Navigating Tax Issues of Opening a Foreign Bank Account

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Yes, an American can open and own a checking or savings account overseas, but it will not save taxes. The U.S. taxes its citizens and resident aliens on worldwide income, so interest earned in a foreign account is reported on your U.S. return just like interest from a domestic bank. Holding money abroad also triggers separate disclosure rules: the FBAR (FinCEN Form 114) once your foreign accounts exceed $10,000 combined, and possibly IRS Form 8938 under FATCA. These are reporting obligations, not taxes, but missing them can cost far more than the tax itself.

Why a foreign account does not lower your U.S. tax

The U.S. is unusual among developed countries in taxing citizens on income earned anywhere in the world. An American living in Germany who deposits a German salary into a German savings account owes tax to Germany as the source country and must still file a U.S. return.

Two relief provisions reduce the double tax, but neither covers every situation:

• Foreign tax credit (Form 1116): Income tax paid to another country can generally be credited against U.S. tax on the same income. The credit is limited to the U.S. tax attributable to that foreign income, so it may not fully offset a high foreign rate, and it does not erase U.S. tax when the foreign rate is lower.
• Foreign earned income exclusion (Form 2555): Qualifying citizens and residents living abroad can exclude a set amount of wages or self-employment income. The limit was $120,000 for 2023 and is adjusted for inflation each year. The exclusion applies only to earned income. Interest on a foreign savings account is unearned income, so it stays taxable even when your salary is fully excluded.

How foreign account income goes on your return

Interest from a foreign bank goes on Form 1040 in the same place as domestic interest, generally through Schedule B. Part III of Schedule B also asks directly whether you had a financial interest in, or signature authority over, a foreign financial account during the year. Answering that question is required even when the account earned nothing.

A few mechanics differ from a U.S. account:

• No 1099: A foreign bank does not usually issue a U.S. Form 1099-INT, so you work from the bank’s statements.
• Currency conversion: Amounts must be reported in U.S. dollars. Income is typically converted at the exchange rate when received or at a yearly average rate applied consistently.
• Foreign withholding: If the foreign country withheld tax on your interest, you report the gross interest and may claim that withholding as a foreign tax credit.
• Currency gains: Moving money between currencies can itself create a reportable gain or loss in some cases, separate from the interest.

Foreign mutual funds and similar pooled investments held through a foreign brokerage can fall under the passive foreign investment company (PFIC) rules, which carry their own forms and less favorable tax treatment. Foreign retirement accounts also have distinct treatment and may need separate analysis.

The FBAR: FinCEN Form 114

The FBAR (Report of Foreign Bank and Financial Accounts) is filed with FinCEN, a bureau of the Treasury, not with the IRS, and it is separate from your income tax return.

Who files: A U.S. person (citizens, resident aliens, and U.S. entities) with a financial interest in, or signature authority over, foreign financial accounts whose aggregate value exceeds $10,000 at any point during the calendar year.

How the threshold works: There is no per-account limit. You add the highest balance of each account during the year. Three accounts that each peaked at $4,000 total $12,000, so all three must be reported even though none individually came close to $10,000. Accounts covered include bank, brokerage and certain other financial accounts held at foreign institutions. Accounts where you only have signature authority, such as an employer’s account you can sign on, generally still count for FBAR purposes even though the income is not yours.

How and when to file: The FBAR is filed electronically through the Bank Secrecy Act E-Filing System. It is due April 15, with an automatic extension to October 15, so no extension request is needed.

FATCA and Form 8938

Congress passed the Foreign Account Tax Compliance Act in 2010, and its main requirements took effect in 2014 after a multiyear phase-in. FATCA works from two directions.

What foreign banks must do

Foreign financial institutions must identify accounts held by U.S. persons and report them to the IRS, including account numbers, balances, names, addresses and taxpayer identification numbers. For individual accounts, reporting applies above $50,000. An institution that does not comply faces 30% withholding on certain U.S.-source payments and can be shut out of U.S. markets.

When you open an account abroad, expect the bank to ask whether you are a U.S. person and to request your taxpayer identification number, often on a Form W-9 or a local self-certification form.

What you must file

Form 8938, Statement of Specified Foreign Financial Assets, is filed with your income tax return. For an unmarried taxpayer living in the U.S., it applies when specified foreign assets exceed $50,000 on the last day of the year or $75,000 at any time during the year. Thresholds are higher for married couples filing jointly and for taxpayers living abroad.

FBAR vs. FATCA

The two filings overlap, and filing one does not satisfy the other:

• Filed with: FBAR goes to FinCEN; Form 8938 goes to the IRS with your return.
• Threshold: FBAR uses $10,000 aggregate at any time; Form 8938 starts at $50,000 for an unmarried filer living in the U.S.
• Scope: Form 8938 also covers some assets that are not accounts, such as certain foreign stock or partnership interests held directly. FBAR covers signature-only accounts that Form 8938 does not.

Why some foreign banks avoid American clients

FATCA places identification, reporting and documentation duties on foreign banks for every U.S. account they hold. For some institutions, the compliance cost of a small account outweighs the business, so they decline U.S. persons or restrict which products they offer them. Applicants can make approval easier by having a clear reason for the account (residence, employment, property or business in that country), a local address where required, and complete identity and tax documents ready.

Penalties for not reporting

Many foreign accounts go unreported. The State Department estimated roughly nine million Americans lived abroad in 2020, while about 1.4 million FBARs were filed. The IRS has emphasized offshore compliance since 2009, and penalties are steep:

• Non-willful FBAR violations: A civil penalty of up to $10,000 per violation, adjusted for inflation.
• Willful FBAR violations: A civil penalty of up to the greater of $100,000 or 50% of the account balance at the time of the violation.
• Criminal cases: Willful failure to file can bring fines up to $500,000 and up to 10 years in prison when combined with certain other violations.
• Form 8938: A $10,000 penalty for failure to file, with additional penalties if the failure continues after IRS notice.

Not paying the tax owed on foreign account income is a separate and more serious problem than the missed disclosure. Unpaid tax brings interest and accuracy penalties, and concealment can lead to civil fraud penalties or criminal charges.

Foreigners with U.S. accounts

The rules run differently for non-citizens. A resident alien (for example, a green card holder or someone who meets the substantial presence test) is taxed like a U.S. citizen on worldwide income and has the same FBAR and Form 8938 obligations. A nonresident alien reports only U.S.-source income and income connected to a U.S. business. Interest a nonresident alien earns on deposits at a U.S. bank is generally not taxed by the U.S. unless it is effectively connected with a U.S. trade or business. Nonresidents usually certify their status to a U.S. bank on Form W-8BEN. Someone who is a resident for part of a year reports worldwide income for the resident portion and only U.S.-source income for the rest.

Example: small accounts that still require an FBAR

In a hypothetical example, a U.S. citizen living in Texas keeps a Mexican checking account that peaked at $6,000 and a Spanish savings account that peaked at $5,000. Combined, the peak balances total $11,000, so both accounts go on an FBAR. Assets are below the Form 8938 threshold, so that form is not required. Interest from both accounts is reported in dollars on Schedule B.

FAQs

The Bottom Line

U.S. citizens and resident aliens with money in foreign banks must report that interest in dollars and disclose the accounts themselves, even small ones. Track each account's peak balance, keep the bank statements, and file the FBAR and Form 8938 when the thresholds apply. A foreign account brings no tax savings, and a missed filing can cost far more than the tax on the interest.