If a US citizen earns foreign wages, those wages of course must be converted to US dollars when using the Form 1116. Can one use either the average of the conversion rate over the year, or the year end one, depending on which is more beneficial? Thanks.
The rule requires that you use an exchange rate that does not distort income. Using an end of year rate (assuming it differed from the rate used when paid) would distort income. A yearly average rate would not distort income if one earned the foreign wages on a fairly constant level during the year. Ditto for a monthly average if earned equally in a month. If one earned the income unevenly, then one could not use a yearly average. The obvious best answer is to use the rate that existed at the time of each payment.
FX rates can be found at
Makes sense, Alan, thank you.
I've used that website, but then filed an amended return to use the the typical cash rate (which is the interbank rate + 4%), which reduces the dollar amount of dividends, interest payments, etc. This accurately reflects the exchange rate I actually get when I convert my money to US dollars to pay taxes. It may not reduce the capital gain though.
So suppose you received dividend payments equally through the year, or for that matter a salary every month. You could convert to US dollars using the average rate for the year, or track the actual dollar amount as each dividend/salary is received, and then choose the method which results in a lower US dollar income.
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