I have a Bank Certificate of Deposits in Brazil, also known as CDB. It's long-term for 5 years.
Seems to be like a CD in the US. I'm American and live in the US.
Does anyone know how to report this in the US taxes? Report interest on inputted interest? Also, calculate foreign tax credits on the income? Even if it's still invested and interest not taken out?
Thanks in advance.
@SandyG19 , as I see from the available information on-line, the CDB appears to be similar in nature to US CD. As such you realize the earned interest at term i.e. if it is five year CDB, then the interest is available to you only on completion of five years. So for US tax purposes, you report the earnings ONLY when constructively received. The foreign tax paid also becomes recognizable ONLY when levied/paid.
Does this answer your query ?
Hello and thanks for your reply. My understanding is that if you have 5 year CD, you pay taxes on interest earned each year, even if not matured. This decreases the yield on the long-term CD. So, by the same token, foreign interest on CDs are also taxable each year, not when they mature. Not sure if this is in agreement with your post.
"What may come as a bit of a shock is that, with some Certificates of Deposit (CDs), you may have to pay taxes before you can even get your hands on that interest. " https://www.moneyrates.com/cd/when-is-tax-due-on-a-cd.htm
"While some interest income, such as the interest on most municipal bonds, is exempt from federal income taxes, most interest income, including the interest on certificates of deposit, is fully taxable. You have to report and pay taxes on any interest from your CD, even if the CD has not yet matured." https://finance.zacks.com/report-interest-cd-not-matured-federal-taxes-1678.html
@SandyG19 , sorry for the confusion ( I think ). You will notice that each of the articles that you so graciously referred, talk of "interest" being credited to your account either in the form cash/liquid or re-invested. This is what I called "constructively received" and therefore I quite agree with the comments of these articles. What I did not say, and probably should have , is that the answer really depends on the type of contract you have . I was assuming that the interest is credited to your account at the end of the term -- i.e. there is no crediting to your account or re-investment during the term.
If the contract allows for periodic crediting or automatic re-investment of earned interest, then effectively it would be "constructively received " and therefore US return would require you to recognize the amount of earnings ( even if there is a limitation on withdrawing the amount from your account ) and therefore the levied/paid foreign tax on the earnings should be eligible for foreign tax credit. Note that if the amount of foreign tax is equal or less than $300 per taxpayer, then the whole amount falls under the safe harbor rules and is recognizable / allowable for the tax year ( i.e. no limited allowability with form 1116 ).
I was trying to stay away from "mark to market" and "imputed earnings" and perhaps just made a mess of it -- sorry .
Does this come more in line with your thoughts ? Is there more I can do for you ?
Thanks again for your reply and useful information. So, the idea is to report monthly interest credited to my account on my US taxes. So, every year I report the amount credited. That's clear now.
Now foreign tax credit - if I wait until maturity, it will be 15%. If I withdraw early, I pay more in taxes. I plan on waiting until maturity.
As I have to report interest credited, it makes sense to report foreign tax credit at 15% - as accrued, not paid, an option with TT. Makes sense to me. I would like to double-check this.