What the dollar-euro exchange rate means for Americans in Europe

The euro sunk below $0.99 on September 5th, marking a 20-year-low for the single currency against the dollar. Here is what that means for Americans in Europe.

What the dollar-euro exchange rate means for Americans in Europe
Photo by Ibrahim Boran on Unsplash

The euro fell 0.70 percent to 0.9884 dollars on Monday September 5th at 0535 GMT, its lowest since December 2002.

Earlier in the summer the currencies had already reached parity with US news outlets are deeming it a “good time to be an American in Europe.”

For Americans who went on holiday in Europe this summer, they could rejoice over wine, taxi rides, and even luxury items being “cheaper than they have been in decades” all thanks to a strong dollar. 

According to American news outlet, CNBC, the near drop in the euro meant that Americans “travelling to one of the 19 European Union countries that accept the euro” will get a “15 percent discount on purchases today relative to a year ago due to the exchange rate.”

But the benefits are not just for American tourists – Americans residing in Europe, as well as European tourism sectors, stand to gain from the exchange rate too. For the tourism industry in Europe, which was hit hard by the Covid-19 pandemic, the weak euro might actually be beneficial, as it might entice more American tourists to spend their holidays here.

For tourists

Americans had become accustomed to budgeting extra for European vacations when taking the exchange rate into consideration. In 2008, the New York Times reports that a €5 glass of wine might have cost Americans the equivalent of $8, compared to the $5.20 it might cost today. Here is what Americans wanting to get a good bang for their buck in Europe this summer should know: 

First, it might not be advisable to go book your trip right now simply because the exchange rate is advantageous for American travellers. Willis Orlando, a travel specialist at Scott’s Cheap Flights told CBS news that “other factors like large crowds still mean higher prices at hotels.”

Unfortunately airfare and lodging are more expensive this summer than they were last year (up 20 to 60 percent in some markets) due to high demand and inflation. On top of that, the airline industry is in crisis, attempting to handle staff shortages and high volumes of tourists, which has led to strikes, cancellations, and long-wait times in airports across Europe.

READ MORE Airport chaos in Europe: Airlines cancel 15,000 flights in August

However, if you do have a trip planned already, you can look forward to your dollar going a longer way at restaurants, stores, and when shopping.

If you want to maximise your benefits from the currently favourable exchange rate, you can take a few money-saving steps:

Use an ATM to withdraw local currency – Instead of converting dollars to euro at the airport or at a conversion teller, who will charge a commission in addition to the exchange rate, simply use an ATM once in Europe. 

Pay with your credit cardForbes recommends this for American tourists, but when paying with your credit or debit card beware of foreign transaction fees. Also be aware that many businesses in Europe do not accept American Express. Another tip is to pay in ‘local currency’ when using your credit card, as if you pay with dollars you could wind up with a conversion fee. 

Consider pre-booking – If you want to lock in the current exchange rate, then consider prepaying for your trip. However, you might not need to do this, as the dollar is expected to “remains strong for months to come,” according to CBS News.

Take advantage of tax-free – The Value Added Tax (VAT) is the sales tax in Europe. If you spend over a certain threshold of money at a single store, you can request a tax-free form to receive a refund on the VAT. You can file this form at the airport or train station when departing.

For Americans living in Europe

The close exchange rate is beneficial for Americans who are residents in Europe as well. The principle is the same – for example, if you have a rent payment coming up, and you have been wondering about the best time to transfer money from your American account to your European bank account, consider doing so now. Your American dollars gaining value means they will go a longer way than they did even just six months ago. If you want to transfer a large sum, check with your American bank account to see what the maximum transfer amount is prior to doing so. 

The euro-dollar rate also benefits Americans residing in Europe who might be looking to buy property in France, as well as those who have any income dollars, whether that be in salary, pensions, or investments. 

Of course, for Americans living in Europe and making their income in euro, the opposite is true that travelling back to the United States will be more expensive now than last year. In this case, it would be worth considering locking in your rates by prepaying for bookings.

The dollar will likely remain strong for the next few quarters, as its value-increase is due to the Fed raising interest levels in the US, making it more attractive for investments than Europe, who is currently suffering from a shortage in gas supplies due to the ongoing war in Ukraine. 

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Ask the expert: What Americans in France need to know about 401(k) and other pensions

Whether you are looking to retire to France or are working here, here's what you need to know about US private pension plans such as the 401(k) and IRA for French residents.

Ask the expert: What Americans in France need to know about 401(k) and other pensions

For many Americans, retiring to France is a dream. The idea of a calm life in the French countryside is understandably alluring, and thanks bilateral tax agreements between the US and France – France is an attainable and attractive destination for pensioners looking to live off their private American pension plans in the land of cheese and wine.

“France is the bees’ knees for American retirees”, summarised tax expert, Jonathan Hadida in an interview with The Local. Thanks to the US-France tax treaty, US-sourced pension income is only taxed in the United States. 

Hadida explained exactly what Americans in France – both of retirement age and pre-retirement – should know about their American private pension plans. 

For those of pre-retirement age (below 59 and a half years old)

One of the most common questions Americans in France have regarding their pension contribution plans is whether they can continue contributing from France.

For 401(K)s, the answer depends on whether you are working in France as a posted worker or whether you are working on a French contract. Posted workers can continue to contribute to their 401(K)s, but those on French contracts cannot.

