Foreign Currency

You must express the amounts you report on your U.S. tax return in U.S. dollars. If you receive all or part of your income or pay some or all of your expenses in foreign currency, you must translate the foreign currency into U.S. dollars. How you do this depends on your functional currency. Your functional currency generally is the U.S. dollar unless you are required to use the currency of a foreign country.

You must make all federal income tax determinations in your functional currency. The U.S. dollar is the functional currency for all taxpayers except some qualified business units (QBUs). A QBU is a separate and clearly identified unit of a trade or business that maintains separate books and records. Unless you are self-employed, your functional currency is the U.S. dollar.

Even if you are self-employed and have a QBU, your functional currency is the dollar if any of the following apply.

• You conduct the business in dollars.
• The principal place of business is located in the United States.
• You choose to or are required to use the dollar as your functional currency.
• The business books and records are not kept in the currency of the economic environment in which a significant part of the business activities is conducted.

Make all income tax determinations in your functional currency. If your functional currency is the U.S. dollar, you must immediately translate into dollars all items of income, expense, etc. (including taxes), that you receive, pay, or accrue in a foreign currency and that will affect computation of your income tax. Use the exchange rate prevailing when you receive, pay, or accrue the item. If there is more than one exchange rate, use the one that most properly reflects your income. You can generally get exchange rates from banks and U.S. Embassies.

If your functional currency is not the U.S. dollar, make all income tax determinations in your functional currency. At the end of the year, translate the results, such as income or loss, into U.S. dollars to report on your income tax return.

Blocked Income

You generally must report your foreign income in terms of U.S. dollars and, with one exception (see Fulbright grants, later), you must pay taxes due on it in U.S. dollars.

If, because of restrictions in a foreign country, your income is not readily convertible into U.S. dollars or into other money or property that is readily convertible into U.S. dollars, your income is blocked or deferrable income. You can report this income in one of two ways:

1. Report the income and pay your federal income tax with U.S. dollars that you have in the United States or in some other country, or
2. Postpone the reporting of the income until it becomes unblocked.

If you choose to postpone the reporting of the income, you must file an information return with your tax return. For this information return, you should use another Form 1040 labeled Report of Deferrable Foreign Income, pursuant to Rev. Rul. 74-351. You must declare on the information return that you will include the deferrable income in your taxable income for the year that it becomes unblocked. You also must state that you waive any right to claim that the deferrable income was includible in your income for any earlier year.

You must report your income on your information return using the foreign currency in which you received that income. If you have blocked income from more than one foreign country, include a separate information return for each country.

Income becomes unblocked and reportable for tax purposes when it becomes convertible, or when it is converted, into dollars or into other money or property that is convertible into U.S. currency. Also, if you use blocked income for your personal expenses or dispose of it by gift, bequest, or devise, you must treat it as unblocked and reportable.

If you have received blocked income on which you have not paid tax, you should check to see whether that income is still blocked. If it is not, you should take immediate steps to pay tax on it, file a declaration or amended declaration of estimated tax, and include the income on your tax return for the year in which the income became unblocked.

If you choose to postpone reporting blocked income and in a later tax year you wish to begin including it in gross income although it is still blocked, you must obtain the permission of the IRS to do so. To apply for permission, file Form 3115, Application for Change in Accounting Method. You also must request permission from the IRS on Form 3115 if you have not chosen to defer the reporting of blocked income in the past, but now wish to begin reporting blocked income under the deferred method. See the instructions for Form 3115 for information.

Fulbright grants.   All income must be reported in U.S. dollars. In most cases, the tax must also be paid in U.S. dollars. If, however, at least 70% of your Fulbright grant has been paid in nonconvertible foreign currency (blocked income), you can use the currency of the host country to pay the part of the U.S. tax that is based on the blocked income. To determine the amount of the tax that you can pay in foreign currency, get Publication 520. You may also be able to get details of these arrangements from the U.S. Educational Foundations or Commissions in foreign countries.

Where To File

If any of the following situations apply to you, file your return with the:

Internal Revenue Service Center
Philadelphia, PA 19255-0215.

1. You claim the foreign earned income exclusion.
2. You claim the foreign housing exclusion or deduction.
3. You claim the exclusion of income for bona fide residents of American Samoa.
4. You live in a foreign country or U.S. possession and have no legal residence or principal place of business in the United States.

