# Is intrest from foreign accounts exempt?



## FFMralph (Dec 22, 2012)

Up until now I have always entered my Interest from German savings accounts as *Taxable Interest *on line 8a of Form 1040.

*Article 11 paragraph 1 of the US/German Tax Treaty* states:
Interest derived and beneficially owned by a resident of a Contracting State shall be taxable only in that State.

That means to me, because I reside in Germany, that it should be entered as *Tax-Exempt Interest *on line 8b and a *Tax Treaty Exclusion* should be claimed.

How do you or your tax preparers handle interest from foreign accounts?


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## Bevdeforges (Nov 16, 2007)

On US tax forms, you are supposed to enter interest income from all foreign accounts. (Line 8a works just fine - just don't forget to include a Schedule B and report the account to the Treasury Dept. on the FBAR form).

The way you claim a "tax treaty exclusion" is to claim a tax credit for whatever tax you pay on the account in Germany. If it's a "tax free" account for German tax purposes, you may be stuck. But take a look at Publication 54, where there is a list of "Common Benefits" in the section under the Tax Treaties. The only thing they mention regarding "investment income" (nothing under interest or bank interest) is that there may be some exclusion from taxation on the part of the country where you are resident and paying taxes.
Cheers,
Bev


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## FFMralph (Dec 22, 2012)

Thanks Bev. That is what I've been doing. Reporting on the Form 1040 line 8a and taking a Foreign Tax Credit for passive income. 

But the Tax Treaty Article 11 states "Inerest by a resident of a Contracting State shall be taxable only in that State" That means interest derived in Germany by someone residing in Germany is only to be taxed in Germany. (The same condition is in the French Treaty)

Publication 54 under the Topic that you mention goes on to state "Several treaties provide exemption for capital gains". 

This sounds to me that interest earned abroad, while living abroad, is only to be taxed by the Country of residence. Are you sure about your answer? I would hate to have been wasting my Foreign Tax Credit.


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## FFMralph (Dec 22, 2012)

Found this which supports my thoughts:

ambafrance-us.org/spip.php?article705 states:

*INTEREST INCOME: article 11 of the treaty *

"Some investments are compensated by interest payment (bonds, Government loans, cash vouchers...). When they are paid to a* resident of the United States*, they are not taxed in France but subject to the US income tax."

That would mean a non-US resident would pay the tax only in France.


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## Bevdeforges (Nov 16, 2007)

Be careful about that interpretation. The overall approach for US taxes is that you get to exclude your "foreign earned income" (i.e. salary) up to the current limit, but that you report everything else - applying whatever available exemptions, exclusions or tax credits are available.

OTOH, it really depends on the amounts involved how likely it is that the IRS is going to look too closely at however you treat it. 
Cheers,
Bev


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## robnw (Jul 18, 2012)

FFMralph said:


> *Article 11 paragraph 1 of the US/German Tax Treaty* states:Interest derived and beneficially owned by a resident of a Contracting State shall be taxable only in that State. That means to me, because I reside in Germany, that it should be entered as *Tax-Exempt Interest *on line 8b and a *Tax Treaty Exclusion* should be claimed.


Consider the effect of the savings clause and whether it overrides Article 11 - see protocol.
http://www.irs.gov/pub/irs-trty/germany.pdf


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## tjbr52 (Jan 2, 2013)

*filing for interest*

Just list bank account name. If you're already getting taxed by the source government, you won't be subject to double taxation


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## FFMralph (Dec 22, 2012)

Bev and Noble, you are both right.
The Savings Clause in the treaty excludes US Citizens abroad from the benifits of treaty listed in Article 11. The full amount of interest has to be reported for US tax purposes.


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