Pay income taxes on a foreign CD account?

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Dear Tax Talk,
As a U.S. citizen with a CD account in a foreign bank in a foreign country, do I have to report to the government even if I am not paid in U.S. dollars and the foreign country deducts taxes from my interest income?
— London

Dear London,
As a U.S. citizen, you have the obligation to pay tax on your worldwide income in whatever currency paid. Of course you would convert the currency into dollars based on prevailing exchange rates when reporting the income on your U.S tax return.

Any income taxes withheld would be a credit against your U.S. tax liability. Form 1116 is used by individuals to claim the foreign tax credit. The form itself can be rather intimidating. Most tax software, however, can automatically complete the form based on a few entries.

Your interest income would be reported on Schedule B. Line 7a of Schedule B asks if you have foreign accounts. In addition to disclosing the existence of the accounts on Schedule B, you’ll need to file a separate form with the Department of Treasury in Michigan. The required Foreign Bank Account Reporting, or FBAR, form is TD F 90-22.1.

Even if you filed an individual income tax return extension, the TD F 90-22.1 is due by June 30 annually. Failure to file the FBAR can subject you to heavy penalties. No FBAR is required if the aggregate value of all your foreign accounts did not exceed $10,000 at any time during the year.

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.

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