How to report interest earned in foreign bank account(s) on US tax returns?

Found useful information about how to calculate interest earnings in foreign bank accounts

http://desiways.wordpress.com/2012/02/29/how-to-report-interest-earned-in-foreign-bank-on-us-tax-return/

How to report interest earned in foreign bank account(s) on US tax returns?

February 29, 2012 desiways Leave a comment Go to comments

Disclaimer: I would like to say this right here that the information here is from my own reading done online or talking to some tax attorneys. The information here may be out-dated. This is from my own experience and my own views and anything written here SHOULD NOT be taken or interpreted as legal advice

Do you have interest bearing accounts in foreign country or countries and wonder how to report the interest earned in those accounts on US tax return? I had the same question and recently I filed my taxes and learnt how to report that interest. I will share my experience and findings.

Should I report the interest earned in foreign bank account(s)?

A CPA or tax attorney would be the best to answer it for you but here’s my finding. If you are considered a U.S. resident for tax purpose you must report the interest earned in your foreign bank account(s). As a U.S. resident for tax purpose, most likely you will be filing form 1040 or 1040A or 1040EZ. There’s a lot of confusion if you should report foreign interest if you are on non-immigrant work visa(H1) and not a permanent resident(i.e. a green card holder).

To clear this confusion let me tell you my own experience. I didn’t report the interest earned in my foreign NRE accounts while I was on H1 visa. I got a wrong advice from a CPA that I don’t need to report this interest unless I was a green card holder. That was totally wrong and if you have read one of my other posts on FBAR, you will know what kind of mess I am in.

So bottom line again, whether your status is H1 or a green card holder:

If you are considered a U.S. resident for tax purpose you must report the interest earned in your foreign bank account(s).

Have confusion if you are a U.S. resident for tax purpose or not? Check  Publication 519(2010), U.S. Tax Guide for Aliens
What form(s) should I use to report the foreign interest?

Schedule B is the form that is used to report the interest earned in local U.S. banks or foreign banks. One important thing to note is you must use form 1040 or 1040A to file your tax return. You should not file Schedule B with 1040EZ. If you are not doing any itemized deductions, then you should file Schedule B with1040A.

If you are using some tax software to prepare your taxes, the software will generate appropriate form(1040 or 1040A) based on your inputs.

Tax Software(Online or Desktop)

If you are using some tax software to prepare your tax, the software will prompt you to input the interest earned i.e. 1099-INT entries and other information related to foreign accounts. Based on your input it will generate Schedule B with appropriate information for you. If you decide to do a paper filing, you will have to print and send Schedule B along with 1040 or 1040A. If you choose to do E-filing, the software will file Schedule B for you.

I used TaxAct’s online Deluxe Edition to prepare and file my taxes. In their Investment Income section, you can add 1099-INT(s). The information you enter here is used by the software in Schedule B which it will generate for you.

You might say, banks like SBI and ICICI don’t give 1099-INT. That’s totally fine.  I just calculated my total interest for each foreign bank account and used the end-of-year exchange rate published by treasury department to convert total interest in rupees to USD equivalent. Then I used TaxAct’s step-by-step guidance to generate 1099-INT for my SBI and ICICI accounts. I entered the Bank name, dollar equivalent of interest earned and the country. Since my accounts are NRE, they are non-taxable in India and so no tax was withheld/paid in India. So I left those entries blank. If you paid interest in your foreign country you should enter the information in appropriate section.

The software will use the above 1099-INT information you entered in Part-I Interest of Schedule B.

Manually filling Schedule B

If you are doing it manually, then you need to fill the foreign bank and interest earned information in Schedule B form’s – Part-I Interest section.

Reporting Dividends

I haven’t done this but I think it should be similar to the interest. Whether using software or manually, at the end the information should be entered in Schedule B. This is Part-II in the Schedule B form. If using a software to prepare, it will fill the details based on the inputs you would have entered during their preparation process.

Part III of Schedule B

You must appropriately answer the questions in Part-III of Schedule B. If you are using a software, somewhere in their process, they will ask you if you have foreign accounts, which country(ies) and if you are required to file TD F 90-22.1. Your inputs are used to complete this part by the software.

Important Notes:

• You must fill the PART III Foreign Accounts and Trusts in Schedule B if it applies to you. When using TaxAct’s, they have a section – Foreign Investment Account Information. I answered the questions in that section and it filled the Part-III for me.
• If you are supposed to file form TD F 90-22.1 i.e. FBAR, you need to file it separately and it’s not filed along with your federal tax.

Hope this helps. Feel free to leave comments if you have any questions or want to share your experience.