence) in my home country, does it also need to be reported somewhere? I assume it is not subject to the Title 26 penalty.
(6b) I looked at form 8938, but that seems to be for people with foreign financial accounts > 50K, my accounts are all much less… so I assume it does not apply to me. Any other forms I may need to know about?
(7) The deadline for the 2013 FBAR is coming up in 5 days. On my 2013 FBAR that will be filed on time, do I need to say that I am planning to follow the streamlined process? It may take me another week or so to get all the amended tax forms ready…
(8) I will be estimating higher balances for some of my accounts that are 4+ years old. The estimates shall not affect the Title 26 penalty since my largest end of year balance was last year – for which I have detailed statements. Do I need to mention somewhere for those older balances that they are estimated higher?
(9) Can I take advantage of the fact that I am amending the last 3 years to take deductions I had missed when I originally filed my taxes. For example, I did not know that excise tax on my car was deductible, so I never deducted it in the past 20 years… or should I avoid additional deductions that may be confusing.
Thank you again for your help and advice.
You’ve been very helpful!
Hello Jan,
Thank you SO MUCH for your response! It was really a breath of fresh air – so clear.
And, of course, I have another question:
My wife’s and my 2003-2010 U.S. tax returns show a “negative” tax liability: although we did not have a tax refund, we had tax deductions (MFJ, etc.) that were not totally utilized.
It seems that these *negative* U.S. tax burdens (unused tax deductions/credits) can be “passed forward” for up to 10 years.
Can I use these U.S. (domestic) “credits” from 2003-2010 to offset current *foreign* tax liability/burden?
I have scoured the 1666 instructions but could not find an answer to my query.
Thank you again for your consideration.
Sincerely, Calvin
From Post 213:
Hi Jan:
Do I need to file Schedule B along with FBAR if my investment in the CDs in India is more than $10,000?
Also, when does one need to file 1116 form. If I am incurring interest on the CDs in India but do not receive the 1099-INT form from Indian bank then do I need to fie the 1116 form along with Schedule B and FBAR?
Thank you again for your help and advice.
Thanks a lot for your help Jan.
Hi Beverly,
You live in Lebanon but you are required to file US taxes. I think this link is really important for you: http://www.irs.gov/Individuals/International-Taxpayers/New-Filing-Compliance-Procedures-for-Non-Resident-U.S.-Taxpayers
Bottom line–in order for you to catch up, you need to file 6 years of FBARS and 3 years of tax returns. But it sounds to me like you’ve been filing your tax returns all along so you’re probably okay there.
If the IRS determines that you’re a low compliance risk (which I’m guessing that will be the case) they won’t even assess any penalties. The bottom line is you didn’t willfully withhold information from the IRS, you just misunderstood the instructions.
Note to anyone reading this–Beverly is living outside of the United States. The rules are different if you live inside the United States. I just want to make that clear.
Hi Calvin,
I’m thinking that I would report your Brazilian bank yield and taxes paid on your US tax return exactly the same way it is reported on your Brazilian tax return (or, if you are not required to file in Brazil–then exactly the same way it is reported on your Brazilian bank statement.
That should be a win/win for you. 1. It’s easier. 2. Your taxes paid to Brazil tie to the taxes that would be owed to the US. And 3 (does this make it a win/win/win?) the paper trail makes sense and to me, that’s almost the best part.
Hi Nitin, (post 211)
Sorry I’m a little out of order here.
If your $15,000 CD in India is the only foreign account holdings that you have, you will only need to file the FBAR, and not the form 8938. The 8938 goes with a tax return, the FBAR is filed separately. Here’s a link about what kinds of accounts are reported where (in case you need to know.) http://www.irs.gov/Businesses/Comparison-of-Form-8938-and-FBAR-Requirements
The FBAR is reported online at this site: http://bsaefiling.fincen.treas.gov/main.html
About how to report the interest earned. If the CD was in the US, you would receive a 1099 for the interest earned after the 2 years. So that’s the way it would be reported. But your CD isn’t in the US. Personally, I would report the interest as it is shown as being earned on your Indian Bank statement. Let’s say you’re using ICICI bank, and their statement shows that the interest was accrued even though it wasn’t paid–then I’d report it on your US tax return because it’s shown on the statement. If nothing gets reported until it’s actually paid–then I’d wait and report it once it’s actually shown on the statement.
Bottom line–be able to tie your US tax return to your bank statements and you’re fine.
Hi Will,
Good questions.
