# US Tax Return - Current Account Interest and ISAs



## JB1611

Hello all,

My apologies in advance if this is not the correct place to ask this question – I have searched online for hours to try and find an answer but am going around in circles!

Being the (supposed) math whiz that I am, I help my wife (a dual UK-US citizen living here with me in the UK) file her taxes annually. This has always been a relatively straight forward process in that she earns below the $100,000 threshold (or whatever the exact amount is) to not have to pay any US taxes as she pays them via her employer in the UK. So we file forms 1040 and 2555 and it’s all very straight forward.

We have just come across the fact that we should be filing the FBAR form, as we have a joint current account which has over $10,000 in it, so will be back-filing those ASAP. But my understanding is that that form doesn’t mean we have to pay any tax on that current account, is that correct?

We also thought about opening a help-to-buy ISA for her, as we are looking to purchase a house soon, but from what I’ve read it seems like opening an ISA is a headache in terms of taxes. Is that correct?

My next question is regarding interest in a current account. In 2014, any interest in a current account would have been taxed by the UK. Does this mean it still needs to be included on the US tax forms (even if it’s a nominal amount) – and do we need to be paying tax on it? If so, could someone please point me as to where exactly it needs to go, and what amount we need to pay on it?

Finally, as of April 2015 there is no tax on interest in current accounts. So does that change anything?

Many thanks!


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## Bevdeforges

Moving you over to the tax section, where you're liable to get a whole bunch more response.

On the FBAR question, no, filing that form doesn't commit you to paying any taxes. It's simply a report of your overseas financial accounts.



> We also thought about opening a help-to-buy ISA for her, as we are looking to purchase a house soon, but from what I’ve read it seems like opening an ISA is a headache in terms of taxes. Is that correct?


I'm not real well versed in the UK savings vehicles, but chances are any sort of "investment" type account could easily subject her to some heavy duty reporting requirements under the FATCA rules. Just be aware that there is a $200,000 threshold for much of the FATCA reporting for overseas residents (vs. the $50,000 one for US residents). Best source for these sorts of things is the IRS website: irs.gov



> In 2014, any interest in a current account would have been taxed by the UK. Does this mean it still needs to be included on the US tax forms (even if it’s a nominal amount) – and do we need to be paying tax on it? If so, could someone please point me as to where exactly it needs to go, and what amount we need to pay on it?
> 
> Finally, as of April 2015 there is no tax on interest in current accounts. So does that change anything?


Basically, all bank interest is supposed to be reported, whether or not it has been taxed by your country of residence. However, if you're using the FEIE (form 2555) to exclude all salary income, the interest drops to the last line on the form 1040 as "adjusted gross income." To the extent that your AGI is less than about $10,000 or so, it should be eliminated by the subtraction of the personal exemption and standard deduction on the flip side of the 1040 form, so no tax payable. 

If your AGI exceeds the sum of your personal exemption plus the standard deduction, you can use the income taxes paid on your passive income (i.e. NOT salary) to offset any tax liability created.

Download and take a look at Publication 54 for an overview.
Cheers,
Bev


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## BBCWatcher

JB1611 said:


> We have just come across the fact that we should be filing the FBAR form, as we have a joint current account which has over $10,000 in it, so will be back-filing those ASAP. But my understanding is that that form doesn’t mean we have to pay any tax on that current account, is that correct?


FinCEN Form 114 is not a tax return and not even an income declaration. You don't use that form to calculate or to pay any tax. It's a financial disclosure form, separately filed and with its own separate filing requirements.



> We also thought about opening a help-to-buy ISA for her, as we are looking to purchase a house soon, but from what I’ve read it seems like opening an ISA is a headache in terms of taxes. Is that correct?


It depends on the construction and holdings of the ISA. If it's an ordinary depository ISA -- basically equivalent to a U.S. Certificate of Deposit -- then that's just a line on IRS Form 1040 Schedule B, something more for Line 8a, and another line on FinCEN Form 114 -- easy. If the ISA is a foreign trust, or runs into PFIC rules, then there's much more paperwork.



