# Gonna file my first US return. A couple of questions.



## DrV

Hello everyone.

I am in the process of filing my taxes for the first time. I am originally from India. We moved here early in 2015 and will be filing a joint return. We are greencard holders.

Me and my wife have around $80k each in our retirement accounts which is not taxable in India. We earned around 8.5% interest on this accounts last year which as far as i know will have to be reported on the 1040.



Now my question is IRS publication 550 states this ,

"Interest Income

This section discusses the tax treatment of different types of interest income.

In general, any interest that you receive or that is credited to your account and can be withdrawn is taxable income. (It does not have to be entered in your passbook.) Exceptions to this rule are discussed later."


Now here is the deal,the PPF accounts under discussion allows me to withdraw ONLY 60% of the amount in the account right now. I dont have access to remaining 40%.

So according to IRS i shouldnt have to pay taxes on 40% of the interest I dont have access to and it wont be counted towards my interest.




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My another question is this.

According to what I have been reading. I will need to file Form 8938. Upon looking at the 8938, i saw that part III of the form asks me to state the reported foreign income on form 1040 which will be a bit lower than my total interest because technically i cant withdraw all of it.

So which amount should i mention,the full interest amount or the amount thats available to me? 

The entire amount will be available to me in 2019 , till then i have access to just 60% of it.


I want to be compliant with IRS. I am new to the country and find the tax rules a bit intimidating to be honest.


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## BBCWatcher

DrV said:


> Now here is the deal,the PPF accounts under discussion allows me to withdraw ONLY 60% of the amount in the account right now. I dont have access to remaining 40%. So according to IRS i shouldnt have to pay taxes on 40% of the interest I dont have access to and it wont be counted towards my interest.


No, your logic fails. You can withdraw 100% of the interest (equal to about 8.5% of the account, not 60%). Consequently it's all reportable income, when credited. The text you quoted refers only to the interest, not to the principle.

The next question you asked is thus moot.

Please also take a look at IRS Form 8621 to see if that applies. It might depending on the nature of the holdings in the account.


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## DrV

BBCWatcher said:


> No, your logic fails. You can withdraw 100% of the interest (equal to about 8.5% of the account, not 60%). Consequently it's all reportable income, when credited. The text you quoted refers only to the interest, not to the principle.
> 
> The next question you asked is thus moot.
> 
> Please also take a look at IRS Form 8621 to see if that applies. It might depending on the nature of the holdings in the account.



You got me a bit wrong.

The PPF account or the public provident fund account withdrawal rules are as follows for the initial 15 year block,




> The entire amount in your account could be withdrawn only on maturity. However, in times of financial crises partial withdrawals are permitted subject to certain ceiling limits. You could withdraw once a year, from the 7th year on wards. Such withdrawals, must not exceed, 50% of the balance at the end of the fourth year, or 50% of the balance at the end of the immediate preceding year, whichever is lower.
> 
> Pre-mature closure of a PPF account is permissible only in case of death.




Now i have already passed 15 years in 2014 and i renewed it before i came here for next 5 years under this provision.



> PPF account holders have an option of extending their accounts after the 15 year tenure with or without further subscription, for any period in a block of 5 years. The balance in the account will continue to earn interest at normal rate as admissible on PPF account till the account is closed. In case the account is extended without contribution, any amount can be withdrawn without restrictions. However, only one withdrawal is allowed per year.



So for me the withdrawal rules are a bit different, 



> If you continue the account after 15 years, with continued deposit, withdrawal up to 60 per cent of the balance at the beginning of each extended period (block of five years) is permitted.




So according to this , I have access to 60% of our total balance which is somewhere aorund 160-165k.


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## BBCWatcher

DrV said:


> You got me a bit wrong.


No, I didn't. You read the text that you quoted from the IRS incorrectly.

In the text you quoted -- which might not be the right text, but let's assume it is -- the IRS only concerns itself with whether the _interest_ (or an equal amount) can be withdrawn. Not even one rupee of the principle. Clearly if you can withdraw 60% of the _whole balance_ then you can withdraw 100% of the interest. Ergo, 100% of the interest is reportable income.

Read that text you quoted again. Nowhere does it say "account." It says "interest." Here, I'll quote it for you:

"In general, any interest that you receive or that is credited to your account and can be withdrawn is taxable income."

Interest that you receive...and can be withdrawn. See that? It's plain English and very clear.

Note that that text doesn't say that your withdrawal must be cost or penalty free. That's not a requirement either. Since you can get the interest, all of it, then per that sentence it's all reportable and taxable income.

That sentence does not support a pro-rata apportionment of interest and principle, which is what you seem to be arguing. If you're looking for IRS instructional support for that idea, you'll have to find it elsewhere, if it exists. If you find such text that'd be wonderful news to tens of millions of Americans who have bank certificate of deposits (CDs) receiving interest income. Meaning, I don't think you're going to find such text.


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## DrV

Yup now i understood. My bad 

Thank you. Appreciate it. I will go ahead and file the taxes right now!


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## BBCWatcher

Just take a look at IRS Form 8621 before you reach a final conclusion about that account and its income. IRS Form 8621 relates to what are called PFICs. Whether your account is a PFIC depends on its construction and/or holdings.