1. I believe you do need to report your Canadian retirement accounts. I used to think you didn’t need an FBAR for those because you are supposed to report them on this form : http://www.irs.gov/pub/irs-pdf/f8891.pdf with your tax return. But, I read somewhere that those also are to be included in the FBAR–although for the life of me I can’t find the document I saw that on. I’m with you, better safe than sorry. And, remember, the gains inside your RRSP are tax free so you’re only reporting the account balances, not paying tax on the gains.
2. I think you’re doing the right thing–do the best you can with what you’ve got to work with.
3. How far back to go? That seems to be the magic question. I would go back for as many years as you’ve had foreign holdings over $10,000 that you need to be reporting on the FBAR. That’s the official IRS rule. I’ve been looking for a “max” but I haven’t found one yet.
4. The IRS won’t have copies futher back than 2007 (I know, I recently asked for someone.) The mortgage interest is taken as a deduction on your schedule A, just like your American mortgage. And yes, you can deduct foreign mortgage interest on a second home.
5. You may not lump all the interest together into one year and pay the tax as a lump sum. (Wish you could. Good idea–just don’t do it.)
6. Since you don’t believe the amendments would affect any carry forwards, I think you’re fine doing the more current years first.
7. Don’t I wish. But it’s not that easy.
One last thing–I think this applies to you: http://www.irs.gov/Individuals/International-Taxpayers/Streamlined-Filing-Compliance-Procedures
You didn’t willfully avoid doing your FBARS, you just didn’t know. You should check that IRS page out.
Hi,
I just recently learnt that I need to report foreign accounts and interest income from foreign accounts. I have accounts under my name that may have been over US$ 10K since 2006. Not sure if Canadian tax sheltered retirement accounts count towards the $10K limit, but can just report them anyways. My wife has one account that is below US$10K. The accounts earned interest (probably < $1K for all the years from 2006 – 2009 combined). As of 2010, the interest is more, but still less than $1200 per year for both my and my wife's accounts combined.
I did not know about this rule and I wish to make my accounts compliant as soon as possible.
(1) I assume I would start by filing FBAR's for all years (how far back) for my accounts since they were more than $10K. I assume we do not need to file an FBAR for my wife's account since it was under $10K for all years. We did not have joint accounts.
(2) For the FBAR's, I also do not have bank statements for all these years and the bank would not provide statements this far back – so I am estimating the account value for each year to the best of my knowledge and adding some buffer to keep it on the safe side.
(3) With regards to reporting the interest, how many years back would I need to go? Again, I am estimating the years farther back and adding $100 or $200 as a safe buffer to the best of my knowledge because statements are not available. I hope that is acceptable. Note, that most of the interest received was wiped out by the foreign currency losing value – but it seems that this is a loss I cannot deduct.
(4) Do I need to file amendments for all these years. How many years back? Would that be by filing 1040X forms and schedule B's. I also paid mortgage interest which I assume I can deduct. Do I report that as negative interest on the schedule B or somewhere else? I also don't think I have a copy of tax forms that I filed prior to 2007. If I have to amend that far back can I get a copy from the IRS?
(5) Can I combine all the interest of the farther back years, say 2006-2009 as a lump sum in my 2010 amended report?
(6) I do not believe the amendments affect carry forward capital gains.losses. As such can I amend the more recent years first? Then amend earlier years when I have more accurate data?
(7) I believe that the total interest for all the years combined is pretty small, less than $3K, can I fill some form and pay the taxes on that number and be done??
Thanks
Hi Jan,
I am currently on H1B and from India. I want to invest in a CD for around $15000 in India. If the maturity of the CD is say for 2 years then:
1) What all forms do I have to fill while filing the return
2) Since I will get the interest after 2 years, will I have to report the interest income after the maturity of the CD or do I have to report the expected interest each year.
Thank you in advance for your time and help.
Hi Amy,
you have signature authority but no reportable interest. You definitely still want to file the FBAR which is due by June 30. Here’s a link to that website: http://bsaefiling.fincen.treas.gov/main.html
Personally, I’d do the amendment just because the whole foreign bank account issue is such a big deal right now. It doesn’t change your tax return, and it probably doesn’t matter but–with all the attention being paid to this issue, I’d rather err on the side of caution with this one.
Your 1040X will have everything exactly the same in both colums (because you have no reportable income to add or changes to make.) In the explanation box you will write: Taxpayer discovered that she does have signature authority for a foreign bank account with a value of over $10,000. Schedule B showing proper checkbox is attached.
