How to Calculate Taxes Owed on a Foreign Bank Account
Calculating tax on foreign bank accounts depends on the type of tax, the currency, the method and when the tax is calculated. Since the bank account is located in another country, the tax is determined by that country's laws and regulations. The tax must be paid in the currency of that country and must also be reported to the United States Internal Revenue Department.
- Determine
if any tax on the foreign bank account is officially due in the
United States. Some personal income is allowed in
foreign accounts, and is not always taxable. Consult the IRS Revenue
Code Section 904, as this is the section relevant to foreign tax laws. - Determine
the amount of interest in the country's foreign currency. You will
have accumulated interest over the time that the account has been
open. - Find
the exchange rate(s) for the conversion from the foreign currency to
the US dollar on the date the interest was calculated for that tax
period. Individuals report foreign interest on Form 1040. The
conversion information can be found on the Internet by looking at
International bank sites. - Determine
if the annual average of exchange rates should be used or if the
conversion must take place on a certain date. The IRS often allows
an average annual rate versus the rate on the conversion date. - Convert
the amount of interest from the foreign currency to the U.S. Dollar. - Calculate
the amount of foreign tax paid to the foreign country against the
income of that bank account. Some countries require foreigners to
pay income tax on the interest earned. The IRS may allow that
payment to count towards some of the U.S. tax owed. - Report
the U.S. Dollar equivalent of the interest accumulated by the
foreign bank on Schedule B of Form 1040. - Report
the paid foreign tax, in U.S. Dollars, as a tax credit on line 47 of
form 1040. The tax you owe is the difference between the U.S. Tax
calculated on the interest and the U.S. Equivalent of the foreign
tax you paid.