How to Use IRS Exchange Rates for Your Tax Return
Regardless of where they live, American expats have to declare their worldwide income and file their US tax returns each year. That’s because the US is one of the few countries in the world that applies citizenship-based taxation.
However, here’s where things get a bit tricky. Since US expats have to declare their income and assets in USD, they have to convert whatever currency is relevant in their new home country into dollars with IRS-approved foreign exchange rates.
Let’s say, for example, that you’re a US expat living in France, which pays its residents and citizens in Euros. In this case, you’ll have to convert all your assets and income in euros into dollars to declare them on your US tax return.
What is the Current IRS Exchange rate?
The IRS has never posted any official exchange rate between currencies. Instead, it accepts any exchange rate that countries use consistently. For countries with multiple exchange rates, the IRS recommends expats “use the rate that applies to your specific facts and circumstances.”
For example, let’s say you’re a freelance graphic designer living as a digital nomad, and you got paid 500 euros on April 5th of 2022 by a Dutch company. In this context, you’ll be using the exchange rate for that day to convert these 500 euros into USD.
But what if you got paid a yearly salary in euros instead of day-by-day freelance projects? If that’s the case, then you’ll need to convert euros into USD using the average annual currency exchange rate for the 2022 tax year.
Examples of Average Exchange Rates
To give you a better idea of average annual exchange rates, here are examples of how different countries’ foreign currencies have converted into USD over the past years:
To view more exchange rates from different countries, check out this page from the IRS official website.
How Do I Convert Foreign Currencies and Assets to US dollars?
Here’s how to use exchange rates to declare any income or assets you own in your new home country:
Converting your foreign currency into US dollars is actually quite simple, even if math wasn’t your forte back in high school. Here are the formulas you must use:
Foreign currency to USD = Foreign currency amount / foreign exchange rate
USD to Foreign currency = amount in USD income X exchange rate
Let’s use India’s Dinar currency for an example:
₹100,000 to USD = ₹100,000 / 73.936 (2021 average exchange rate) = $1,352
$100,000 to rupees = $100,000 X 73.936 (2021 average exchange rate) = ₹7,392,600
On top of declaring worldwide income, Americans must also report any foreign financial assets they own. This might include any banks, stocks, or bonds in your name.
Whether or not you have to declare these foreign assets depends on their value. For example, if you have more than $10,000 across different foreign bank accounts, then you’ll need to file an FBAR disclosure.
To convert your foreign assets into US dollars, determine the maximum value of the assets in the country’s foreign currency. Then, use the same formula mentioned above to determine the value of your assets in USD.
Let’s say that you have 28,700 BRL ($5,319 with the 2021 yearly foreign exchange rate) in a Brazilian bank account and 39,000 ($5,017 with the 2021 yearly foreign exchange rate) in a Hong Kong HKD bank account as well. As a result, you’ll have met the $10,000 threshold and will be required to file with the US Treasury an FBAR.
Need Help With Your Us Tax Return While Overseas?
Exchange rates are just one of many components of the IRS’ demanding tax system for US expats. To save yourself plenty of time and headaches from all the tax paperwork you must file to stay compliant with your obligations, it’s sometimes best to let a team of tax professionals do the work for you.
At Bright!Tax, we serve US expats across 200 countries to help them comply with the IRS and offer personalized tax advice for each of our clients. Even if you’ve been behind on your taxes, our team can help you catch up with the Streamlined Procedure program to ensure you don’t pay penalties.
Feel free to contact us today if you have any more questions.