Then, attach a correct Schedule B where you checked the box. Don’t add any other supporting documents that might have been on your original return (like a schedule A or child tax credit or any other form.) There’s no changes to the other forms so you don’t include them.
I already filed my 1040 return for 2013. I just found out that I had signature authority only on some corporate foreign accounts starting in 2013 that totalled more than $10k. I did not answer ‘yes’ to that question on my Sch. B when I filed it. Am I ok, or do I need to amend? Thanks!
Hello Jan,
Thank you for your very informative blog. I have read all posts and trust that my question has not been addressed yet:
I am American married to a Brazilian. We have been filing jointly (MFJ) since 1995. We have a Certificate of Deposit (CD) account in Brazil. The bank manager has explained to us that “the CD does not generate dividends, it generates yield (interest?) which increases the principal” (i.e., no yield/interest is put in our checking account, it stays in the CD and shows up as an increase in the total value). Tax is withheld (automatically paid at the source) in two different cases:
a. a portion of the CD is sold off (and then only that portion that is sold off is taxed).
b. the CD “matures,” wherein the entire (remaining) balance is ‘dumped’ into the checking account and the entire gain/interest from that remaining portion is taxed automatically and immediately (it is all computerized).
I/we are required to report worldwide income to the IRS. Whereas we get a “foreign tax credit” in the US against the taxes we pay on the yield (interest?) that the CD generates, it seems that the IRS also views the yield that has *not yet* been taxed in Brazil as income and expects us to pay taxes on that in the US now, even though it will eventually be paid in Brazil.
As mentioned, the growth in the accounts is taxed if portions are withdrawn or when the CD eventually matures. However, if the interest is taxed by the IRS now (prior to being taxed in Brazil, which thereby provides/generates a “foreign tax credit”), we will end up being taxed twice on the same interest.
The tax paid (at the source) on gain/interest on CDs in Brazil is apparently the same as in the US: 15% (or more, when amounts are not left in the account for a sufficient length of time). Thus, a sufficient “tax credit” for having paid tax on the CD’s gain/interest will undoubtedly occur in the eyes of the IRS, but registration/reporting of same needs to be “coordinated” with the time at which the actual tax is *due* and automatically *paid* in Brazil. Otherwise we will apparently be *taxed twice* on the same “income.”
Is our analysis correct? If so, how can we deal with (avoid) this?
Thank you for your consideration.
Sincerely, Calvin
Hi Jan,
I just have been reading about FBARs and did not know I was required to be sending these in annually as I self-prepare my taxes. I am an overseas taxpayer and I have also misintrepreted the bottom line of Schedule B to mean “interest” as earned interest on a foreign account. I am really confused what to do to remedy the problem…. first with the FBARs and then the issue of ticking the right box. I live in Lebanon, so I don’t know of anybody to help me figure this out. Please help.
Hi,
I would like to know the following:
Myself and my wife are under temporary visa (h1&h4) for the past many years and we both have accounts in India which does not even cross the threshold amount $10,000. Do we need to file fabric forms?
Also if these accounts are interest bearing accounts such as savings or fixed deposits, what is the minimum amount that needs to be reported , less or more than $10.
Please confirm
I just recently realized that I may fall under the FBAR filing process. In 2012 I deposited over the $10,000 ilimit nto my foreign account to pay off our mortgage. I was over the limit for about 6 months. The mortgage company withdrew the money all at one time. I work for a US company overseas an only use/used this account to pay local bills etc. I don’t receive any income in the local currency. Should I file an FBAR for that tax year? I earned about $2.00 interest and all the money I deposited was filed under a 2555 for the tax year.
Hi Michael,
I haven’t had any experience with foreign interest generating AMT. But here’s a link to the AMT assistant: http://apps.irs.gov/app/amt2013/assistant/process?execution=e2s1
It will help you determine if you’ll be hit with AMT.
Hi Essje,
As I understand it, your Employee Provident Fund is taxable in the US. I find it rather disturbing that income from India that is tax free in India is taxed in the US, but all of my research is still having it be taxable. I even spoke with a CPA in India who said the same thing.
I would love for someone to prove me wrong. So if anybody is reading this and can show that this is incorrect, please make a post with the documentation–like an IRS publication or internal revenue code citation–please make a post. I would appreciate it, and so would people who read this blog.
But for now, I have to say that your Employee Provident Fund is taxable.
Hi Mark P,
Your daughter is a US citizen living and working in Australia and is married to an Australian citizen. She makes about $20,000 USD per year.
So Mark, even though all of her $20,000 in Australian income will be excluded with the 2555 form, she still is required to file.
