Which Exchange Rate to use on US Expat Tax Returns?

By ZM Ishmurzina

American expats face the same question during the US tax time. Which exchange rate should Americans living abroad use? The question is quite simple but it is very important for U.S. citizens and green card holders with a foreign income. Choosing a correct rate has a significant impact on US expat tax returns.

This is a typical email from our clients, American expats living abroad. “I wonder which exchange rate I have to use on US expat tax returns for several years. Also, I started to rent a property located in New Zealand. Which rate is recommended by the IRS?”

Let’s review key issues.

Which currency should American expats use to prepare US expat tax returns?

U.S. citizens and green card holders are taxed on their worldwide income. American expats earn income and incur expenses in multiple foreign countries. However, U.S. taxpayers are required to translate their foreign income and overseas expenses into U.S. dollars.

How can American expats minimize a tax liability on US expat tax returns by using a correct rate?

Most of the time Americans living abroad receive a foreign income like wages and salaries evenly throughout the year. In this situation American expats can use the yearly average exchange rate to translate the foreign currency to U.S. dollars. However, U.S. citizens and green card holders working overseas can choose the rate on the day that the payment is made to take an advantage of more favorable rates if it is the case.

There are some unique circumstances. For example, if a specific transaction happened on a certain day, then American expats can use the rate for that day. For example, a sale of business or rental property might be one of these cases.

Which exchange rate should American expatriates use?

The Internal Revenue Service does not have an official rate. Generally, the IRS accepts any rate as long as it is used consistently on US expat tax returns.

The IRS website has a list of government and external resources to determine currency exchange rates. Oanda.com is a popular website to obtain historical rates. It is easy to navigate and find all required information.

Governmental Resources for Exchange Rate

· Treasury Department’s Currency Exchange Rate

· Federal Reserve Bank

· U.S. Department of Agriculture

External Resources for Exchange Rate

· Oanda.com

· xe.com

· x-rates.com

Which exchange rate should American expatriate use to prepare the FBARs and FATCA?

American expats must report the maximum account value in U.S. dollars. The taxpayers living abroad should use the Treasury’s Financial Management Service rate from the last day of the calendar year. This rate can be found on www.fms.treas.gov. Currently the rates from 2008 are available on this website. American expatriates, who need to file the FBAR for prior years, must refer to any above verifiable rate and indicate the source of the rate. The Treasury’s rate must be utilized to prepare the FATCA form 8938 as a part of US expat tax returns.

Conclusion

American expatriates should review their particular situation to determine the best exchange rate to use. U.S. expatriates who need help with US expat tax returns must consult an expat tax CPA that provides international tax services. International tax experts at Artio Partners are here to help you.