The reason for this is quite simple – 401(K)s are employer-pension plans. Posted workers can continue to report their 401(K) contributions in the way that they normally would while based in the United States – on the W2 tax form in Box 1. 

As for Americans working in France on local (French) contracts, “Generally what happens is that you have to roll it into an IRA with a US-investment broker to manage your funds”, Hadida explained for those looking to continue contributing. 

As for IRAs (Individual Retirement Accounts), it is possible to continue contributing from France. However, you must have earned taxable income in the United States. 

“There are two ways Americans in France are able to avoid double taxation – via foreign income exclusion or the foreign tax credit,” Hadida told The Local.

“Basically, you wind up in the same position, but these are two different ways of getting to the same place.

“If you go with the foreign income exclusion option. This is great because it goes straight off the top and writes off the first S120,000 of income in 2023. But the problem is that this  means you have zero taxable income in the United States, so you cannot contribute to an IRA.

“On the other hand, with the foreign tax credit you still have taxable income in the United States so you can still contribute to an IRA.

“The foreign tax credit tends to be a good option well for those living in France because taxes are generally higher in France than they would be in the United States.”

READ MORE: Ask the experts: What do Americans in France need to know about investments and pensions?

The next step would be to determine whether it is advantageous to continue contributing to a traditional IRA or a Roth IRA. 

“I generally recommend that it is best to make it a contribution to a Roth IRA as you will get the benefit of tax free growth for as long as you hold the money in the Roth and no tax upon distribution. Americans in France generally don’t need the ‘deductible’ contribution which is a benefit of the traditional IRA”, Hadida explained.

However, the decision to stick with a traditional or Roth IRA depends on your income and tax bracket, as well as how much you would like to contribute. 

If the Roth IRA is not possible for you, Hadida offered an alternative solution: the backdoor Roth contribution. In order to do this, “you contribute to a non-deductible IRA contribution and then roll the money over to a Roth IRA.  There is currently no threshold for this”, the tax expert explained.

Keep in mind that such a step would likely require the assistance of a tax or financial adviser. 

What about Americans in France who have had their IRAs closed down?

Hadida warned: “There has been an ongoing issue with people having their traditional IRA accounts closed by US-based banks when they realise you are not living in the United States”.

This issue of having Americans abroad having their IRAs closed is also linked to challenges some Americans have experienced with trying to open new IRAs while resident in France.

International Financial Advisor, Bryan Dunhill with Dunhill Financial, an American-expat advisory company, told The Local that whether IRA closures depend on the US-based bank, and for the most part occur because “banks are concerned about the possibility of misadvising clients”. 

Luckily, according to Dunhill, there is a solution for Americans in France who find themselves in this situation. “Basically, you need to go to an American expat advisory company who will be able to open a new IRA for you.

“For example, with Dunhill Financial, we are able to open up the same account with our provider, and we transfer all the securities in kind”, Dunhill explained. 

The financial adviser added that “you have to transfer the money within 60 days from the date that the original IRA is closed. Otherwise, there will be tax consequences”. 

As for your IRA, “everything that is earned within the plan until you take it out grows tax-free”, Hadida explained. That being said, it is advisable to report your IRA or Roth IRA to French authorities as a foreign-based bank account. “It’s safer to say yes – report them all. There is no real downside to reporting it. You can do this on the 39-16”.

Essentially, this means that those of working-age (pre-retirement) do not have to worry about reporting to any capital gains French authorities. The reporting aspect comes once you begin drawing your pension in your later years.

For those of retirement age (over 59 and a half), looking to withdraw from pension funds

The picture for retirees is a bit different than for those still in the workforce. 

“The reason we call France the bees’ knees for American retirees is because US-sourced pension income is only taxed in America. That means when you take money out of your 401(K) or IRA, those are taxable at your tax bracket in the United States. 

“You have to report it on the US-side and pay US taxes at your marginal rate”, Hadida said.

The tax expert continued: “On the French side, US-sourced pension income is reportable in France for rate-purposes but benefits from a deemed credit.

“This means you put it on your French tax form, and you calculate the tax and you get a deemed credit equal to that. Ultimately, you wind up paying no French taxes on your US-sourced pension thanks to Article 18 of the US-France tax treaty”.

READ MORE: Pensions: What should I expect if I worked in both France and a non-EU country?

How do I signal my US-sourced pension income on my French taxes?

Although you probably won’t end up paying French taxes on your US pension, you do need to tell the French taxman about it. This is the same for all non-French income.

Dunhill explained: “You fill it in within box 1AL or 1BL on form 20-42 on the French tax return, then you claim it in on the 8TK of the 20-47 to say it is US-based pension income, and then you will get a tax credit from the French.

“It goes in and it goes out on the French side. Being a US-retiree in France is fantastic”. 

For both 401(K)s and IRAs, Americans in France should still keep in mind that early withdrawal (prior to the age of 59 and a half) can still lead to a 10 percent early distribution penalty. There are certain exemptions, such as first time homebuyers and higher education, but you should meet with a tax adviser to determine if you qualify.

This article is intended as an overview of pension and tax rules and does not constitute financial advice. If you have specific questions about your personal situation, we advise you to seek independent financial advice from a specialist in US-French rules.

Jonathan Hadida is a lawyer specialising in international taxation and advising expats – find more on Hadida Tax Advisors here. Bryan Dunhill is an international tax advisor with Dunhill Financial, an American-expat advisory company.