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David C. Murray

Declaring income earned on Costa Rican Certificates of Deposit for U.S

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We have certificates of deposit at a Costa Rican cooperative. When the CDs were issued, the cooperative also issued a "coupon" for the interest they would accrue, but those coupons are only redeemable at the time the CDs mature. The interest is not paid or compounded during the duration of the term of the CDs.

 

The CDs were purchased with funds which had already been taxed by IRS, so when the CDs mature, the principal will not be taxable again.

 

I understand, of course, that the interest earned normally would be taxable, but what if we roll that interest over into a new CD without ever withdrawing it? Suppose we'd invested (say) $1,000 at 10% per annum for five years. Our interest earning would be $500 and that would normally be taxable. But what if on the date the CD matured we bought a new $500 CD with that interest without it ever passing through our hands? Would the maturation of the coupon be a taxable event even if we reinvested the interest immediately?

 

Thanks in advance.

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I would suggest that if you still have someone that prepares your US taxes, that you ask them this question, as it is more complex than an individual could answer, and you would not want to take our advice, and then end up owing tax.

 

Income earned outside the US is not taxed up to a certain level, so the little interest on your CD's would probably not be taxable too, unless your combined income is above the taxable level.

But you really should check the IRS site or with a US tax preparer on this. This is not something I would ask on a forum where the answers could be all over the map.

 

If you do talk to a US preparer, can you post the info they give you here?

 

Thank, Dana

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We have certificates of deposit at a Costa Rican cooperative. When the CDs were issued, the cooperative also issued a "coupon" for the interest they would accrue, but those coupons are only redeemable at the time the CDs mature. The interest is not paid or compounded during the duration of the term of the CDs.

 

The CDs were purchased with funds which had already been taxed by IRS, so when the CDs mature, the principal will not be taxable again.

 

I understand, of course, that the interest earned normally would be taxable, but what if we roll that interest over into a new CD without ever withdrawing it? Suppose we'd invested (say) $1,000 at 10% per annum for five years. Our interest earning would be $500 and that would normally be taxable. But what if on the date the CD matured we bought a new $500 CD with that interest without it ever passing through our hands? Would the maturation of the coupon be a taxable event even if we reinvested the interest immediately?

 

Thanks in advance.

 

 

Dave I am no tax lawyer but I would think any interest you get is taxable when you get it. Think of it this way ... say you have a CD or bond with a coupon. ... say you go and exchange the coupon for a cash ... is that cash taxable? ... I think so ... now you change your mind and go back to the bank and reinvest it ... I don't think the IRS cares ... they want the tax on the interest. I think the only way to avoid this would be to have an "instrument" whereby you bought a product that would give you $500 in five years and what they did as far as CD's was invisible to you. In essence, you bought a bond, payable in five years and you saw none of the money nor had access to it during that five years .... that would be my take .... I don' t think what you are saying is any different than my savings account where the interest in reinvested yet I still need to pay income tax on it annually.

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Jim, I think you're absolutely right. The interest credited in any tax year must be declared in that tax year whether you actually withdraw it or not. What you say makes perfect sense.

 

Dana, close. The "earned income tax exemption" applies only to income you earn through your own work efforts. That is, you must declare but may exclude up to around $95,000 in salaries and commissions earned through your own work, but you may not exclude interest, dividends, rents, profits from sales, etc which do not derive from your own actual labors.

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Can I throw a tax question out ...

 

I have an opportunity to do consulting for a California company, while a resident of Florida and living full time in Costa Rica. Any thought on taxes? Does the $95k exclusion only applies if the company is in CR and I am working in CR? Is that how it works?

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Hi,

I have been using CR CD's for 4 years now. I'm not sure I'm doing everything correctly, but I have been trying to do what the IRS wants done. This is what I go on, subject to new input:

- If you have more then $10,000 in deposits outside the US, you need to use a special form to report these deposits to the IRS. Failure to do so can result in major penalties.

- CD interest is passive (unearned) income and is *not* covered by the $95K "foreign earned income exemption." It's taxable from the first dollar.

- CD interest income is "realized" when the coupon matures (even if you don't cash it in!). No avoiding this by reinvesting (2 year CD's may help a little).

- I "think" the built in 8% CR tax on the CD interest is deductible on your US taxes as "Foreign taxes paid." I called the IRS and asked about this and they said yes, but this is my first year claiming it, so the Jury is still out on that one.

- If you have questions, call the IRS. You may need to call more than once as the wait times can be long. I thought they were surprisingly helpful.

 

Jim

Edited by jjlen53

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You're right, Jim, ownership of any foreign account which has a balance of $10,000US for even one second during the year must be reported to IRS each year. There are no tax implications, but the fact of the ownership must be reported. The form is sent to an address in Detroit separately from your income tax return filing. Completing it is a simple matter -- takes just a few minutes.

 

Too, interest is indeed "unearned" and cannot be included in the foreign earned income exemption which applies only to compensation for employment.

 

The CD rates the banks quote are net of Costa Rica's 8% interest rate tax. So if (say) BCR quotes 4.5% on one CD or another, that's what you'll get at maturity. On the other hand, interest earned at non-profit cooperatives (which, incidentally, pay much, much higher rates) is not subject to the 8% tax.

 

Edited by David C. Murray

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Can I throw a tax question out ...

 

I have an opportunity to do consulting for a California company, while a resident of Florida and living full time in Costa Rica. Any thought on taxes? Does the $95k exclusion only applies if the company is in CR and I am working in CR? Is that how it works?

I would think that you would only be liable for Fed and Fl. state taxes (if any). But Calif is aggressive on income tax, so you should consult a tax advisor.

And you have the last part correct.

Edited by DanaJ

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Hi Jim,

 

I'm no tax attorney, either, but in terms of your business, if it's internet based and you're a legal resident of FL, you'd declare income on IRS form 1040 (and file supplemental schedules as needed) and would pay US taxes. IIRC, FL has no state income tax. My spouse does economic consulting over the internet for several CA-based businesses (and those located elsewhere) and has never been responsible for CA state taxes, only for federal taxes. We're still legal residents of WA state, which also has no income tax. No CR taxes due because income is being generated within the US.

 

Hope this answers your question!

 

regards,

Gayle

Edited by salish sea

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Hi Jim,

 

I'm no tax attorney, either, but in terms of your business, if it's internet based and you're a legal resident of FL, you'd declare income on IRS form 1040 (and file supplemental schedules as needed) and would pay US taxes. IIRC, FL has no state income tax. My spouse does economic consulting over the internet for several CA-based businesses (and those located elsewhere) and has never been responsible for CA state taxes, only for federal taxes. We're still legal residents of WA state, which also has no income tax. No CR taxes due because income is being generated within the US.

 

Hope this answers your question!

 

regards,

Gayle

 

Perfect Gayle ... I really feel out of control when I don't understand and can not do my own taxes ....

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