> My next question is regarding interest in a current account. In 2014, any interest in a current account would have been taxed by the UK. Does this mean it still needs to be included on the US tax forms (even if it’s a nominal amount)...


Yes, you report the gross interest on Schedule B and on IRS Form 1040 Line 8a (2015 edition at least).



> ...and do we need to be paying tax on it?


Yes, it's taxable, but....

(a) You get to take a Foreign Tax Credit (IRS Form 1116) to account for any foreign income tax paid;
(b) You have your personal exemption, standard deduction (or itemized deductions), credits, etc. That is to say that everybody has some part of their income taxed at 0% (or even occasionally at negative tax rates).

So, reportable, taxable, but not necessarily (or even very often) taxed. Part (a) is quite nice in the sense that the U.S. lets you "bank" excess FTCs to spend on other years' tax liabilities in the same income category. That can be handy, too.



> Finally, as of April 2015 there is no tax on interest in current accounts. So does that change anything?


That gross interest is still reportable, still taxable, not necessarily taxed. In that case there's no Foreign Tax Credit, so part (a) doesn't apply.


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## iota2014

A help-to-buy ISA is a Cash ISA and counts against your wife's Cash ISA allowance. Cash ISAs are FATCA-exempt, so in theory your wife should not have trouble opening one. However, practice varies, so she might have to try more than one provider. 

The US would like to tax the interest on your wfe's accounts, whether they're current accounts or ISAs. She can offset the US tax by the amount of UK tax paid on the current account(s) during 2015, by using FTCs. However, since ISAs are tax-free, she won't have any FTCs to put against the American tax demand, and the same goes for the interest on the current accounts, starting with the 2016-17 tax year.

FBARs are just information returns, not tax returns. But if filing FBARs, the IRS would like her to file Schedule B along with the 1040 to report that she has foreign accounts.


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## iota2014

Just remembered - HMG tops up the final balance on a Help-to-Buy ISA by 25%, doesn't it? The US is presumably going to want a share of that bonus, unless it is exempt under the US tax code or the US-UK Treaty. The Treaty probably won't help, but she might be able to exclude it as non-taxable, if it counts as a social welfare benefit. If it was me I would assume that it does.


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## BBCWatcher

iota2014 said:


> Just remembered - HMG tops up the final balance on a Help-to-Buy ISA by 25%, doesn't it? The US is presumably going to want a share of that bonus, unless it is exempt under the US tax code or the US-UK Treaty. The Treaty probably won't help, but she might be able to exclude it as non-taxable, if it counts as a social welfare benefit.


IRS Publication 525 provides a lot of support for that position. However, any such government home buying assistance is not a cost and is not part of the cost basis of the property.

For example, let's suppose you buy a home for 400,000 pounds. You have an ISA worth 40,000 pounds to help pay for the home, and the government has kicked in 10,000 pounds (25%). The actual cost basis of the home is thus 390,000 pounds -- you have to pull out the government's contribution. (If this is a marital property, as usual, with a marriage between a U.S. person and a non-resident alien spouse then 50% of the property is attributable to the U.S. person. However, the government assistance may or may not be split depending on how and to whom it's provided.)

When it comes time to sell you take the net sales proceeds, less allowable costs, and subtract the cost basis from that to calculate the net capital gain. So the government assistance "widens" the potential capital gain, assuming the property does increase in value. (Not a given! British real estate is generally fetching very high market prices right now.) There's typically a $250,000 capital gain exclusion on a primary residence, but the government assistance ends up digging into that exclusion amount.

As I see it that government assistance is not reportable income, so it's not taxable. (It's still reportable via FinCEN Form 114 as it passes through a financial account, albeit only within a total high balance for that account, not as a separate item.) But you still have to track it for the cost basis calculation and future net capital gain calculation. The capital gain might be taxable, but it'll be taxable only above the exclusion (if you're qualified for an exclusion) and at the lower capital gains tax rates, less any applicable foreign income tax and/or excess Foreign Tax Credits you choose to spend down.

Hopefully this explanation was clear, but if not, please post a follow-up.


