ACA American Citizens Abroad

A Guide For the Perplexed

(A few tips and sources of help in preparing your U.S. tax return)

By Roger B. Adams, EA

 

Introduction

Here’s an interesting little factoid for you; of the 140 million or so tax returns filed last year fully 60% of those were prepared for the taxpayers by a paid professional. That’s right, 84,000,000 people have no desire to undertake that onerous task and who can blame them?

 

In America professional preparers are pretty thick on the ground and there are plenty to go around. Conversely, Americans abroad have a real problem in that there are very few professionals to whom one can go to seek expert advice. To make matters worse, in addition to all the regular taxing statutes and regulations there is the unfortunate overlay of additional international rules and treaty provisions which confuse the issues even further so that even some professionals don’t get it right.

 

Many taxpayers abroad are forced by circumstances or finances or both to complete their own returns unaided. Assembled below are some links to resources that can really help you answering those difficult questions at no or very little cost to you.

 

But first a most important subject:

 

Currency Conversion – An Arithmetic Interlude

 

The value of the currencies of nations in relation to each other changes every second of every day as those currencies are bought and sold; billions change hands daily.

 

When you fill out your U.S. tax return the IRS wants all those figures to be in U.S. Dollars. When you live abroad you will, more than likely, be getting income in the currency of the foreign country where you live. The value of that foreign income will have to be converted to U.S. Dollars before you can do your American taxes.

 

Usually you will be getting money on a regular weekly or monthly basis like a paycheck, payments from customers, or a pension. Also remember that your expenses will be in that foreign currency too. In these cases you will want to establish the value of the foreign currency in relation to the Dollar for the yearly average. However, every once and awhile, you will get a big chunk of money on a specific day; selling your home abroad or separating from your company are good examples. You will want that day’s rate.

 

Happily, there are places where you can get these figures quickly and easily if you have an internet connection. Try this one and go there now:

 

http://www.oanda.com/convert/fxhistory

 

This excellent site will give you the average price of the Dollar for any year you wish. For example, for the average exchange rate for 2008 select language (English), select U. S. Dollar first and then your currency. Just type in “starting date 01/01/08 – ending date 12/31/08” and press the “get table” button.

 

Every day in 2008 is displayed and at the bottom is the average rate for the year. The figure you see is the value of one U.S. Dollar against one unit of your foreign currency. The 2008 average exchange rate for the Euro is, for example, 0.6843 (that is, for a little more than 68/100 of a Euro you can buy one U.S. dollar.

 

This is an indispensable tool for those living abroad; bookmark that site.

 

If you don’t have an internet connection you can still get the exchange rate by calling one of the three IRS offices abroad:

 

Germany +49-69-7535-3834

England   +44-20-7894-0477

France     +33-1-4312-2555

 

So, now you have the yearly average; what do you do with it? The formula is very simple. Here is where the arithmetic part starts; fire up your calculator:

U.S. Dollars = Local Currency / Conversion Ratio

Example: Brian and Jenna are working in London and together make £62,000 for tax year 2008. Let’s say the Dollar to Pound conversion rate is 0.5449

$113,782 = £62,000 / 0.5449

 Now, when Brian and Jenna fill out their U.S. return they write a note on the bottom of the first page of Form 1040 that says “Conversion rate - $1 = £0.5449”. That way the IRS knows that they have consistently used that ratio throughout their return when figuring income and expenses.

 

 

Here are some average exchange rates for the last five years courtesy of Oanda. Remember; divide the foreign currency by the number in the box.

 

 

 

Now that we know all we need to about converting currencies let’s examine where you can get some help in figuring your tax to your maximum advantage and maybe even get a refund.

 

 

HELP!

 

It is not unusual to have questions about tax matters as you prepare your returns or before you complete a specific transaction. You may be extra prudent and wish to plan the proper way to arrange your affairs so as to keep your taxes to a minimum. You conclude you need advice; where do you go for competent guidance?

 

Please, do not ask a friend at the club; you are sure to regret it.

 

The Internal Revenue Service

 

1a. The IRS has a help line especially for taxpayers abroad. It opens at 6:00 AM eastern time and closes at 11:00PM. The number is +215-516-2000. If you call real early you get an IRS person fast. Not a toll free call. I have always found them to be polite and helpful.

 

1b. There is a special page on the IRS website just to help international taxpayers. You will find it very worthwhile to explore this section in detail.

 

1c. Many common questions on topics that give everybody trouble can be answered using “tax trails”.

 

1d. If you are having a problem it is more than likely that someone else has had it too. The IRS has developed a very extensive list of “frequently asked questions” (FAQ). Note number 13; it is specifically related to questions from taxpayers abroad.

 

1e. Get any form, schedule, or publication you need at: http://www.irs.gov/formspubs/index.html

 

Above all else download Publication 17; it is the “how to” of tax preparation covering every subject that you will encounter on the tax return:

http://www.irs.gov/pub/irs-pdf/p17.pdf

 

2. Contact a tax professional who knows about international matters. A tax professional is a CPA, an enrolled agent, or a tax attorney. Your U.S. Consulate may have contact information. Unfortunately, expert tax help abroad is not easy to find.

 

3. Ask TaxMama. This is a site frequented by many thousands of people looking for answers to everyday tax problems. Many tax professionals come here to comment. If your question is not too complex you might get a quick answer or be referred to someone who can help you. http://www.taxmama.com/subscribe/askform.html

 

4. The National Assoc. of Tax Professionals will provide a researched answer to your question no matter how difficult or obscure giving reference to the authority in tax law; all this for under $50. You do not need to be a member. It is money well spent.

http://www.natptax.com/research_center.html#Research

 

 

Conclusion

I hope this little guide has helped at least a little bit.

 

Nobody can know everything about everything; do not hesitate to seek informed help when it comes to doing your taxes. You won’t be sorry.

 

Now, get all your tax stuff together, wait for a cold, nasty, rainy day and go for it.

 

 

Copyright © 2009, Roger B. Adams, EA, all rights reserved

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