The exclusions and the deduction are explained in chapter 4.

If you do not know where your legal residence is and you do not have a principal place of business in the United States, you can file with the Philadelphia Service Center. The address for the Philadelphia Service Center is shown above.

However, you should not file with the Philadelphia Service Center if you are a bona fide resident of the Virgin Islands or a resident of Guam or the Commonwealth of the Northern Mariana Islands on the last day of your tax year.

Resident of Virgin Islands  

If you are a bona fide resident of the Virgin Islands on the last day of your tax year (even if your legal residence or principal place of business is in the United States), you generally are not required to file a U.S. return. However, you must file a return with the Virgin Islands and pay your tax on income you have from all sources to the:

Virgin Islands Bureau of Internal Revenue
9601 Estate Thomas
Charlotte Amalie
St. Thomas, Virgin Islands 00802.

Non-Virgin Islands resident with Virgin Islands Income.   If you are a U.S. citizen or resident and you have income from sources in the Virgin Islands or income effectively connected with the conduct of a trade or business in the Virgin Islands, and you are not a bona fide resident of the Virgin Islands on the last day of your tax year, you must file identical tax returns with the United States and the Virgin Islands. File the original return with the United States and file a copy of the U.S. return (including all attachments, forms, and schedules) with the Virgin Islands Bureau of Internal Revenue.

The amount of tax you must pay to the Virgin Islands is figured by the following computation:

Tax paid to V.I. Form 8689, Allocation of Individual Income Tax to the Virgin Islands, is used for this computation. You must complete this form and attach it to your return. You should pay any tax due to the Virgin Islands when you file your return with the Virgin Islands Bureau of Internal Revenue.

You should file your U.S. return with the Internal Revenue Service Center, Philadelphia, PA 19255-0215.

See Publication 570, Tax Guide for Individuals With Income From U.S. Possessions, for information about filing Virgin Islands returns.

Resident of Guam  

If you are a resident of Guam on the last day of your tax year, you should file a return with Guam and pay your tax on income you have from all sources to the:

Department of Revenue and Taxation
Government of Guam
P.O. Box 23607
GMF, GU 96921.

However, if you are a resident of the United States on the last day of your tax year, you should file a return with the United States and pay your tax on income you have from all sources to the Internal Revenue Service Center, Philadelphia, PA 19255-0215.

See Publication 570 for information about filing Guam returns.

Resident of the Commonwealth of the Northern Mariana Islands  

If you are a resident of the Commonwealth of the Northern Mariana Islands on the last day of your tax year, you should file a return with the Northern Mariana Islands and pay your tax on income you have from all sources to the:

Division of Revenue and Taxation
Commonwealth of the Northern Mariana Islands
P.O. Box 5234, CHRB
Saipan, MP 96950.

However, if you are a resident of the United States on the last day of your tax year, you should file a return with the United States and pay your tax on income you have from all sources to the Internal Revenue Service Center, Philadelphia, PA 19255-0215.

See Publication 570 for information about filing Northern Mariana Islands returns.

Nonresident Spouse Treated as a Resident

If, at the end of your tax year, you are married and one spouse is a U.S. citizen or a resident alien and the other is a nonresident alien, you can choose to treat the nonresident as a U.S. resident. This includes situations in which one of you is a nonresident alien at the beginning of the tax year and a resident alien at the end of the year and the other is a nonresident alien at the end of the year.

If you make this choice, the following two rules apply.

1. You and your spouse are treated, for income tax purposes, as residents for all tax years that the choice is in effect.
2. You must file a joint income tax return for the year you make the choice.

This means that neither of you can claim tax treaty benefits as a resident of a foreign country for a tax year for which the choice is in effect. You can file joint or separate returns in years after the year in which you make the choice.

Example 1.   Pat Smith, a U.S. citizen, is married to Norman, a nonresident alien. Pat and Norman make the choice to treat Norman as a resident alien by attaching a statement to their joint return. Pat and Norman must report their worldwide income for the year they make the choice and for all later years unless the choice is ended or suspended. Although Pat and Norman must file a joint return for the year they make the choice, they can file either joint or separate returns for later years.