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## JB1611

Wow thank you all so much for your responses - this has certainly cleared some things up for us.

I've pulled up form 1040 again to look at the figures in more detail - my understanding is that as long as the interest (from current account and ISA if we get one) is less than $10,300 (which is the $6,300 Standard Deduction plus the $4,000 Exemption in lines 40 and 42), we don't need to pay anything, since the Taxable Income (line 43) is still -0-. Am I correct? 

So the ISA is okay to have, and declare on 1040 and Schedule B? From all the comments I was reading online I was under the impression they were a no-go for US citizens due to making the tax filing procedure overly complicated. Just for reference, you can only add £200 a year to these ISAs so the amount in there will be nominal.

Finally, just to clarify, we should be filling in:
- 1040
- Schedule B (to declare the interest from current account and ISA - that all goes in Part 1?) 
- 2555 
- FinCEN Form 114 (which gets filed separately online)

I don't think we need to bother with 1116 as her income is covered entirely in 2555.

Thanks again for all your help!


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## iota2014

> So the ISA is okay to have, and declare on 1040 and Schedule B? From all the comments I was reading online I was under the impression they were a no-go for US citizens due to making the tax filing procedure overly complicated


Stocks and shares ISAs can be a nightmare for anyone filing US taxes. Cash ISAs don't cause a problem in that way. It's just that the FIs offering Help-to-Buy ISAs may tend to be mutuals (e.g. building societies), and some of them may be avoiding taking on US-citizen customers in an effort to minimize their FATCA due-diligence costs. So you might need to try more than one place.


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## BBCWatcher

JB1611 said:


> ....my understanding is that as long as the interest (from current account and ISA if we get one) is less than $10,300 (which is the $6,300 Standard Deduction plus the $4,000 Exemption in lines 40 and 42), we don't need to pay anything, since the Taxable Income (line 43) is still -0-. Am I correct?


Yes, with two "double check this" caveats:

(a) That assumes the correct filing status. Married people cannot file as "Single," for example.

(b) That also assumes there's no other non-excludable income. If there is none, if there's only interest income, then the entirety of the personal exemption and standard deduction has to try to cover only the (gross) interest income.



> So the ISA is okay to have, and declare on 1040 and Schedule B?


A _depository_ ISA holding cash is (generally) viewed as just another, ordinary bank account, so yes, that should be fine. If you want an opinion on a specific ISA by name, let us know. Also reportable via FinCEN Form 114 and, if applicable, IRS Form 8938 (similar to FinCEN Form 114 but a higher threshold).



> From all the comments I was reading online I was under the impression they were a no-go for US citizens due to making the tax filing procedure overly complicated.


ISAs invested in things like unit trusts/mutual funds, equities, etc. could get very complicated, yes. If they're simply tax-advantaged bank savings or current accounts, no, they're not particularly complex. The "ISA" label doesn't mean anything, really, in terms of U.S. tax treatment. What counts is the construction of the account and its holdings.



> Finally, just to clarify, we should be filling in:
> - 1040


Yes, the gross interest should end up on Line 8a (2015 edition; could be a different line in future editions).



> - Schedule B (to declare the interest from current account and ISA - that all goes in Part 1?)


Yes, but you also need to answer the Yes/No questions in Part III, at least.



> I don't think we need to bother with 1116 as her income is covered entirely in 2555.


True, but...excess Foreign Tax Credits, if you can grab them, are valuable. It's like clipping coupons that you can use at the supermarket later on, potentially.

Which leads me to the recommendation to pick your favorite (or favourite) tax preparation software and use that to prepare the forms. H&R Block has a free edition this year (tax year 2015), so you could start with that and see how it goes. The tax preparation software should make short work of spitting out a Form 1116 for you. It should also figure out what other forms, if any, you're missing. And you forgot at least one: IRS Form 8965. You would use that form to declare an exemption to the Obamacare Minimum Essential Coverage requirement for health insurance, typically by choosing reason code C.


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## JB1611

Excellent, thanks so much for the help! I will definitely look into the H&R Block software as that sounds like it will make things easier.

