Hello, I am not resident and not American citizen. I have opened a saving account last month in a Bank in the us and I have signed a copy of W-8. However, I am reading this month my statement and I earned interest but it was reduced by a legend "federal withholding" for about 30%. I am asking why it happens? What could be the problem? I would believe that interest of bank deposits were tax free. Am I correct?
Thanks in advance.

It would be exempt if this was a normal bank account savings interest. I assume you gave them a w-8ben form, properly completed stating you are a foreign person. If so, interest income from a savings, checking, CD, and similar interest is exempt. You may need to call your bank and straighten out whatever the problem is. If they don't reverse the withholding, you'll need to file a return, I would guess a 1040NR, to claim credit for the withholding for refunding, and state on the form the type of interest it is, and that it is exempt. Remember to attach the 1099int form you should get from the bank showing the withholding, or it won't be allowed. However, you will need to iron out what's going on with the bank.

Actually, a tax return (Form 1040NR) is required ONLY IF the tax rate for interest earned is actually different from the 30% withholding.

You need to review the tax treaty between the U.S. and your country to determine what tax rate applies. IRS Pub 901 also has a table near the end of the publication to show the effective tax rates on interest earned (note you may need to read each applicable footnote).

If there is NO tax treaty between your country and the U.S. then the tax rate is 30% and NO tax return is required.

No. Typically, interest earned on deposits are taxable income. But, in my experience, it's not common for the bank to withhold taxes in advance on interest earnings. Typically, at the end of the year, you (and the IRS) receive what's known as a Form 1099, which documents the interest earned by you and what you have to declare as income, which is then subject to taxation. But perhaps it's different for you because of your non-resident, non-citizen status.

Thank you for your answer. I have the saving account in BOFA and I gave them a W-8 form. I called them and say me that need additional new forms about my non-residence. When I went to the Bank I gave them all they ask me but it seems is not enough.
It is difficult to me travel again to the U.S. to give the new papers. I ask you, if I go the next year, can I have a problem with the IRS? I mean, if I assume I loss this "Federal withholding" I would need doing something else with the IRS?
Thank you very much.

Thank you for your answer. I read that there is NO tax treaty between my country and the U.S. and I opened a saving account with BOFA. I found this in IRS web page, let me know if it is applicable for me:

Interest on deposits (Income Code 29). Foreign persons are not subject to withholding on interest that is not connected with a U.S. trade or business if it is from:
Deposits with persons carrying on the banking business,

Deposits or withdrawable 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, open account time deposits, Eurodollar certificates of deposit, and other deposit arrangements.
Let me ask if I understand you:
1) That IRS publication, Could apply to me? And in this case it is possible that I could be exempt.
2) If I am not exempt, no tax return is required?

Thank you for your patience.

I just checked IRS Pub 901.

If you are NOT covered by a tax treaty, then interest earned on deposits in a U.S. bank that is NOT effectiveky connected to a U.S. trade or business is EXEMPT from U.S. income taxes (page 33, IRS Pub 901, third column under "Table 1".

Thank you Atlanta Tax Expert, you have been absolutely helpful. I really appreciate your answer. Thank you again.

Glad to help!

Actually a treaty whether it exists or not is not really relevant to his issue.

Per pub 519 Tax Guide for Aliens, p 15, a nonresidents interest from a savings account is exempt if its not connected to any trade or business, period. And nowhere in this Interest exclusion matter does it references treaties.

Pub 901 Tax Treaties, which primarily deals with treaties therefore is not relevant This income is exempt by IRS Code, not a treaty.

This gentlemen only needs to submit a properly completed F w-8ben, and if he meets the criteria, the bank is not allowed to tax it.

If he wants to pursue the recovery of the withholding he can work with the bank, by correspondence or otherwise to correct it. He is not required to, if he wants, he can to let the matter drop. 30% is the maximum they can take out, and the IRS will consider, the matter closed, no further forms need be filed, no further action necessary.

He has to remember though if the bank is still paying him any interest its still going to keep withholding 30%, until that issue is resolved.

Now, if he decides get his withholding back, he has two options.

1. What we've already gone over, try to get the bank a correct W-8ben and ask for the withholding back. IF they do, that ends it, stories over.

2. If they don't give he must file a 1040NR to recover it.

a. To do so he must complete page 4,line 76a, column (a) Amount withheld at source, he puts the amount the bank withheld; in column (e) he puts 0%, which represents his correct rate as its completely exempt and not subject to tax..
b. Also, completes p.5 item L, which states...

