[MitiLanglin]

Hi, I am checking this for my married friends who are US citizens. They have been filing their foreign earned income jointly (Form 2555EZ) with the bona fide status since 2007.

1. One of the couple changed job last year so does he need to file 2 separate forms of 2555EZ for each employer's period?

2. They bought a property in the foreign land last year with monthly mortgage payment to a foreign bank. Which forms do they need to file for US tax return?

3. They also have bank and brokerage accounts in the foreign land. There were some capital gains/losses in their brokerage accounts, and bank interest received from bank during the tax period. Which forms they should use for filing?

Thanks in advance for your kind reply on the above questions!

[Five Rings]

Question 1) No

Question 2) Form 1040 Schedule A, line 11

Question 3) They must report their worldwide income. Thus, capital gains and losses on Form 1040 schedule D and line 13 of the 1040, and interest on form 1040 line 8a.
Additionally, if these foreign accounts exceed $10,000 they report those on Form TDF90-22.1

[MitiLanglin]

Thanks, Five Rings. I will let my friends know.:)

[Five Rings]

One more thing; if the cap gains and interest are taxed by the other country either directly on that country's tax return or by withholding at source they should file a Form 1116 (foreign tax credit) to avoid double taxation.

[IntlTax]

For rules related to the mortgage interest, see https://www.askmehelpdesk.com/taxes/...ry-181648.html

[Five Rings]

Yes, I read that already as you see from my post. Note that the taxpayers are not in the US.

[IntlTax]

Five Rings, Thanks. I had mistakenly thought the taxpayers were inside the U.S. You rightly point out that the withholding tax does not apply if they reside outside the U.S.

[Five Rings]

Well, this whole question of interest paid by a US resident to a foreign bank is very interesting.

For example the USMT Tech Expl. Of 11/15/06 states in Art. 11:
Paragraph 1
Paragraph 1 generally grants to the State of residence the exclusive right to tax interest beneficially owned by its residents and arising in the other Contracting State.
The term “beneficial owner” is not defined in the Convention, and is, therefore, defined under the internal law of the State of source. The beneficial owner of the interest for purposes of Article 11 is the person to which the income is attributable under the laws of the source State. Thus, if interest arising in a Contracting State is received by a nominee or agent that is a resident of the other State on behalf of a person that is not a resident of that other State, the interest is not entitled to the benefits of Article 11. However, interest received by a nominee on behalf of a resident of that other State would be entitled to benefits. These limitations are confirmed by paragraph 8 of the OECD Commentary to Article 11. See also paragraph 24 of the OECD Commentary to Article 1.

In the US/Portugal treaty TE (Art. 11) it clearly excludes interest on mortgage loans:

Paragraph 3 provides three cases where source-based taxation of interest is eliminated: 1) when the debtor is the government of the Contracting State, a political or administrative subdivision thereof, or any of its local authorities; (2) when the recipient of the interest arising in a Contracting State is the government of the other Contracting State, its political subdivisions, or local authorities, or an institution or organization wholly owned by them; and (3) when the interest is on a loan with a term of 5 years or more granted by a bank or other financial institution that is a resident of the other Contracting State. The second exemption, where the creditor is the other government, a subdivision or local authority thereof, or a wholly government-owned institution is broader than the exemption provided underCode section 892 , but is similar to the rule in several other U.S. income tax treaties. It is principally intended to benefit Eximbank and OPIC. Under its domestic law, Portugal would tax interest paid to those U.S. Government lending institutions.

[IntlTax]

I agree that a treaty may reduce or eliminate the withholding tax. To rely on a treaty, the payor needs to get a W-8BEN from the recipient certifying that they [the recipient] qualify for treaty benefits.

[Five Rings]

Yes, of course; how stupid of me. No one is disputing the treaty benefit.

But tell me, is there any evidence, anecdotal or otherwise, where foreign banks have refused to sign a W8-BEN. Or, have any banks produced a written policy statement on the issue?

It seems to me, after UBS gave over a list of supposedly secret accounts held by US citizens to the IRS, that signing a W8 is pretty small potatoes

[IntlTax]

I have no evidence that a bank would refuse to complete the W-8BEN. I do note, however, that the bank would also need to get a U.S. employer identification number to claim the treaty benefits. If the bank has no activity in the U.S. it may be reluctant to obtain a U.S. tax ID number.

[Five Rings]

The SS-4 only requires some simple informational elements and for the entity to check the box for "compliance with IRS withholding regulations".

I don't know; keeping a customer happy and avoiding the rat's nest of the client withholding 30% and the resulting wrangle over that might be not only the smart but the easy thing to do.

One wonders how a Brazilian working temporarily in America would handle his house mortgage payment in Sao Paulo.

[MitiLanglin]

Thanks for all of the replies. My friend is trying to file tax on his own after reading your advices.

1. On the 2555EZ form, should he squeeze both of his employers' info into line 6 "employer's name? Space is quite limited. So, should he just fill in the his most current employer info and combine his annual income of both employers into single 2555EZ form? Prior to your advice, initially he thought of filling up 2 individual forms for each employer's pay period.


2. For saving interest earned from foreign banks, is it right to just fill in the total in Form 1040 line 8A? Does he have to include this is Schedule B Part 1 Interest too?

Thanks again for your valueble advice.

[Five Rings]

1. Put in the last employer info and then, in the white space on the bottom of the first page, put in the second employer info or just attach a note to the form listing the second employer. There is no need to do two forms.

2. Include the foreign interest on line 8a. Depending on the country (as in most European states) tax is withheld on interest as it is earned at a certain tax rate. Be sure to claim that withheld tax on form 1116 as a tax credit. If the taxpayer has accounts exceeding $10,000 a TD F 90-22.1 must be filed; follow the directions on the Form.

[MitiLanglin]

Thanks, Five Rings.

If there is no tax withheld on the foreign bank interest earned, do we still need to submit form 1116? Is it right for us to just fill in the foreign bank interest on line 8a of Form 1040 only? We are a bit confused as we thought we should fill in the foreign bank name on Schedule B Part 1 Interest for the interest earned.

[Five Rings]

If there is no tax to credit there is no need to file the 1116.

If total interest income exceeds $1,500 then you must list the banks and amounts on schedule B.

Where in the world is there a government that does not tax interest income?

[MitiLanglin]

Thanks, Five Rings!

We reside in Singapore and its saving interest from bank is tax-free. Thus we have to report this as taxable income on form 1040 and can't claim tax credit on form 1116.

We also plugged in our foreign tax paid in form 1116 and noticed that it made no difference to the taxable income in 1040. If we are not claiming any foreign tax credit for our foreign mortgage interest, foreign tax paid and foreign interest earned, we can just skip form 1116, include the $1500 interest on schedule B with our form 2555EZ right?

[Five Rings]

Wait a minute.

If you paid foreign INCOME tax in Singapore it Has to result in a credit against US income tax.
However, if you are excluding all your income then you will not be able to use the foreign tax credit for your earned income.
Mortgage interest is an itemized deduction on schedule A; it has nothing to do with the FTC. If you are taking the standard deduction you do not do schedule A.

Yes, you put the interest income on schedule B. Don't forget to do the "foreign earned income worksheet" to arrive at your tax.