US Equivalent to a Cash ISA

digitalvibe

I know that in the US, the closest equivalent to an S&S ISA is a ROTH IRA, but is there any equivalent to a Cash ISA? Asking because as an American who's been living in the UK for many years (and must submit US taxes every year), this is the first year I'm being told that I must pay US tax on "interest income", i.e. the very small amount of interest I earned with my Cash ISA is taxable under US tax law. I'm not convinced this is accurate so wanted to point my US accountant in the direction of a US equivalent scheme (if one exists) to point out that the Cash ISA I have is non-taxable here and hoping non-taxable there as well.

masonic

It is correct that a UK cash ISA has no special tax treatment in the US.

MDMD

The tax treatment of ISAs is set out in UK legislation - which only applies to the UK in the same way that any other law does.

EdSwippet

digitalvibe said:

... I'm being told that I must pay US tax on "interest income", i.e. the very small amount of interest I earned with my Cash ISA is taxable under US tax law. I'm not convinced this is accurate ...

It's correct, I'm afraid. From one result of a suitable Google search:

Reporting for Cash ISAs vs. Stocks and Shares ISAs

ISAs come in various flavors, but the most common schemes are cash ISAs or stocks and shares ISAs.

For US taxation purposes, the cash ISAs are treated as a normal foreign bank account with interest subject to tax at ordinary rates. ...

Just be grateful you don't have funds or ETFs in a stocks and shares ISA. If you do, you'll face a living US tax hell.

bostonerimus

The US does not recognize the ISA tax free wrapper. So any interest, dividends or capital gains on funds held inside a UK ISA owned by a US tax payer is subject to US tax and also to PFIC rules.

It is true that the closest thing the US has to an ISA is the ROTH IRA as money is deposited after tax and there is no tax on withdrawals as long as you follow the rules, however, the ROTH is designed as a retirement investment and there are significant withdrawal restrictions before you reach age 59.5.

You can invest in numerous things inside a ROTH including a Money Market Fund which would give you an investment very similar to a Cash ISA.