Example 2.   Bob and Sharon Williams are married and both are nonresident aliens. In June of last year, Bob became a resident alien and remained a resident for the rest of the year. Bob and Sharon both choose to be treated as resident aliens by attaching a statement to their joint return for last year. Bob and Sharon must report their worldwide income for last year and all later years unless the choice is ended or suspended. Bob and Sharon must file a joint return for last year, but they can file either joint or separate returns for later years.

Social Security Number (SSN)

If your spouse is a nonresident alien and you file a joint or separate return, your spouse must have either an SSN or an individual taxpayer identification number (ITIN).

To get an SSN for your spouse, apply at a social security office or U.S. consulate. You must complete Form SS-5. You must also provide original or certified copies of documents to verify your spouse's age, identity, and citizenship.

If your spouse is not eligible to get an SSN, he or she can file Form W-7 with the IRS to apply for an ITIN.

How To Make the Choice

Attach a statement, signed by both spouses, to your joint return for the first tax year for which the choice applies. It should contain the following:

1. A declaration that one spouse was a nonresident alien and the other spouse a U.S. citizen or resident alien on the last day of your tax year and that you choose to be treated as U.S. residents for the entire tax year, and
2. The name, address, and social security number (or individual taxpayer identification number) of each spouse. (If one spouse died, include the name and address of the person making the choice for the deceased spouse.)

You generally make this choice when you file your joint return. However, you can also make the choice by filing a joint amended return on Form 1040X. Attach Form 1040, 1040A, or 1040EZ and print Amended across the top of the amended return. If you make the choice with an amended return, you and your spouse must also amend any returns that you may have filed after the year for which you made the choice.

You generally must file the amended joint return within 3 years from the date you filed your original U.S. income tax return or 2 years from the date you paid your income tax for that year, whichever is later.

Suspending the Choice

The choice to be treated as a resident alien does not apply to any later tax year if neither of you is a U.S. citizen or resident alien at any time during the later tax year.

Example.   Dick Brown was a resident alien on December 31, 1999, and married to Judy, a nonresident alien. They chose to treat Judy as a resident alien and filed a joint 1999 income tax return. On January 10, 2001, Dick became a nonresident alien. Judy had remained a nonresident alien. Because both were resident aliens during part of 2001, Dick and Judy can file joint or separate returns for that year. Neither Dick nor Judy was a resident alien at any time during 2002 and their choice is suspended for that year. For 2002, both are treated as nonresident aliens. If Dick becomes a resident alien again in 2003, their choice is no longer suspended and both are treated as resident aliens.

Ending the Choice

Once made, the choice to be treated as a resident applies to all later years unless suspended (as explained above) or ended in one of the ways shown in Table 1-1 below.

If the choice is ended for any of the reasons listed in Table 1-1, neither spouse can make a choice in any later tax year.

If you do not choose to treat your nonresident spouse as a U.S. resident, you may be able to use head of household filing status. To use this status, you must pay more than half the cost of maintaining a household for certain dependents or relatives other than your nonresident alien spouse. For more information, see Publication 501.

Table 1-1. Ending the Choice

Revocation	·	Either spouse can revoke the choice for any tax year.
	·	The revocation must be made by the due date for filing the tax return for that tax year.
	·	The spouse who revokes must attach a signed statement declaring that the choice is being revoked. If the spouse revoking the choice does not have to file a return and does not file a claim for refund, send the statement to the Internal Revenue Service Center where the last joint return was filed.
	·	The statement revoking the choice must include the following:
		·	The name, address, and social security number (or taxpayer identification number) of each spouse.
		·	The name and address of any person who is revoking the choice for a deceased spouse.
		·	A list of any states, foreign countries, and possessions that have community property laws in which either spouse is domiciled or where real property is located from which either spouse receives income.
Death	·	The death of either spouse ends the choice, beginning with the first tax year following the year the spouse died.
	·	If the surviving spouse is a U.S. citizen or resident and is entitled to the joint tax rates as a surviving spouse, the choice will not end until the close of the last year for which these joint rates may be used.
	·	If both spouses die in the same tax year, the choice ends on the first day after the close of the tax year in which the spouses died.
Divorce or Legal separation	·	A divorce or legal separation ends the choice as of the beginning of the tax year in which the legal separation occurs.
Inadequate records	·	The Internal Revenue Service can end the choice for any tax year that either spouse has failed to keep adequate books, records, and other information necessary to determine the correct income tax liability, or to provide adequate access to those records.

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