One of the most complex areas of tax law involves international tax. This is because oftentimes, there are two competing bodies of law. This is especially common when a U.S. person has a foreign certificate of deposit (CD) that generates interest income. There are the foreign country’s tax laws, rules, and requirements, and then there are the filing requirements required by the IRS in the United States. What can make this exercise even more complicated, is when the foreign countries’ tax laws conflict with US tax laws.
Summary of U.S. Tax on Foreign CD Interest
In a very common situation, a client contacts Golding & Golding, with several foreign accounts and assets. Usually, the client will have some form of savings account which typically includes a certificate of deposit or CD.
With a CD, there is usually a term such as one-year, three-years or five-years. During the term, the interest in the account is accruing but not being distributed. While in the foreign country in which the CD is being maintained there is typically no tax until the money is distributed, the rules in the United States are different.
U.S. Tax on Accrued Overseas CD Interest
Under the US tax rules if a person has a CD in a foreign country the accrued income is taxable – unless otherwise limited, excluded or exempted under other IRS regulations. Therefore, in a typical example if a person has $400,000 in a Brazilian FD, Indian CD or Hong Kong Term Deposit that generates income — the accrued income is taxable in each year it accrues — irrespective if it is distributed or taxable in the foreign country
Can I Gross It Up at the Distribution?
Why? Because the IRS sees that as potential artificial tax avoidance. For example, if a person knows that the CD terms five years then they may be tempted to manipulate their annual taxes either during the first four years or during the fifth year to artificially reduce the overall tax liability.
In other words, the IRS doe not let taxpayers plan around the gross-up of a foreign Certificate of Distribution (CD).
International Tax Amnesty – Golding & Golding (Board-Certified)
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