US tax question on worldwide income

[ExpatCM]

Hello

I was hoping someone can answer this question.

For the purposes of calculating worldwide income, if you own a non-USD denominated fixed deposit with maturity greater than one year that pays interest at maturity, are you supposed to include the annual accrued but unpaid interest in a year that it hasn't matured yet as income for that tax year?

Or is it permissible to include all the interest since inception in the tax year it matures?

Thanks to all.

 

[Sunset]

I think you can chose whichever way is better for you.

The non-USD part is not relevant, except that you will need to covert the number to USD.

 

[ExpatCM]

I think you can chose whichever way is better for you.

The non-USD part is not relevant, except that you will need to covert the number to USD.

Thanks for the reply
Perhaps I worded poorly. I said non USD but meant to imply that I’d convert the local interest figures to USD using the year end average exchange rate set by the treasury.

So it sounds like it depends if it’s more or less advantageous for a given tax year if I’m understanding you correctly? I’d like to not include them this year so as to increase the amount I can use as a withdrawal conversion from a traditional IRA to a Roth IRA and not generate enough taxable income to necessitate filing a tax return. I know the standard deduction is increasing to 24K for a married couple filing joint so that helps us.

Can anyone definitively confirm this response from IRS guidelines?

Thanks everyone

 

[Freedom56]

I have declared the interest at maturity. Any tax withholding that you paid to the foreign tax agency can be taken as a foreign tax credit on your US return.

 

[ocean view]

Depends. Are you a cash or accrual basis taxpayer? Most individuals are cash basis. If it’s not been paid in the calendar year, then it’s not income.

You don’t get to cherrypick from year to year.

 

[ExpatCM]

I have declared the interest at maturity. Any tax withholding that you paid to the foreign tax agency can be taken as a foreign tax credit on your US return.

Thanks for the reply. The interest in my example is not subject to any local taxes so that doesn't apply to us.

 

[ExpatCM]

Depends. Are you a cash or accrual basis taxpayer? Most individuals are cash basis. If it’s not been paid in the calendar year, then it’s not income.

You don’t get to cherrypick from year to year.

Hello
Thanks for the reply.
I'm unclear of my tax accounting status but I assume it would be cash. Our situation is not highly complicated and all our US sourced CD's mandate minimum annual interest payments for maturities greater than one year. However, we got the bank in Malaysia to give us a three year term on our fixed deposits that must stay on file while on the retirement visa program and they will only credit interest with principal at maturity.

So basically, I'd say I never had any reason to use an accrual method. We are not and have never been business owners. Sounds like if I choose NOT to include accrued but unpaid foreign interest that would count as choosing an accrual method so perhaps it's best to simply include it?

We were not required to file a return in 2016 or 2017 because we don't make enough income and 90% of our investment portfolio is tax sheltered. I'd prefer not to file a return in 2018 but would like to ensure I use correct methodologies to backup all sources of worldwide income.

Thanks

 

[gauss]

Depends. Are you a cash or accrual basis taxpayer? Most individuals are cash basis. If it’s not been paid in the calendar year, then it’s not income.

You don’t get to cherrypick from year to year.

+1

I am not an expert on US taxation of worldwide income, and I know that it is a complicated topic.

That being said the general rule is that if you are a cash based taxpayer, which most individuals who file 1040 are, then you pay tax on the interest when you receive it.

I would doubt there is an exception for worldwide income, but I would need to research it to be sure.

-gauss

 

[ExpatCM]

+1

I am not an expert on US taxation of worldwide income, and I know that it is a complicated topic.

That being said the general rule is that if you are a cash based taxpayer, which most individuals who file 1040 are, then you pay tax on the interest when you receive it.

I would doubt there is an exception for worldwide income, but I would need to research it to be sure.

-gauss

That sounds very reasonable to me. Thanks for your comments and thoughts.

 

[kaneohe]

https://pocketsense.com/irs-require-payment-accrued-interest-bank-cds-4400.html

"Original Issue Discount
If you buy a CD with a term longer than 12 months, then the CD issuer may opt to make annual interest disbursements. In this case, you pay taxes on the money as you receive it. If the issuer does not make annual interest disbursements then the issuer has to provide you with an original-issue-discount 1099 form. This form details the amount of interest that you accrued but did not receive during each year of the CD term. You must pay taxes on an annual basis based upon the interest as shown on the OID 1099 even though you only actually receive the interest at the end of the CD term."

https://www.depositaccounts.com/blog/cd-interest-bank-1099int-forms-and-taxes.html

"The answers on how the CD account holder and the bank should report the interest to the IRS is in the IRS Publication 550. This excerpt from page 6 provides some of these details:

"Certificates of deposit and other deferred interest accounts. If you open any of these accounts, interest may be paid at fixed intervals of 1 year or less during the term of the account. You generally must include this interest in your income when you actually receive it or are entitled to receive it without paying a substantial penalty. The same is true for accounts that mature in 1 year or less and pay interest in a single payment at maturity. If interest is deferred for more than 1 year, see Original Issue Discount (OID), later."

