Foreign Fixed Deposit interest

[pk]

@Juancar , having gone over my replies on your situatiuon , I just want to clarify the following:

(a) if there is no foreign tax credit/deduction angle , then ignore my last para in my most recent reply.

(b) what I was trying to get at is that the concept of "constructive receipt" is applicable  for US taxes  . That is to say , if your CD agreement with the bank says that  "interest would be deposited  X times a year", then even though the actual available monies are not available to you ( without penalty ), it is your on the banks books.  Thus you need to recognize this as income .   There could be cases  ( for example  a six month CD ) where the  Financial institution  says that interest will be "credited " to your account ONLY at the end of the  CD agreement  period  ( often called TERM ) ,  then  there is no "constructive receipt" till the end of the contract.

This constructive receipt  persists even when the CD contract  spans  over the end of the year -- Say October of one year to March of the next year.  In such a case , if the interest credition is every quarter, then you recognize  the  interest earned  in Dec of one year for that year's return  and  the March  interest credition in the following year return.

 BWT, why isn't the interest earning no taxed in the source country ?  Or is that the source country does no have a tax treaty with US ?

Does this make sense  or am I confusing you more  ?

[Juancar]

Thank you pk for your response

1.- No interest is withheld because I do not live in that country and I signed a document saying so. It means, that I only have to report it here in the US. I assume that because of FATCA that information will be transmitted to the IRS anyway.

2.- There could be cases where the  Financial institution  says that interest will be "credited " to your account ONLY at the end of the  CD agreement  period  ( often called TERM ) ,  then  there is no "constructive receipt" till the end of the contract. Yes, that is exactly my case in all CDs (the 12 months and the 18 month CDs) only paid the interests at the end.

So, should I report the interests of those CDs this year or the following? Should I report a portion for the 2024 and the remaining in 2025?

Somebody else published a similar question a year ago and the person who answered included this link in the response.

https://www.goldinglawyers.com/how-does-the-irs-tax-foreign-certificate-of-deposit-interest/#:~:text...

How do I proceed?

@pk 

[pk]

@Juancar , 

the ref article is  saying the same thing -- constructive receipt.    IRC Sections 861, 1272, 1273, 1274  and 1275 in looking at CDs , especially foreign ones as  OID ( Original Issue Discount )  equivalent,  extends this  "Constructive  Receipt"   further and actually likes a  CD   to   a loan/ debt instrument  with  present value  ( purchase price ) being a discounted future value i.e. an OID .    In this interpretation,  the   incremental value   ( value at redemption LESS  original  purchase price ) divided  by the  length of the contract  is per day earning  that needs to be recognized as income.

Thus it implies that  you  need to recognize and pay tax on  interest earned   during the tax year.   Thus   for your CDs  that span over the year end , you recognize  the  earnings for the year ( allocated based on the interest rate  times the number of days  under contract in the current tax year).  

Does this make sense ?

[Juancar]

@pk 

But how about Publication 550? It makes a difference between short term CDs (1 year or less) and long term CDs (more than 1 year). 

Let me copy and paste again what it says:

Page 7 - Certificates of deposit and other deferred interest accounts.

If you buy a certificate of deposit or open a deferred interest account, interest may be paid at fixed intervals of 1 year or less during the term of the account. You generally must include this interest in your income when you actually receive it or are entitled to receive it without paying a substantial penalty. The same is true for accounts that mature in 1 year or less and pay interest in a single payment at maturity. If interest is deferred for more than 1 year, see Original Issue Discount (OID), later.

Pg 20 -  Certificates of Deposit (CDs)

A CD is a debt instrument.

If you buy a CD with a maturity of more than 1 year, you must include in income each year a part of the total interest due and report it in the same manner as other OID.

Applying those rules, I should only apportion the 18-month CD because the other ones are short term (1 year). 

[pk]

@Juancar , having gone through all that you pointed out ( refs) and the statutes I mentioned earlier,  think your best bet is to  recognize the  incomes  and pay the taxes as you see it ----  the amounts accrued  or  credited to your account by the last day of 2024  -- for 2024 tax year.  Thus for an 18 month  CD opened  in Say June of 2024, would require you to recognize  six months worth of  interest  by 12/31/2024.  You can use daily, monthly or quarterly  methods, just use the same discipline for all the CDs.  Keep all your documentation  ( on how you came to the  earned interest figures and exchange rates involved ), just in case there is a challenge  ( very unlikely ).

Also note that  any/all  bank accounts  or CDs etc. come under FBAR  ( form 114  at FinCen.gov and on-line only ) and FATCA ( form 8938 along with your return ).

Sorry to took so long to  help -- forgive

pk