Getting caught short whilst having funds on the other side of the Atlantic, with a weakening Dollar, is never fun. I’m sure most of us can sympathise with the situation as we’ve probably been there ourselves. It is 8 years since we’ve been in this phase of a definitive exchange rate cycle.
The 2010 rate was 1.54. If the rate were to rise to 1.70 for 2011, that’s a 10% increase to the Dollar. A 10% rise in reportable ($) income, even though (£) income remains unchanged, may cause adjustments for some. Those just below the applicable filing threshold for 2010 or those just escaping AMT and the resulting 1116AMT may be in a different position if the rate were 1.70. Yes, you will likely remain free of US tax, but what is required to be in that position may entail additional effort (and for some, possibly cost). Someone may be contemplating selling something they purchased in 2010 which is subject to capital gains tax. At 1.70, they may be in for a real shock if they break even on the sale, or sell at a small loss. (Ianp- what if it was purchased on 26 May 2010?)
Unfortunately, income and asset reporting are not limited to those who are ‘earning’ an income. In addition to thresholds, there’s FBAR reporting and next years great addition, Form 8938. As we found out on another thread, they may now have to file Schedule B (and/or 8938) even if they remain below the 1040 filing threshold. A 10% increase in the ($) value of their accounts, even though they’re constant to the (£) level of funds in 2010, could result in required reporting. At 1.70, £5,883 equals $10,001. I would hazard a guess there are one or two full time students with that amount in their aggregate bank accounts on at least one day of the year.
Fluctuating exchange rates can cause upset when we need to transfer funds. No, it may not change day to day living standards if you live on £’s, but it can provide some challenges come next April. When we’re in this particular phase of the exchange rate transition it’s something everyone should keep in mind. Let’s hope it’s a blip, and not a full blown realignment.
UK taxes paid will realign with exchange rates. But the level of thresholds, deductions, and exclusions do not. When exchange rates are moving rapidly upwards, some individuals may be forced to respond accordingly.