The ISA that we're looking at is the Halifax help-to-buy one (I already have one but a couple can each have one and effectively get 2 contributions to a new home).

In terms of filing as married/single - I thought (from what I'd read previously) that she should file as single, as I'm a UK citizen and don't have anything to do with her taxes. Reading your comment, I'm guessing she should file as married (filing separately)? In the past she's filed as single - are there any implications/corrections needed??

Thanks again!


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## iota2014

Halifax shouldn't be a problem - they'll just want a Form W-9, I expect.


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## Bevdeforges

She should file as married, filing separately. There are a few minor inconveniences with this status, but it doesn't sound like you're going to run into any of them. 

Be a bit careful with the 1116 vs 2555 option. If you eschew the FEIE in favor of going FTC 100% (including for her salary income) it may be difficult to switch back to the FEIE in future. Also, be aware that the tax basis may be different between the US and UK. Simple example: in many European countries, your "taxable income" from employment is your salary less the social insurances you pay. Those insurances aren't deductible for US tax purposes. It may not make a difference, but it can and you have to run the numbers to see how it works in your case.
Cheers,
Bev


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## BBCWatcher

JB1611 said:


> In terms of filing as married/single - I thought (from what I'd read previously) that she should file as single, as I'm a UK citizen and don't have anything to do with her taxes.


Where did you happen to read that? Maybe we can get that bad information corrected if there is such bad information floating out there. (Glad I mentioned it.)

The instructions for IRS Form 1040 (page 13-15 in the 2015 edition at least) don't tell you that. Publication 501 (pages 6-8 in the 2015 edition at least) doesn't tell you that, either. The only exception made when a U.S. person is married to a non-resident alien spouse is that a Head of Household filing status may be allowed, depending on the circumstances.

By the way, although it's kind of you to assist, and she may accept your assistance (or not), your wife has the U.S. tax filing and financial reporting responsibilities, not you. She's the one who at least has to sign her own tax returns, and she's the one held responsible for any problems. Unfortunately this is not a responsibility she can pass onto you, at least in the legal sense, except perhaps if she has a mental disability and you have power of attorney for that reason. Ordinarily she'd be the one asking questions in this forum.  I mention that in case there was any confusion or ambiguity.


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## BBCWatcher

JB1611 said:


> The ISA that we're looking at is the Halifax help-to-buy one....


I agree with Iota2014 about the W-9.

That account appears to be a simple, cash-based bank account. Therefore, from the U.S. tax point of view (and from really anybody's point of view outside the U.K.), it's just another ordinary, foreign bank account. The 2.5% interest (current rate) is U.K. tax free, but that doesn't matter to the U.S. (or to any other country for that matter). That interest is still U.S. reportable, taxable, but not necessarily (or even very often) taxed. So you report the interest, as/when credited, on Schedule B, rolled up onto 1040 Line 8a. The account is FinCEN Form 114 and/or IRS Form 8938 reportable, as/if applicable. And, as mentioned, I think you're on firm ground in treating the government assistance portion -- that 25% bonus when you cash out -- as non-income from the U.S. point of view, but it still has to be taken into account when calculating the U.S. cost basis of the property, and then ultimately the U.S. net capital gain upon sale of the property. That 25% bonus was not part of the cost of the property from the U.S. point of view -- you didn't pay that, somebody else did. So it reduces the U.S. cost basis, meaning it tends to raise the future U.S. net capital gain (or reduce the future U.S. net capital loss).

All pretty simple, really.


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## iota2014

JB1611 said:


> In terms of filing as married/single - I thought (from what I'd read previously) that she should file as single, as I'm a UK citizen and don't have anything to do with her taxes. Reading your comment, I'm guessing she should file as married (filing separately)? In the past she's filed as single - are there any implications/corrections needed??


No implications, and no need to file an amended return, as long as it doesn't change the "tax due" amount - which in your wife's case, from what you've said, it presumably doesn't.


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## BBCWatcher

Or maybe the implication is that she doesn't consider herself married and is free to date?


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