"Have you excluded any gross income other
Than foreign source income not effectively
Connected with a U.S. trade or business?
If “Yes,” show the amount, nature, and source of the excluded income. Also, give the reason it was excluded.

He'll describe this as bank account interest he wants to exclude, and complete.
Other areas of the form e.g. name, address, withholding on line 58, etc.


The IRS will allow the refund of the withholding, even though the bank does not.

The bank should issue him a F 1042S, not a 1099int, as previously indicated, showing the amount withheld which he must attach to the 1040NR to claim the withholding.

And that's right S-cianci, rules are different for aliens. The interest income from a normal savings account you and I, as citizens would earn is taxable, but not so for aliens, they are exempt by code from this income. This income is similar to certain gambling income aliens receive, an exemption by code exists, even if no treaty is invovled.
Its when they don't complete the form properly withholding occurs in error, and sometimes the bank makes mistakes as well.

I want to emphasize the 1040NR must be fully completed, I've only gone over main areas of the form that relate to his issue.

Mack:

Read the footnote for interest as it pertains to Mexican citizens. They pay a 4.9% tax on interest earned from banks, despite what IRS Pub 519 says.

Tax treaties take precedence over the IRC.

Atlanta

With all due respect,

If, you're talking about footnote "qq", in Pub 901, that is a different type of interest.

That interest is from loans, bonds, or securities only. Lochos question was on "savings account"
Interest.

The footnote qq states;

" The rate is 4.9% for interest derived from (1) loans granted by banks and insurance companies and (2) bonds or securites that are regularaly and substantially traded on a recognized securities market..."


So, the 4.9% does not pertain to normal savings accounts. Additionally, tax treaties are used to create a tax advantage to the nonresident. It would make no sense to have a tax treaty that "increased" a persons tax over the IRS tax code.

And actually if you go to the Mexican tax treaty it states as follows:

Article 11

"2. Such interest may also be taxed in the Contracting State (USA) in which it arises and according to the
laws of that State. However, if the beneficial owner of the interest is a resident of the other Contracting
State(Mexico), except as provided in paragraph 3 the tax so charged shall not exceed:

a) 4.9 percent of the gross amount of interest derived from:
(I) loans granted by banks, including investment banks and savings banks, and
Insurance companies;
(ii) bonds or securities that are regularly and substantially traded on a
Recognized securities market;

As long as the interest does not exceed 4.9% , and the IRS code is saying 0%
But again this rate is on a whole different type of interest unrelated to Lochos's
Question. And even if it was the treaty is saying that interes will remain at zero
As it does not exceed 4.9%. I believe the
Writers of pub 901 erred in omitting the "does not exceed" phrase.
There are other references in this treaty that give more credence to 10% or 15%
Rate than this footnote your referencing.

But the treaty is not going to have its residents taxed at a
Higher rate than what the US is giving them already.

What Loschos might be also talking about is backup withholding if he did not put a
Correct tax id no. on the notice, backup withholding is about 28%, and he said the
FITW was about 30%.

Re-reading the 'qq' footnote, I amend my earlier post to read that the tax rate on interest should in fact be 10% vice 4.9%.

Regardess, In my opinion, it is NOT 0%.

The backup wthholding is generally 30% across the board unless the tax treaty specifies otherwise, and, I agree that Lochos is probably talking about such backup withholding.

I understand your humble opinion Atlanta, but it is zero in this case. I work with NRA, that submit F W-8ben to banks to get the 0% rate on their savings acct interest, fairly often.

The treaty reference you're using where you state 4.9% once and now have modified it to 10% are both not applicable to individuals as it states in the Mexican treaty on interest income;

Article 11 "2. Such interest may also be taxed in the Contracting State in which it arises and according to the
laws of that State. However, if the beneficial owner of the interest is a resident of the other Contracting
State (Mexico), except as provided in paragraph 3 the tax so charged shall not exceed:... 4.9%... 10%... "

The tax their talking about is the US tax. Also, as you can see these are not "set" rates, to say that Mexican residents are taxed on interest at 4.9% or 10% on interest income, their limits.

The IRS tax on this income for NRA is 0% per pub 519, p 15, so it does not exceed these limits as stated in the treaty, and thats why banks don't tax this income at all, as the IRS law indicates...

"Nonresident aliens can exclude the following items from their gross income:
... Interest Income... " Pub 519 , p.15.


However, I Respect your right to disagree.

Estimado mack20007, your answer was absolutely brilliant. I have proceed as you recommend, I ask the bank for the witholding back and they did this. I had to send information about my residence outside the US and my ID. To sum up, you know a lot about taxes and I would like to congratulate you. Thank you very much.