Claiming Tax Treaty Benefits

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Hi,

I moved to the US from Egypt in 2016, and am filing a joint tax return with my husband as a resident alien.

I have a term deposit back in Egypt that generates a monthly interest, this interest in non taxable back in Egypt.
Can I claim it to be non taxable in the US as well based on an existing tax treaty between the US and Egypt.

This are links to the treaty documents:
https://www.irs.gov/pub/irs-trty/egypt.pdf
https://www.irs.gov/pub/irs-trty/egypttech.pdf

Thanks!

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What did any Egyptian friends of your living in the US say?

From reading the treaty PDF, it does not appear that the interest would be exempt from US tax.

Article 12, section 1-3 seem to the relevant parts. It says that
1: the interest is subject to tax by both countries.
2: the tax rate cannot be more than 15% and
3: it is exempt from tax
a: if the interest is received by one of the countries (or state or city within) --does not apply to you
b: if received by a resident of US (you) for a loan (deposit) made to or insured by the US (or state or city within), then it is not taxable by Egypt.

3b appears to exempt an American living in Egypt from US tax on interest on an Egyptian loan or deposit, and exempt an Egyptian living in US from Egyptian tax on interest on an American loan or deposit, but not your situation, an Egyptian living in US from US tax on Egyptian loan or deposit.

Therefore you are probably required to report it on Schedule B and also mark the box that you owned a foreign bank account.

In reality, the IRS would probably never know about it unless you report it.

You really should not use your actual full name as your username on forums.

RidicuRuss said:   In reality, the IRS would probably never know about it unless you report it.
  You don't want to risk penalties for failing to disclose foreign bank accounts. Penalties are stiff even if there isn't any taxable income in the accounts. 

No one faced this situation before. 

Thanks for the reply!

Within article 12 in the technical explanation of the treaty, I found the following:
"=12ptParagraph (3) provides that interest beneficially derived by one of the Contracting States, or by an instrumentality of that Contracting State not subject to tax by that Contracting State on its income, will be exempt from tax by the other Contracting State. Under this rule, interest income derived by the Export-Import Bank of the United States and the Overseas Private Investment Corporation (OPIC) on loans, made to Egyptian residents will be exempt from tax in Egypt. The exemption also applies where a resident of a Contracting State receives interest income with respect to debt obligations made, guaranteed or insured by that Contracting State or an instrumentality thereof. "

Doesn't this imply that it's non taxable in the US since it's non taxable in Egypt?

Hi -Tax accountant here who deals a lot with these type of questions. Uncle Sam wants every dollar you make. If you are considered as a US resident, then you are taxed on your world wide income, regardless where it is earned. Even if Egypt does not tax the income, it is still considered as income as it probably does not follow any of the US tax exempt rules. Per paragraph (1) it mentions that both states may tax the income, but by paragraph (2) not to exceed a tax of 15%. Per paragraph (3) if you have a government sponsored bond or investment vehicle - for the US (treasury bonds, or US notes) these will not be taxable in the other country. Hope this helps.

So far what I understand is that my best case scenario is getting taxed 15%
Another thing I can't understand is, how is this handled when it comes to states taxes. Will I be taxed again?

Yaz2017 said:   So far what I understand is that my best case scenario is getting taxed 15%
Another thing I can't understand is, how is this handled when it comes to states taxes. Will I be taxed again?

  

Depends on the state, but in general, if the state has a tax, yes you will.

 

Could you ask the people at your US embassy or US consulate? Surely this particular Egypt/US tax scenario has come up before, even if you and your acquaintances have never heard of it.

If it's a big deal for your finances and you don't want to admit to having that financial arrangement unless you are forced to, then you should pay for a consultation with a tax expert who has suitable knowledge -- it's better to be safe than sorry.

Don't put too much trust in free online advice and in your own attempts at interpreting complex legal/bureaucratic language.

You don't want to put down on official government forms something that is false or that you aren't certain about and which might get you into trouble, it's just not worth it -- especially with the stance of those in the upper echelons of power in the US becoming less friendly to foreigners in general.

Good to note.
Thank you



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