Reporting Foreign Bank Interest on US Taxes

Foreign Bank Interest Is Taxable in the US

If you earn interest from a savings account, time deposit, or any other bank account outside the United States, that income is subject to US income tax. The rule applies to US citizens, green card holders, and resident aliens who pass the Substantial Presence Test - regardless of whether the interest is paid out or reinvested.

Where to Report: Schedule B

Foreign interest is reported on Schedule B, Part I of Form 1040. Steps:

1. List the name of the foreign financial institution.
2. Enter the interest amount converted to USD.
3. Complete Part III of Schedule B - this section asks whether you had a financial interest in or signature authority over a foreign financial account at any time during the year. Answer "Yes" and provide the country.

Failing to answer Part III can draw IRS scrutiny even if your account balance was small.

Converting to US Dollars

The IRS requires income to be reported in USD. You have two options:

• Average annual rate: Use the yearly average exchange rate published by the IRS (available at irs.gov/individuals/international-taxpayers).
• Rate on the date received: Use the exchange rate on the specific date the interest was credited or paid.

Either method is acceptable; be consistent within a given account.

Foreign Tax Credit for Withheld Tax

Many countries withhold tax at the source on interest payments - Brazil, for example, withholds income tax (IR) on certain accounts. If the foreign bank withheld tax:

1. File Form 1116 to claim the Foreign Tax Credit.
2. The credit offsets your US tax dollar for dollar.
3. You cannot both deduct and claim a credit for the same foreign tax - the credit is almost always more beneficial.

FBAR and FATCA Interaction

Foreign bank accounts that earn interest almost always trigger additional reporting:

Both filings are informational and do not create additional tax, but the penalties for missing them are significant - up to $10,000 per year for non-willful FBAR violations.

Common Accounts for Brazilian Expats

Brazilian residents in the US often have interest-bearing accounts such as:

• Conta corrente or poupanca with Brazilian banks
• CDB (Certificado de Deposito Bancario) - treated as interest income
• LCI/LCA - also treated as interest income for US purposes, even if tax-exempt in Brazil

Brazilian tax exemptions do not carry over to the US. If an account is tax-free in Brazil, the interest is still fully taxable in the US.

Not Sure What Applies to You?

Your visa status, account balances, and the type of account all affect your reporting obligations. Start the free 5-minute Declara.Tax diagnostic to get a personalized list of forms and next steps.