How the US taxes your UK ISA

An ISA is a UK creation, and the US has no matching concept. To the IRS an ISA is just an ordinary foreign account that happens to be tax-free under another country's law. That UK tax-free status carries no weight on a US return, so everything inside is taxed by the US as if the wrapper were not there.

Cash ISAs

The simplest case. Interest in a cash ISA is tax-free to HMRC but taxable to the IRS as ordinary income in the year it is earned. You still benefit from the UK break, so a cash ISA is not harmful for a US person; it just does not deliver the tax-free result a UK-only saver gets. Report the interest on your US return and, if balances are high enough, on the FBAR and Form 8938.

Stocks and shares ISAs

Here the wrapper can actively hurt. Gains and dividends are taxable to the US, and the deeper problem is the holdings: UK funds inside the ISA are almost all PFICs, which the US taxes at punitive rates with heavy annual filing. An ISA full of UK funds combines a US tax bill with a US filing burden and gives nothing back on the US side.

What this means in practice

A cash ISA is usually harmless and occasionally worth holding for the UK break alone. A stocks and shares ISA holding UK funds is the one to think hard about, because the PFIC treatment can outweigh any UK saving. Individual shares inside a stocks ISA avoid the PFIC issue but still lose the US tax shelter.

See the PFIC rules for the fund problem, and the cash ISA and stocks and shares ISA pages for who opens them.