Posted by forex at 12:51 AM
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1. Determine if any tax on the foreign bank account is actually due in the U.S. Generally, foreign source income is taxable to individuals. Consult Internal Revenue laws, especially Internal Revenue Code Section 904, and relevant IRS publications. (See references and resource.)
2. Determine the amount of interest in the foreign currency, which accumulated in the foreign account for the tax year or period.
3. Find the exchange rate(s) for foreign currency conversion to the United States dollar on the actual dates, when interest was received and/or foreign tax paid, and/or the average conversion rate for the whole tax period (which, for individuals, reporting interest foreign interest on their Forms 1040, would be the relevant calendar year). Published conversion rates may be found, among other places, on the Internet. (See, as example, the currency converter page from the Bank of Canada, the Canadian Government's national bank, analogous to the U.S. Federal Reserve Bank.)
4. Determine if conversion must be calculated on the day paid, or if an annual average of exchange rates may be used overall. (The IRS often permits an annual average rate to be used overall.)
5. Convert the amount of interest as paid in the foreign currency to its equivalent amount in the U.S. dollar.
6. Calculate the amount of foreign tax paid to the foreign country, if any, against the interest income in that bank account. (Some countries require foreigners who open bank accounts to pay them income tax on interest earned. The IRS may allow some or all of that tax paid to be a credit against the U.S. tax due on that interest.)
7. Report the U.S. dollar equivalent of the interest accumulated for the foreign bank account on Schedule B of your Form 1040, Interest and Dividends, being careful to write the name of the paying bank.
8. Report the paid/allowable foreign tax (in U.S. dollars) as a tax credit on Line 47, Form 1040. The tax you actually owe is the difference between the U.S. tax you calculated on the interest income accumulated and the U.S. equivalent of the foreign tax you paid. That is evidenced by the difference between the interest income you reported on Schedule B, which is carried to Line 8, Form 1040, and the tax credit you took on Line 47, Form 1040.