Dear Tax Talk,
My Brazilian mother has some money in CDs in the U.S. There are no tax withholdings right now. Does she have to pay taxes for this money in the U.S.? She gets about $3,000 in interest income per year.
— Tina

Dear Tina,
In order to encourage investment in the U.S., a foreign person is exempt from U.S. income taxes on bank deposit interest earned. Foreigners are not subject to withholding on interest if it is from certain types of accounts.

Accounts exempt from withholding on interest
  • Deposits with persons carrying on the banking business
  • Deposits or accounts with savings institutions chartered and supervised under federal or state law as savings and loan or similar associations, such as credit unions; if the interest is or would be deductible by the institutions; or
  • Amounts left with an insurance company under an agreement to pay interest on them.

Deposits include certificates of deposit, money market accounts, time deposit open accounts, Eurodollar certificates of deposit and other deposit arrangements. The exemption is strictly for bank deposits and does not work the same for some deposits with brokers and dealers. Care should be given to the tax consequences when investing with a nonbank.

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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