When you’re determining filing requirements, it’s basically if you make more money than your exemption plus the standard deduction. For a person who is married filing separately–that would be anything over $10,000.
It doesn’t matter that it will be excluded with the 2555–the IRS doesn’t know she’s filing a 2555 unless she actually files one!
(Just like people who get nasty IRS letters but they claim children who give them big refunds–the IRS doesn’t count what you COULD possibly claim, only what’s in the IRS’s best interests for you to claim.)
So, file for your daughter. Use the 2555 exclusion. Have her file separately since there is no reason to put her husband on the return at all.
Hi Shefali,
About the FBAR–yes, report the joint account on both of your FBARS.
1. Yes, I would report the fixed deposits in corporations as other assets even though you do not have an account number. It is still an asset.
2. If your mother’s income is so low that she is not required to file a tax return, then the interest does not have to be reported. That said, I like to file a return even if a person isn’t required to because a: it helps prevent, or at least identify identity theft, and b: the statute of limitations. Just in case your mom may have needed to file, or “something comes up.”
3. If your mom is the principle owner, then it should be reported on her return, but she’s not filing–see–here’s a good example of why she should file. It would be zero taxable income to her, but is probably taxable to you. But since she’s not filing, you might want to claim the interest on your return just to show it, since your name is on the account. Personally, I’ll file a return for your mother and put the interest on her. And yes, it does go on a Schedule B.
Hi Rahul,
I believe that you interpretation is correct and that you should report the interest each year even though you don’t actually have access to it. I’ve had several discussions with my colleagues and people posting here and I think it’s best to report annually.
Also Jan, I forgot to mention that i would be jointly filing taxes with my husband in the USA.
Hi Jan,
I had an urgent query. I am on Fiance Visa K1 and would not be receiving my greencard until Aug 2015. I have a Commercial Deposit in my home country for about $40,000. It is completely tax free. I am earning a 9% interest on the same which is about $3600 per annum. I will have to declare my $40,000 CD in the FBAR alongwith the interest income of $3600. I wanted to ask you that the interest income would be subject to how much tax deduction in the USA once I declare it?
Hi Jan,
I had an urgent query. I am on Fiance Visa K1 and would not be receiving my greencard until Aug 2015. I have a Commercial Deposit in my home country for about $40,000. It is completely tax free. I am earning a 9% interest on the same which is about $3600 per annum. I will have to declare my $40,000 CD in the FBAR alongwith the interest income of $3600. I wanted to ask you that the interest income would be subject to how much tax deduction in the USA once I declare it?
Hi Dee,
When you have multiple tax payments, I generally use 12/31 as the date paid and lump them all together. Now if I have different types of investments or different countries, then I’ll file separate 1116 forms, but if everything is from one bank–just use the 12/31 as the date paid and combing the tax payments, that will be acceptable.
Hi Jan,
I have a follow up question to a post from dec 2013. Here’s the original post from saurabh
“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”
Here’s my question: I understand the interest rates but the point is the final principal+interest is less than original deposited amount because of ruppee losing value. Is it still considered income then if the deposit amou t itself is less??
Thanks!!
Is interest earned in NRO ( non-repatriable ) account taxable in US?
( Interest is equivalent to more than $10000 )
Since I can not convert that money to dollers (non-repatriable) should I report it?
Thanks in Advance..
I heard that even some foreign earnings can trigger AMT. Is it true?
For example:
US citizen who works for a company in US as an employee (single tax payer with no dependants, no other earnings or complications, etc.).
If he makes 120K with his W2 and earns another 30K from interest in US, he has no obligation for AMT. In fact he can earn a lot more and still does not have to pay AMT.
However, If he makes 120K with his W2 and earns another 30K from Foreign interest outside US, he has to pay over $1000 in AMT. (Assuming he pays 15% tax on his foreign tax earnings to Foreign Government and claims those taxes paid with his IRS Form 1116 as Tax Credit).
Am I calculating this right? Can you comment on this?
Hi Jan,
I moved to USA (from India) on work visa in Apr-2011. In 2013 I received my Employee Provident Fund (it’s like 401k in US) where both employee and employer contribute to it. Amount that goes to this account is pre-tax and also interest earned on it non-taxable in India. My question is- this money is non-taxable in India and it was earned before I moved to USA, though i receive while I am in USA, am i supposed to pay income tax on it in USA? if yes, how much it would be, if no, could you tell me the reason why it will be tax free in USA?
Also do i need to report this money in FBAR from.
I would appreciate your help on it.
Thanks,
Essje