Exchange Rate Tips for US Expats Filing Tax Returns
Working in a foreign country can open up a host of new opportunities and adventures for US expats, including the chance to learn a new language or become immersed in an exciting new culture. Yet, as with any experience, it can also be fraught with several new headaches. Two of the most frustrating are where to buy peanut butter and how to sort out your US expat taxes. As the availability of good peanut butter changes from country to country we will focus on US expat taxes in this article.
For US citizens and Green card holders working abroad, preparing and filing taxes is rarely a simple process. One of the main reasons for this is that individuals not only need to comply with tax regulations for their host country, but they often must also submit a US tax return as well. And, when dealing with foreign currency and differing tax years, this can seem like an arduous task.
US expats not only need to ensure they complete the correct forms and gather the appropriate documentation, but they must also convert any foreign currency to US dollars when submitting tax returns. This is where there is an opportunity to use foreign exchange rates to your advantage!
Individuals who are diligent in documenting their income and keeping the paystubs or salary receipts can actually use tax exchange rates to their advantage when filing US tax returns. The IRS gives taxpayers the flexibility to calculate income on an annual, monthly or daily exchange rate; taxpayers are able to report income and expenses based on the lowest exchange rate, as long as they are consistent across their tax return. If you are living in a country where there have been exchange rate movements (i.e. the currency is not pegged to the USD) you can quite easily figure out which rate is most beneficial to your specific circumstances.
The IRS allows you to view exchange rates on a number of different websites including:
The US Treasury FX rates – http://fms.treas.gov/intn.html
The Federal Reserve FX Rates – http://www.federalreserve.gov/econresdata/statisticsdata.htm
There are also a number of commercial websites that hold details of historic rates. For additional information about how exchange rates can be converted on your US tax returns, please take a look at Greenback’s blog post regarding exchange rates.
To ensure that one gets the most advantageous exchange rate it is best to list out one’s income and look up the daily, monthly and annual foreign exchange rate for those days/periods. Then calculate the US dollar value on each date and add them up to see which has the lowest USD value. This is what US expats will want to use on their US expat tax returns. By keeping a spreadsheet that details the date income was received, how much income was received and any local taxes paid one can literally save thousands of dollars for what would amount to a few minutes work. In many circumstances an employer will actually provide you will everything but the foreign exchange rate in the form of a pay stub! When tax seasons rolls around, taxpayers who take the additional step of comparing the exchange rates on the dates they were paid will be grateful that they have the ability to report the lower US dollar value on their US expat tax return.
Greenback Expat Tax Services specialises in the preparation of US expat taxes for Americans living abroad. Greenback offers straightforward pricing, a simple, hassle-free process, and CPAs and EAs who have extensive experience in the field of expat tax preparation. If you have questions about filing your tax returns of if you’d like help completing your US expat taxes, please contact Greenback.