Foreign Interest Income and the IRS, US Tax, 1040 Schedule B & Form 8938
Contents
Foreign Interest Income
Foreign Interest Income: The U.S. Tax rules and IRS requirements for taxpayers with foreign interest income is complex. When a foreign country is involved, the U.S. tax rules may result in a different outcome than the foreign country tax rules. For example, interest may be tax-free overseas, but in the U.S., that same income does not qualify as tax-exempt.
U.S. person individual for tax purposes, includes:
- U.S. Citizen
- Legal Permanent Resident
- Foreign National who meets the Substantial Presence Test
In addition, interest income growing within an investment fund or retirement fund abroad may not enjoy tax deferred status in the U.S.
The United States follows a worldwide income tax model (aka Citizen-Based Taxation). This means the United States taxes U.S. persons on their worldwide income.
The main forms that a U.S. taxpayer uses to report foreign interest income, include:
- 1040 Tax Return
- Schedule B
- Form 8938
U.S. Tax Rate for Foreign Interest Income
Unlike certain dividends or capital gains, foreign interest income is taxed at the filers progressive tax rate. Stated another way, the tax rate on a taxpayer’s foreign interest income is the same as the tax rate for other general income and gets taxed at OI rates (ordinary income).
Other types of foreign (and U.S.) income may receive reduced tax rates.
For example, if you earned foreign capital gains, and it was long-term than it is taxed at 15% — unless the filer is in the highest tax bracket, in which you are taxed at 20%.
When it comes to foreign dividends, a U.S. person is taxed at ordinary income tax rates, unless it is a qualified dividend, –and then the same rules apply for long-term capital gains (15%/20%).
**These reduced rates can vary from year-to-year
Report Foreign Interest on a U.S. Tax Return
When it comes to reporting form interest income, there are usually three (3) places you have to report the interest.
Form 1040
Interest income on a form 1040 is usually included on line 8. This includes both US and foreign based interest income.
Schedule B
This is where it gets a bit tricky. If you did not have any foreign accounts or foreign interest income, then you would only file schedule B (in most situations) when the total value of the interest and dividends earned exceed $1500.
The rules are different when you have signature authority over a foreign account. When you have signature authority over a foreign account, you have to identify it on schedule B, Question seven, even if you have no foreign interest or dividends.
Therefore, even if you have minimal interest income and the minimal interest income/dividend income is below $1500, if it is being generated from a foreign account in which you either have ownership or signature authority over the count, you have to include a schedule B (with most programs, the interest included on schedule B will flow through to line 8 of your 1040 tax return).
Form 8938
Form 8938 is used to report specified foreign financial assets. The form also requires that you identify any income that is generated from these assets.
Therefore, if you have an account or asset that must be reported on form 8938, it is important to note that you also have to include any income generated from those accounts or assets directly on page 1 of the Form 8938.
Unreported Foreign Income
If you have unreported foreign interest income or other foreign income, which has not been declared to the IRS, you may consider entering one of the approved IRS Offshore Voluntary Disclosure Programs to timely and safely get into IRS offshore compliance-before it’s too late.
What Can You Do?
Presuming the money was from legal sources, your best options are either the Traditional IRS Voluntary Disclosure Program, or one of the Streamlined Offshore Disclosure Programs.
We Specialize in Safely Disclosing Foreign Money
What Types of Clients Do we Represent?
We represent Attorneys, CPAs, Doctors, Investors, Engineers, Business Owners, Entrepreneurs, Professors, Athletes, Actors, Entry-Level staff, Students, Former/Current IRS Agents and more.
You are not alone in this situation.
Golding & Golding: About our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm today for assistance.