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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Is my US pension taxed in France?

Deciphering whether or not you will owe French tax on your US-based pension can be confusing. To give you an answer, The Local spoke with experts and consulted the US-France tax treaty to give an overview of how you might be affected.

Is my US pension taxed in France?

When it comes to taxation on foreign pensions, it all depends on the tax treaty between France and the country that is paying your pension, which is why the situation is significantly different depending on where that pension is paid.

Luckily for American retirees living in France, they benefit from a generous US-France tax treaty to avoid double taxation on all pension income, including private pensions. 

To better explain the situation, The Local spoke with tax expert, Jonathan Hadida from HadTax.

“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 explained.

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

You should also consider if you have a pension from another country besides the US, as different rules may apply based on that country’s bilateral tax treaty with France. Here is the situation for BritishCanadian, and Australian pensions, and here is an overview of the system.

How do I report US-sourced pension income to French authorities?

Although you won’t end up paying French taxes on your US pension, you do need to tell the French taxman about it if you are a tax resident here.

The annual French income tax declaration requires you to declare all global income, including pensions.

Keep in mind that even though you are not subject to French taxes on your US pension, it does count towards your household income which can push you into a higher tax bracket, and this could affect your ability to qualify for certain means-tested grants and government aid in France.

International Financial Advisor, Bryan Dunhill with Dunhill Financial 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”, Dunhill said.

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 (in the US). 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.

READ MORE: EXPLAINED: The rules on tax residency in France

What about social charges?

In addition to taxes (impôts), France also requires people to pay social charges (prélèvements sociaux) on income. However, only specific types of income can be considered for social charges, such as the CSM charge (PUMa) for healthcare. 

The general rule is that pensioners and their spouses do not have to pay the CSM charge, but France specifically exempts people who have a pension from France, the EU, the EEA and the UK (people with S1 forms).

There is some debate over whether common types of American private pensions such as a 401(K) or IRA are treated as a pension (and therefore exempt from CSM) or as investment income (which can attract CSM charges). 

Hadida told The Local: “Under the principle of equality amongst taxpayers, URSAAF has treated most US pensions/IRA distributions/401(k) distributions akin to a French/Swiss/European pension and have therefore exempted Americans with pension income.”

“I have called URSSAF, and I was told by the representative that they should be paying for PUMa. But in practice, I have not seen many American pensioners charged for it.

READ MORE: Cotisations: Why you might get an unexpected French health bill