Your Economy (No Politics)

[Elroy Jetson]

There is ANOTHER compelling reason to open foreign bank accounts, rather than open an account with Everbank, I didn't mention in my previous posts.

If your "Euros" at Everbank appreciate 25%, in addition to earning annual interest, you owe ordinary taxes (not capital gains) on the currency appreciation. Your "Savings Account" at Everbank is actually a US Dollar account with an attached futures contract, so all currency gains on the contract, in addition to the annual interest, are taxed as ordinary income, regardless of your holding period.

By contrast, gains or loss on foreign currency either in bills, coin, or in a foreign bank account are not a taxable event for individuals.

Its interesting that Australia just changed their tax law to make this a taxable event for Australian citizens. I suspect the reason for this is large losses in value on US Dollar accounts, and other weak currencies, held by Australians - especially those working overseas.

The interest you earn on your foreign bank accounts is wholly taxable as ordinary income in the year it is earned, both in the nation where the bank account is located AND in the USA. Typically, Canada, Switzerland, Europe, or Australia withhold a 10% tax on the interest paid as full payment of local taxes. The interest is also taxable in the USA, but the tax withheld is a Foreign Tax Credit on page two of the 1040 tax form.

Let's say you earned $10,000 in interest. Switzerland withholds $1,000. You owe US tax on $10,000, say 25% or $2,500. The Foreign Tax Credit reduces your tax by $1,000 for a total tax of 25%, your normal US tax rate. But in this case 10% went to Switzerland and only 15% is paid to the USA. You convert the foreign interest into US Dollars on your Schedule B using "any reasonable method". The easiest is to use the exchange rate on say, Dec 31. Which ever method you choose should be used every year.

You MUST file a US Treasury form TD F 90-22.1 by June 30 of the the following year *ten weeks after the tax is due to the IRS), each year you have a foreign account.

Form: http://www.irs.gov/pub/irs-access/f9022-1_accessible.pdf

Explanation: http://www.irs.gov/pub/irs-pdf/p4261.pdf

For this additional paper-work, your currency appreciation is not taxable. If the US Dollar falls in value, owning a home and holding money in a foreign currency are the only two ways I know of maintaining the value of your savings without having to pay a tax on the alleged gain against the falling US Dollar.

The combination of higher interest paid by foreign banks and the tax advantage over a setup like Everbank, usually makes the nuisance of maintaining accounts with foreign banks worth the trouble.

Incidentally, HSBC branches in China will open Renminbi accounts, another potentially attractive currency, for US citizens.