I earned interest on money in a foreign bank account. How should I report this?

Americans are taxed on their worldwide income so this interest must be reported and it will be taxable. If foreign taxes were paid on this income the amount that was paid can be offset against US taxes using the foreign tax credit. This tax credit prevents double taxation.

Example: An American citizen owns a one year Canadian Dollar CD. The American citizen receives a notice from the bank where his CD is held informing him of the amount of interest he made and the amount of Canadian taxes that were paid to the Canadian Government. The American citizen must report the amount of interest earned on his tax return, but he can offset some of the taxes he will owe using the foreign tax credit.