Brazil interest on CDB- Certificate of Deposit

[SandyG19]

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.  

[pk]

@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 ?

[SandyG19]

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

[pk]

@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 ?

[varunagrawal]

Thank you - I had FDs (also known as certificate of deposit) in India. These FDs provided monthly interest payouts (thats how I requested) and I was reporting this interest income every year.
But last year I chose to do early maturity (pre-maturity) as I needed the funds. This resulted in me getting an amount less than the principal (because of penalty charges).
So, for example, if I had a INR 100,000 certificate of deposit for 6% interest (monthly payout) for 5 years, I was reporting the INR 6000 every year. Because I wanted to withdraw the principal before maturity, I received say INR 95,000, a INR 5000 loss.
How is this 'loss' to be reported? Can it be used to reduce total interest income from other FDs? If possible, I would like to read more about it. Thanks.

[pk]

@varunagrawal , despite  your fixed deposit account being in a foreign  country ( India ), the interest earnings recognition ( and pay taxes on )  and that of "early withdrawal" penalty is the same as if the financial entity were a US based one.  Thus when you recognize the  interest earned in 2021, you also tell TurboTax that there was early withdrawal penalty.  This will be offset against the earnings and in a sense you will be "whole". 

Note that since the interest was paid out monthly, you will need to use  dollar of the day exchange  rate to convert to US$-- ditto for the early withdrawal penalty.

Does that help?  Is there more I can do for you ?

pk  

[varunagrawal]

Thank you for your helpful reply!