OK, all that said, there are some times when the IRS lets you pro-rate interest and other passive income. Here are a couple examples:

1. Since you arrived in 2015 and became a U.S. person then, tax year 2015 is what's known as your "dual status" tax year. As I recall the IRS gives you the choice to file a joint tax return as if you were a U.S. person for your entire dual status tax year, and that might be the best option, especially if you arrived early in the year. However, if you are filing a dual status tax return (i.e. Form 1040 with a Form 1040NR attachment/exhibit) then the IRS not only allows you but expects you to apportion the interest income on that account -- and all your other income, for that matter. So let's suppose you arrived on February 5, 2015. That would mean the first 35 days of 2015 you were not a U.S. person, and the remaining 330 days you were. So 330/365ths of that year of interest income would appear on your 1040 as reportable/taxable income, and the rest (35/365ths) would fall outside. But like I said, this apportionment may not be worth the trouble because you lose some other tax benefits if you file a dual status tax return (1040+1040NR), and it's more complicated even if you're using tax preparation software. You have to have a "decent" amount of non-U.S. source income that can be apportioned to your time before you became a U.S. person, relative to your total income, in order for this approach to make sense.

2. If you have a joint account, ordinarily you would apportion the interest income in equal shares to the joint account holders. Same with things like home sales and rental income, typically. Of course that apportionment doesn't matter if you're filing a joint return, there's one joint account holder, and the joint account holder is your spouse.


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## DrV

I am not sure if the 8621 applies. The name of the account is "Public Provident Fund" . I am unable to provide you a link because of my low post count.



I came in January so i think as you said filing a joint income would be a better option!


It has been rough because a huge chunk of our savings have been wiped out by the falling INR vs USD over the years. I want to be upto date on my taxes . I have heard immigrants slacking on FBAR and foreign income reporting and everything and i dont want to get into any trouble .



I also have a demat account for stocks in the stock market. What kind of account will that be while reporting it on FBAR and Form 8938? A deposit account? TurboTax doesn't seem to give me anyother opton.


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## BBCWatcher

DrV said:


> I am not sure if the 8621 applies. The name of the account is "Public Provident Fund" .


India's PPF does not look to me like a PFIC for U.S. tax purposes.



> I came in January so i think as you said filing a joint income would be a better option!


Yes, I think so unless you or your spouse happened to have a relatively large amount of non-U.S. source income in 2015 but before you arrived, and that income was either not foreign taxed (by India for example) or was lightly taxed. For example, if you received a large severance payment in 2015 before you arrived, or if you sold a home in 2015 before you arrived and had significant gains on that sale, then it might be worth filing dual status tax returns.

Assuming that's not the case, in IRS Publication 519 there's a section entitled "Choosing Resident Alien Status." Refer to that publication for instructions on the correct statement to attach to your joint tax return to make the choice of filing a joint tax return for all of 2015, including those days in January before you arrived.



> It has been rough because a huge chunk of our savings have been wiped out by the falling INR vs USD over the years.


Well, yes and no. Interest rates in India are higher as partial compensation, and the exchange rate will bounce around. Also, a weak rupee means less U.S. tax owed on that interest. However, this is just a bit of a lesson that portfolio diversification is helpful, including currency diversification. The best thing you can do is just save steadily and regularly, in a diversified and low cost way, since currencies and savings vehicles will bounce around.

Speaking of which, you have a deadline of April 15 to contribute to a U.S. Roth IRA (U.S. tax advantaged individual retirement account) for you and your spouse for tax year 2015. Have you given any thought to doing that?



> I also have a demat account for stocks in the stock market. What kind of account will that be while reporting it on FBAR and Form 8938?


It'd be FBAR and FATCA reportable, yes, assuming you meet the filing thresholds (FinCEN Form 114 and IRS Form 8938 respectively). It's a foreign financial account, clearly. Moreover, that account _might_ be a candidate for IRS Form 8621.


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## ForeignBody

DrV said:


> I also have a demat account for stocks in the stock market. What kind of account will that be while reporting it on FBAR and Form 8938? A deposit account? TurboTax doesn't seem to give me anyother option.



The definitions are far from clear but on the FBAR I would put it under "Securities".

On the 8938 I put it under "Other Foreign Asset".

I think the more important thing is that it is reported rather than worrying too much about exactly how it is listed.


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## Bevdeforges

ForeignBody said:


> I think the more important thing is that it is reported rather than worrying too much about exactly how it is listed.


I think this is the key thing. If in doubt, disclose. If you get the category "wrong" it's usually pretty easy to adjust - or to explain if they come back with questions. It's only if you don't disclose that you run into problems - at least if they find it before you happen to mention it.
Cheers,
Bev


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## expatconfused

ForeignBody said:


> DrV said:
> 
> 
> 
> I also have a demat account for stocks in the stock market. What kind of account will that be while reporting it on FBAR and Form 8938? A deposit account? TurboTax doesn't seem to give me anyother option.
> 
> 
> 
> 
> The definitions are far from clear but on the FBAR I would put it under "Securities".
> 
> On the 8938 I put it under "Other Foreign Asset".
> 
> I think the more important thing is that it is reported rather than worrying too much about exactly how it is listed.
Click to expand...

Can you also talk about how to compute maximum value of demat account? As you can imagine value of stocks are changing continuously and it is almost impossible to determine true maximum value. For that matter, it is difficult to determine it on any particular day also unless you were checking the value on same day. Any suggestions?


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## Moulard

From the filing instructions...

In most cases, you may use the value of a specified foreign financial asset that is not a financial account and that is held for investment and not held in an account maintained 
by a financial institution as of the last day of the tax year, unless you know or have reason to know based on readily accessible information that the value does not reflect a reasonable estimate of the maximum value of the asset during the tax year.

So in short, report on the fair market value of your stocks on 31 Dec.


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