Is Foreign Interest Income Taxable in the US?
Understand how US tax laws apply to your foreign interest income, including essential reporting and strategies to avoid double taxation.
The United States operates a tax system based on citizenship, meaning its citizens and resident aliens are subject to US income tax on all income, regardless of where it is earned or where they reside. This principle of worldwide taxation applies to all types of income.
General Taxability and Income Reporting
This includes interest income generated from foreign sources, such as deposits in foreign bank accounts, foreign corporate bonds, or loans made to foreign entities. US citizens and resident aliens must report this income irrespective of the country where it originates or the taxpayer’s physical location.
This income is reported on Schedule B (Form 1040), “Interest and Ordinary Dividends.” Taxpayers must list each source of interest income in Part I, including those from foreign banks or companies, and enter the total amount received. If total interest income exceeds $1,500, or if a foreign account exists, taxpayers must also complete Part III of Schedule B.
Even if a foreign institution does not provide a Form 1099-INT or an equivalent tax document, the interest income must still be reported. All foreign currency amounts must be converted into US dollars for reporting. The Internal Revenue Service (IRS) accepts any consistently used, publicly available exchange rate, such as the spot rate on the date of the transaction or a yearly average for regularly received income.
Mitigating Double Taxation
Taxpayers earning foreign interest income may face double taxation by both the foreign country and the United States. To alleviate this, the US tax system provides mechanisms, primarily the Foreign Tax Credit (FTC). The FTC allows eligible taxpayers to reduce their US tax liability by the amount of income taxes paid or accrued to a foreign country on foreign-sourced income.
To claim the Foreign Tax Credit, taxpayers use Form 1116, “Foreign Tax Credit (Individual, Estate, or Trust).” Eligibility for this credit requires that the taxpayer is a US citizen or resident alien, the income is foreign-sourced, and the foreign taxes were legally owed and paid or accrued. If total foreign taxes paid are below certain thresholds—currently $300 for single filers or $600 for those married filing jointly—taxpayers may claim the credit directly without filing Form 1116. Filing the form allows for potential carryovers of unused credits.
Beyond the Foreign Tax Credit, the United States has income tax treaties with many countries. These treaties are agreements designed to prevent double taxation and can provide specific rules for how certain types of income, including interest, are taxed. Such treaties may reduce the US tax rate on foreign interest income or exempt it entirely, depending on the specific treaty provisions. Taxpayers should consult the relevant treaty, as provisions can modify the application of US tax laws.
Foreign Financial Asset Reporting
In addition to reporting foreign interest income, US taxpayers have separate obligations to report their foreign financial accounts and assets. Two primary forms govern these disclosures: FinCEN Form 114 and Form 8938.
FinCEN Form 114, known as the Report of Foreign Bank and Financial Accounts (FBAR), requires US persons to report any financial interest in, or signature authority over, foreign financial accounts. This obligation arises if the aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year. The FBAR is filed electronically with the Financial Crimes Enforcement Network (FinCEN), not with the IRS, and covers accounts such as bank accounts, brokerage accounts, mutual funds, and certain life insurance policies.
Form 8938, “Statement of Specified Foreign Financial Assets,” is another reporting requirement, mandated by the Foreign Account Tax Compliance Act (FATCA). This form is filed with the taxpayer’s annual income tax return and requires reporting of specified foreign financial assets if their value exceeds certain thresholds. These thresholds vary based on filing status and whether the taxpayer resides in the US or abroad. For instance, a single taxpayer residing in the US must file Form 8938 if the total value of specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the year. Higher thresholds apply for married individuals filing jointly and for taxpayers living abroad.
Form 8938 covers a broader range of assets than the FBAR, including direct holdings of foreign stocks and securities, as well as interests in foreign mutual funds and foreign partnerships.