2024 IRS Exchange Rates

For US expats, one of the critical considerations when preparing a US tax return is converting foreign income into US dollars. Since the IRS requires all amounts reported on tax returns to be in US dollars, expats must use an appropriate exchange rate to convert their income and expenses.

Why is the IRS Exchange Rate Important?

The IRS exchange rate is used to convert all foreign income and expenses into US dollars for US tax reporting purposes. This affects a variety of tax forms, including:

• Form 1040: For reporting worldwide income.
• Form 2555: For claiming the Foreign Earned Income Exclusion.
• Form 1116: For claiming the Foreign Tax Credit.
• Form 8938: For reporting foreign financial assets. 

In order to meet IRS reporting requirements, US expats need to determine the exact amount of foreign income and expenses in US dollars. This exchange rate is especially important for expats who have income or assets in foreign currencies, as well as for those utilizing tax benefits like the Foreign Earned Income Exclusion or the Foreign Tax Credit.

Determining the Right Exchange Rate for 2025

When filing your 2024 US tax return in 2025, choosing the correct exchange rate is crucial for accurately converting foreign income into US dollars. US expats have two primary options to consider, depending on the nature of their income and financial transactions: the Annual Average Exchange Rate and the Spot Rate (Daily Rate).

1. Annual Average Exchange Rate

The annual average exchange rate represents the average value of a foreign currency relative to the US dollar over the entire tax year. This rate is especially useful for individuals with steady, recurring income, as it simplifies calculations and smooths out fluctuations in daily exchange rates.

• Who Should Use It:
  • US expats receiving consistent income, such as salaries, pensions, or rental income.
  • Those who prefer simplicity when preparing their tax returns.
• Advantages:
  • Avoids the complexity of tracking daily fluctuations in exchange rates.
  • Provides a single rate for the year, making it easier to calculate income totals.
• Considerations:
  • The annual average rate may not reflect the exact value of a specific transaction, particularly for significant one-time events.

2. Spot Rate (Daily Rate)

The spot rate, or daily exchange rate, refers to the specific exchange rate on a particular date. This option is more precise for transactions tied to a specific day or event, such as the sale of an asset, receiving a bonus, or making a large investment.

• Who Should Use It:
  • American expats with irregular income, such as commissions or bonuses.
  • Those who sell property, receive a significant inheritance, or report capital gains.
• Advantages:
  • Provides accuracy for one-time or large transactions.
  • Reflects the exact rate on the transaction date, which may result in a more favorable tax outcome.
• Considerations:
  • Requires meticulous record-keeping to match each transaction with its corresponding exchange rate.
  • May increase the complexity of preparing your tax return.

Choosing between the annual average exchange rate and the spot rate depends on your income sources and financial activities. For many expats, it may even be appropriate to use a combination of both methods—for example, applying the annual average rate to regular income like a salary and the spot rate for one-time transactions like the sale of a property.

2024 IRS Exchange Rate

The IRS has published the official exchange rate for the 2024 tax year. This rate should be used when converting foreign currency to US dollars for preparing your 2024 US tax return, which is due in 2025.

Source: IRS.gov

Key Steps for using the 2024 IRS Exchange Rate in your US Tax Return

1. Identify Your Income Sources: Determine all sources of income earned during the year and categorize them by type (e.g., wages, self-employment income, interest, dividends).
2. Choose the Exchange Rate: Decide whether to use the annual average rate or the spot rate for each income type. Ensure consistency throughout your tax return to avoid discrepancies.
3. Convert Income and Expenses: Use the chosen exchange rate to convert all amounts from your foreign currency into US dollars. For expenses that are deductible, such as business or housing costs, ensure accurate conversion to claim the correct deduction.
4. Document Your Calculations: Keep detailed records of the exchange rates used, including their source and the calculations performed. This documentation is essential in case of an audit.

Filing US taxes as an expat can be complex, especially when dealing with foreign currencies. At Universal Tax Professionals, we specialize in assisting American expats with their US tax obligations, ensuring accuracy in reporting foreign income, deductions, and credits. Our experts can guide you in choosing the most appropriate exchange rates and provide tailored advice for your unique situation.

If you need assistance with your 2024 US tax return, our team is just a call or email away.