Publication 54 - Tax Guide For U.s. Citizens And Resident Aliens Abroad - 2006 Page 5
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44tax liability as figured after the exclusion or de-
If you choose to postpone the reporting of the
the grant or other person having control of grant
payments to you.
duction.
income, you must file an information return with
your tax return. For this information return, you
You should prepare at least two copies of this
Foreign Currency
should use another Form 1040 labeled “Report
statement. Attach one copy to your Form 1040
of Deferrable Foreign Income, pursuant to Rev.
and keep the other copy for identification pur-
Rul. 74-351.” You must declare on the informa-
You must express the amounts you report on
poses when you make a tax deposit of noncon-
your U.S. tax return in U.S. dollars. If you receive
tion return that you will include the deferrable
vertible foreign currency.
income in your taxable income for the year that it
all or part of your income or pay some or all of
Figuring actual tax. When you prepare
becomes unblocked. You also must state that
your expenses in foreign currency, you must
your income tax return, you may owe tax or the
you waive any right to claim that the deferrable
translate the foreign currency into U.S. dollars.
entire liability may have been satisfied with your
income was includible in your income for any
How you do this depends on your functional
estimated tax payments. If you owe tax, figure
earlier year.
currency. Your functional currency generally is
the part due to (and payable in) the nonconvert-
the U.S. dollar unless you are required to use
You must report your income on your infor-
ible foreign currency by using the following
the currency of a foreign country.
mation return using the foreign currency in
formula.
which you received that income. If you have
You must make all federal income tax deter-
blocked income from more than one foreign
minations in your functional currency. The U.S.
country, include a separate information return
dollar is the functional currency for all taxpayers
Adjusted
for each country.
except some qualified business units (QBUs). A
gross
QBU is a separate and clearly identified unit of a
Income becomes unblocked and reportable
income that
is blocked
trade or business that maintains separate books
for tax purposes when it becomes convertible, or
Tax on
Total
income
×
and records.
when it is converted, into dollars or into other
=
blocked
U.S. tax
income
money or property that is convertible into U.S.
Even if you have a QBU, your functional
Total
currency. Also, if you use blocked income for
currency is the dollar if any of the following
adjusted
your personal expenses or dispose of it by gift,
gross
apply.
income
bequest, or devise, you must treat it as un-
•
You conduct the business in dollars.
blocked and reportable.
You must attach all of the following to the
•
The principal place of business is located
If you have received blocked income on
return.
in the United States.
which you have not paid tax, you should check
•
A copy of the certified statement dis-
to see whether that income is still blocked. If it is
•
You choose to or are required to use the
cussed earlier.
not, you should take immediate steps to pay tax
dollar as your functional currency.
•
on it, file a declaration or amended declaration of
A detailed statement showing the alloca-
•
The business books and records are not
estimated tax, and include the income on your
tion of tax attributable to amounts received
kept in the currency of the economic envi-
tax return for the year in which the income be-
in foreign currency and the rates of ex-
ronment in which a significant part of the
came unblocked.
change used in determining your tax liabil-
business activities is conducted.
If you choose to postpone reporting blocked
ity in U.S. dollars.
income and in a later tax year you wish to begin
•
The original deposit receipt for any bal-
Make all income tax determinations in your
including it in gross income although it is still
ance of tax due that you paid in noncon-
functional currency. If your functional currency is
blocked, you must obtain the permission of the
vertible foreign currency.
the U.S. dollar, you must immediately translate
IRS to do so. To apply for permission, file Form
into dollars all items of income, expense, etc.
3115, Application for Change in Accounting
Figuring estimated tax on nonconvertible
(including taxes), that you receive, pay, or ac-
Method. You also must request permission from
foreign currency. If you are liable for esti-
crue in a foreign currency and that will affect
the IRS on Form 3115 if you have not chosen to
mated tax (discussed later), figure the amount
computation of your income tax. Use the ex-
defer the reporting of blocked income in the
you can pay to IRS in nonconvertible foreign
change rate prevailing when you receive, pay, or
past, but now wish to begin reporting blocked
currency using the following formula.
accrue the item. If there is more than one ex-
income under the deferred method. See the
change rate, use the one that most properly
instructions for Form 3115 for information.
reflects your income. You can generally get ex-
Adjusted
change rates from banks and U.S. Embassies.
gross
Fulbright Grant
If your functional currency is not the U.S.
income that
Estimated
is blocked
dollar, make all income tax determinations in
Total
tax on
All income must be reported in U.S. dollars. In
income
× estimated =
your functional currency. At the end of the year,
blocked
most cases, the tax must also be paid in U.S.
U.S. tax
translate the results, such as income or loss, into
Total
income
dollars. If, however, at least 70% of your Ful-
U.S. dollars to report on your income tax return.
adjusted
bright grant has been paid in nonconvertible
gross
foreign currency (blocked income), you can use
income
Blocked Income
the currency of the host country to pay the part
If you must pay your host country income tax
of the U.S. tax that is based on the blocked
on your grant, subtract any estimated foreign tax
You generally must report your foreign income
income.
credit that applies to your grant from the esti-
in terms of U.S. dollars and, with one exception
mated tax on the blocked income.
(see Fulbright Grant, later), you must pay taxes
Paying U.S. tax in foreign currency. To
due on it in U.S. dollars.
qualify for this method of payment, you must
Deposit of foreign currency with disbursing
If, because of restrictions in a foreign coun-
prepare a statement that shows the following
officer. Once you have determined the
try, your income is not readily convertible into
information.
amount of the actual tax or estimated tax that
U.S. dollars or into other money or property that
•
You were a Fulbright grantee and were
you can pay in nonconvertible foreign currency,
is readily convertible into U.S. dollars, your in-
paid in nonconvertible foreign currency.
deposit that amount with the disbursing officer of
come is “blocked” or “deferrable” income. You
the Department of State in the foreign country in
•
can report this income in one of two ways:
The total grant you received during the
which the foundation or commission paying the
year and the amount you received in non-
•
Report the income and pay your federal
grant is located.
convertible foreign currency.
income tax with U.S. dollars that you have
Estimated tax installments. You can ei-
•
in the United States or in some other
At least 70% of the grant was paid in non-
ther deposit the full estimated tax amount before
country, or
convertible foreign currency.
the first installment due date or make four equal
•
Postpone the reporting of the income until
The statement must be certified by the U.S.
payments before the installment due dates. See
it becomes unblocked.
educational foundation or commission paying
Estimated Tax, later.
Chapter 1 Filing Information
Page 5
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