 

[gauss]

So are the CDs held directly with the foreign financial institution or are they held indirectly via a US brokerage account?

If the former, I would be concerned that 1099's may not be issued. If 1099s are indeed issued then they should tell the whole story.

-gauss

 

[Sunset]

OP - Far more important than how to declare the interest is to be sure you are declaring to FINCEN your foreign holdings (if needed to declare based on account values). Hopefully you know about this as the penalties are really bad.

Part of the problem you may find with this foreign interest, is they don't issue 1099's as that is a USA concept, maybe they issue something similar but probably just at the end of the 3 yrs.

This is not advice, but what I would do in this situation is declare the interest when received, as you will have some type of proof on what was received at that point. Much less confusing than claiming you already paid tax on some it in prior years. How IRS treats US based CD's is what most folks are used to and not having the 1099 would confuse the IRS. Especially as in a foreign country, what we are calling a CD, may not meet the requirements to be called a CD if it were in the US.

 

[ExpatCM]

So are the CDs held directly with the foreign financial institution or are they held indirectly via a US brokerage account?

If the former, I would be concerned that 1099's may not be issued. If 1099s are indeed issued then they should tell the whole story.

-gauss

My question is not regarding US based CD’s. What I’m asking about is foreign issued fixed deposits denominated in a foreign currency and the local bank is not responsible for any IRS tax reporting other than initial FATCA questions when the accounts were opened. The income is exempt from local tax reporting as long as the fixed deposits do not exceed 100K local currency which is why the banks issue two separate fixed deposits to comply with the terms of the retirement visa. (You need to keep 150K on deposit in the local currency and bank while participating in the retirement visa program)

I’m aware of OID 1099s but that’s not the point of my question. It’s whether accrued and unpaid interest must be calculated when figuring the amount of total income for US tax purposes whether or not a local bank issues any tax forms. The income would be converted to USD using year end exchange rates for purposes of wordwide income reporting

In my case there are no tax forms issued by the local bank and interest accrued for 2018 will not be paid in this tax year so I’m trying to ascertain if I should include the unpaid interest on my spreadsheet when calculating all my word wide income.

 

[MichaelB]

The same principle applies regardless of where the CD is domiciled (unless the interest is not guaranteed). Even if the interest is not paid until maturity, if it is accured, it would be declared yearly. If the financial institution does not submit a 1099, the taxpayer should do the calculation.

 

[ExpatCM]

OP - Far more important than how to declare the interest is to be sure you are declaring to FINCEN your foreign holdings (if needed to declare based on account values). Hopefully you know about this as the penalties are really bad.

Part of the problem you may find with this foreign interest, is they don't issue 1099's as that is a USA concept, maybe they issue something similar but probably just at the end of the 3 yrs.

This is not advice, but what I would do in this situation is declare the interest when received, as you will have some type of proof on what was received at that point. Much less confusing than claiming you already paid tax on some it in prior years. How IRS treats US based CD's is what most folks are used to and not having the 1099 would confuse the IRS. Especially as in a foreign country, what we are calling a CD, may not meet the requirements to be called a CD if it were in the US.

Yea we file our FBAR diligently and that has nothing to do with taxes or the IRS. Different topic and FINCEN is a different agency

There’s ten million Americans living outside the homeland and all are responsible for reporting worldwide income so clearly the IRS is well versed on foreign income and in fact has hundreds of pages of rules on the topic which is why we pay someone to file in years when we have enough income to ncceasitate filing a return

With or without including the converted USD equivalent income on my foreign denominated fixed deposits, we still won’t need to file a return because we will not meet the minimum threshold for a return given that our total income will be less than the standard deduction for married filing joint.

But whether I include accrued interest in the spreadsheet which I keep for backup helps determine how much I can convert from my traditional IRA to my Roth and pay no tax on the conversion since we will only convert an amount that when added with all our other taxable income will not surpass the threshold for filing a return

So it’s kind of an arbitrary question about how the IRS considers unpaid interest on foreign passive income in terms of being reportable as worldwide income.

