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You pose an interesting question, for which the answer hopfully is not too hard to understand. Basically, interest income from foreign banks is treated the same way as though you have received them from a domestic (U.S.) bank. The practical difference is that you would not receive a form 1099-INT which shows the interest income received for the year which you would have gotten from an American bank.
Now, there are several provisions in place that would prevent you from paying tax twice on the same income, in your case on interest income. If your account is located in European country that charges tax on the interest income (vs the value, the balance of the account that some European countries tax) then this foreign tax paid could be used to calculate the foreign tax credit on your U.S. tax return. In other words, the foreign interest income will be taxed in the U.S. at same rates as your domestic interest income, but you can offset the U.S. tax calculated on the foreign bank interest by the tax you paid to the European country. Keep in mind that even though the foreign tax credit reduces your U.S. tax liability dollar for dollar, there are various limitation and calculation made to the foreign tax paid before you can apply it in that manner. If you plan on using this set-up, I would advise to use a tax professional to prepare your 1040, especially is you are talking about a significant amount of interest income. The reason I say this is because there is a lot to the calculation of the foreign tax credit and it takes somebody with experience to get it right.
If you would like to know what the general tax rates are in U.S., please refer to this IRS publication:i1040tt.pdf. Simply visit irs.gov and type "tax table" into the search box and it will be the first at the result list.
Again, keep in mind that there is no special tax treatment for foreign bank interest received by a U.S. taxpayer and that this income is treated like ordinary income. But the foreign tax credit, in most cases, does prevent double taxation of the same income.
If you have more questions, please let me know! I aim to please.
Hello and thank you for using Just Answer,If you are a resident alien of the US you will be allowed to use the Form 1116 to claim the credit for the taxes paid to another country on the same income that is taxed by the US. You will be a resident alien if you are in the US for more than 183 days in the tax year. Res Aliens are taxed like US citizens (worldwide income) so it is not important that you bring the money here to the US or not. If the foreign tax is higher than the US that is better for you but you will not be allowed a credit for more than the US tax. You will be allowed to carry the extra over to future years. All amounts need to be converted to US dollar so the US dollar conversion is important. It is the dollar not the rate that will matter.
You will need to report accounts still held in foreign countries. An FBAR is a Report of Foreign Bank and Financial Accounts. The form number is XXXXX F 90-22.1. Any United States person (resident aliens are US person) who has a financial interest in or signature authority or other authority over any financial account in a foreign country, if the aggregate value of these accounts exceeds $10,000 at any time during the calendar year. Under FATCA, U.S. taxpayers with specified foreign financial assets that exceed certain thresholds must report those assets to the IRS. This reporting will be made on Form 8938, which taxpayers attach to their federal income tax return.
Form 8938 is required when the total value of specified foreign assets exceeds certain thresholds. For example, a married couple living in the U.S. and filing a joint tax return would not file Form 8938 unless their total specified foreign assets exceed $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year. The new Form 8938 filing requirement does not replace or otherwise affect a taxpayer's obligation to file an FBAR (Report of Foreign Bank and Financial Accounts). Some people must file both. The house in Italy would not be under the reporting and you would not be taxed in the US on it unless you use it for business (such as rental).
Leaving your savings in the other country would not make a difference. You may still need to report (based on amount in the account) and you are required to report and pay US tax on the interest if a resident alien.
<strongCustomerLast Viewed on 8/4/2012 at 8:45 AM
Did you have another question on this subject before you rate? If you need more clarification on residency I would be happy to a address that.
as a resident alien (which I will be) I will have to report ALL INCOME, which for me will mean US employment income + interest on savings, regardless of the country it is generated;Correct
I will avoid double taxation by deducting the foreign tax from the US tax on interest income (up to the equivalent US tax amount);
Using form 1116 will calculate the amount yes, only up to the US amount if foreign is higher
I will not have to include in the reporting my house in Italy, which will not pay any tax in the US.
Correct, unless sold or used for business(rental)
By the way, when you say that it doesn't matter whether I bring savings with me or not - I suppose you meant purely from a tax perspective.
Correct, tax advice only
As for the exchange rate,