 

[ExpatCM]

The same principle applies regardless of where the CD is domiciled (unless the interest is not guaranteed). Even if the interest is not paid until maturity, if it is accured, it would be declared yearly. If the financial institution does not submit a 1099, the taxpayer should do the calculation.

That sounds reasonable. Can you definitively and conclusively tell me you know this firom experience or professional experience ?

I keep bank statements as back up and it does show the principal and interest at maturity as part of the statement

Thanks for the response

 

[kaneohe]

........................

I’m aware of OID 1099s but that’s not the point of my question. It’s whether accrued and unpaid interest must be calculated when figuring the amount of total income for US tax purposes whether or not a local bank issues any tax forms. ......................................................

I have no idea what the right answer is for you but I would think the OID 1099 is suggestive of what IRS is looking for. The OID links above presumably were not written w/ foreign investments in mind....but for US investments , IRS wanted the accrued interest declared each yr. Here you would be helped by info from a 1099 OID but I would think even in the absence of that document, IRS would expect similar numbers calculated by you.....and payment sooner (each yr) rather than later (at maturity).

 

[MichaelB]

The previous posts all pretty much covered this

That sounds reasonable. Can you definitively and conclusively tell me you know this firom experience or professional experience ?

I am not a tax preparer, but I did read IRS Pub 1212, which covers this situation, here https://www.irs.gov/publications/p1212#en_US_201801_publink1000206318

 

[Alan]

Hello
Thanks for the reply.
I'm unclear of my tax accounting status but I assume it would be cash. Our situation is not highly complicated and all our US sourced CD's mandate minimum annual interest payments for maturities greater than one year. However, we got the bank in Malaysia to give us a three year term on our fixed deposits that must stay on file while on the retirement visa program and they will only credit interest with principal at maturity.

So basically, I'd say I never had any reason to use an accrual method. We are not and have never been business owners. Sounds like if I choose NOT to include accrued but unpaid foreign interest that would count as choosing an accrual method so perhaps it's best to simply include it?

We were not required to file a return in 2016 or 2017 because we don't make enough income and 90% of our investment portfolio is tax sheltered. I'd prefer not to file a return in 2018 but would like to ensure I use correct methodologies to backup all sources of worldwide income.

Thanks

Since you appear to be resident overseas then much will depend on whether there is a double taxation agreement between your country of residence and the USA.
https://www.irs.gov/businesses/international-businesses/united-states-income-tax-treaties-a-to-z

You mention that 90% of your investment portfolio is tax sheltered, and the USA may or may not recognise that tax shelter wrapper in another country. Examples from my own situation as a US citizen living in the UK. The IRS recognises the UK equivalent of 401k's and none of the growth within such a personal DC pension plan is taxed until distributions are made. The other very popular tax sheltered plans are ISA's which, like a Roth, are funded with after-tax money (up to annual contribution limits) and withdrawals are totally tax-free. However, the IRS does not recognise ISA's so any growth is taxed as income as it arises, e.g. interest and dividends. If the ISA contains the equivalent of mutual funds or ETF's then they are treated as PFIC's and taxed accordingly.

My wife and I personally have "Cash ISAs" which accumulate interest every 3 months and compound until we make a withdrawal. The IRS require us to declare and pay tax on that interest as it arises, and along with other interest bearing accounts we do not receive 1099-INT's but do declare the interest on Schedule B.

 

[ocean view]

If the answer to this question determines how much Roth conversions you can make without triggering a filing requirement, I would take the conservative approach and include the income in the year accrued.

 

[Alan]

Thanks for the reply
Perhaps I worded poorly. I said non USD but meant to imply that I’d convert the local interest figures to USD using the year end average exchange rate set by the treasury.

So it sounds like it depends if it’s more or less advantageous for a given tax year if I’m understanding you correctly? I’d like to not include them this year so as to increase the amount I can use as a withdrawal conversion from a traditional IRA to a Roth IRA and not generate enough taxable income to necessitate filing a tax return. I know the standard deduction is increasing to 24K for a married couple filing joint so that helps us.

Can anyone definitively confirm this response from IRS guidelines?

Thanks everyone

We are doing similar financial gymnastics while we do IRA to Roth conversions, so can appreciate the difficulties faced. I guess that you aware that the published Treasury rate for FBAR reporting is the spot rate as of December 31st and not the published average that the IRS provides.

https://www.irs.gov/individuals/international-taxpayers/yearly-average-currency-exchange-rates


For FBAR use this:

https://www.fiscal.treasury.gov/fsreports/rpt/treasRptRateExch/itin-12-31-17.pdf