Warning! The notes below apply to TurboTax Deluxe 2011. There have been some changes since. In particular the Treasury Department form TD F 90-22.1 has been superceded by FinCEN Form 114, which you can file online. I could not find the form in TurboTax 2013.

These are some notes on using TurboTax to fill out US taxes if you live abroad. Some of these notes are particular to my personal situation so may not apply generally.

Disclaimer: I am neither a tax attorney nor an accountant. I disclaim all responsibility for any errors here. If you find an error, please let me know. Don't sue me.

This document assumes you are familiar with TurboTax and are somewhat familiar with how taxes are computed on foreign income. For more information on the latter, see Jane A. Bruno's The Expat's Guide to U.S. Taxes. Her book is very thorough, but be aware that it is slightly out-of-date since Congress passed some new rules in 2010. Yay, Congress! Of course, you should also look at IRS Publication 54, the Tax Guide for U.S. Citizen's and Resident Aliens Abroad.

This is not a walk through of TurboTax. It's intended more to point out things you need to look out for. I filled out the forms first by using the guided interviews, sometimes with made-up numbers since I didn't have all my paperwork, and then by flipping over to the form view to check or correct the entries. Much of the text here refers to fields that are more easily found in the form view than through the interviews.

TurboTax is available online and as a desktop app. I paid the extra for the desktop version since it let me more easily manage multiple versions of the tax return as I tried out different scenarios.

Preliminaries

The basic computation for computing your tax is (income - deductions) * rate - credits. The main challenge for expats is with computing income and, to a lesser extent, computing credits, specifically the foreign tax credit. There are some deductions (e.g., the foreign housing deduction) that may apply to you, but none applied to me. I will not discuss them.

Exchange rates

All values entered in the tax form must be in US dollars. This means any foreign currency amounts must be converted. The exchange rate you should use is the rate prevailing on the day of a given transaction. But, I have heard you can get away with using the average rate for the year. I decided not to do this because I'm a bit paranoid and, more importantly, I worked out I might save some money by using different exchange rates throughout the year.

To get the prevailing exchange rates, you can use onada.com to get the rate for a given day, or you can use the quarterly rates from the Treasury Department. I created a spreadsheet where I computed all foreign currency values using both sources and then did two versions of the tax return with the different values. For the Swiss franc, at least, the 2011 Treasury rates were much better than the onada.com rates.

Note that the Treasury quarterly rate for a given date applies to the subsequent quarter. So, the, 31 December 2010 applies to transactions in the first quarter of 2011.

Forms

The forms that matter for expats are:

Income

Form 2555: FEI

In my case, since I did not have a US employer, I did not get a W-2 form. Do not enter your foreign salary into TurboTax under ``Wages and Salary'', instead it will entered under ``Less Common Income'' in the ``Foreign Earned Income and Exclusion'' section.

If you have foreign earned income (FEI)—a salary—then you can exclude a large chunk of that income from your taxable income. You can take the FEI exclusion if you either qualify under the "physical presence test" or the "bona fide resident test". I'll assume you meet one of these tests.

To qualify for the exclusion under the bona fide residence test, you must live abroad for the entire tax year. Thus, in your first year abroad, you probably do not qualify. I therefore used the physical presence test. This test requires you be abroad for 330 days out of 365. It doesn't matter which 365 day range you use as long as it precedes your filing. You have to enter the starting and ending dates of the range in Form 2555. The end date in one year minus one calendar day after the start date. TurboTax will not compute this for you. In my case, I used 01/10/2011 to 01/09/2012. If you enter the wrong dates (say, by forgetting to subtract one day from the end date) or if you enter an end date after the current date, TurboTax may report that you do not qualify for the exclusion. It took a few attempts to convince TurboTax that I qualified.

You also need to enter on Form 2555 the dates you travelled to the US. These dates include as full days in the US any travel days spent over international waters, even if you weren't on the ground in the US at any time on those days. You must also report any income earned in the US on business. Since I made two business trips of 9 days each to the US (including travel days), the values I entered here were my prorated salary for those 9 day periods. You need to attach an explanation of how you computed the income.

Any foreign-source income earned in the US needs to be subtracted from your FEI before computing the FEI exclusion. Enter this in Part IV of Form 2555 under ``C Adjustment''. Be sure to enter a negative value. You have to compute the sum of all foreign income earned in the US manually.

To the left is a portion of the form using some mock values. Note the income differs for the different periods abroad, even though they are the same length, because of changes in the exchange rate.

Housing exclusion

You can also exclude some of your foreign housing expenses for the year. Enter this on page 3 of Form 2555, line 28. My only housing expenses were my rent. The maximum exclusion differs depending on locality. If you exceed the maximum, you can take a deduction on the excess, but I got nowhere near the maximum exclusion. You also have to report the number of days your tax home is abroad. Unlike with the physical presence test, this does include time spent in the US. In my case, I lived abroad from 01/10/2011 to the end of the year, i.e., 356 days.

FEI exclusion

Given your FEI and housing expenses, TurboTax will compute your FEI exclusion. This will be subtracted from your income. Keep track of this value (line 45 on page 3 of Form 2555), since you will need to enter it later.

Interest

I earned interest on my foreign bank accounts. To enter this date, I added mock 1099-INT forms under ``Interest on 1099-INT''. There is no place to enter this interest under the ``1099-OID, Foreign Accounts'' section under ``Interest and Dividends''.

Credits

Form 1116: Foreign Tax Credit

There is a worksheet to fill out the form. This was a pain since TurboTax required reentering some data on the worksheet.

First compute your foreign taxes and enter in Part II of the worksheet. You compute the credit by subtracting the fraction of your FEI that was excluded in Form 2555. Thus, if you excluded all your income on Form 2555, you cannot take a foreign tax credit also. To compute this ratio, copy the FEI exclusion from the bottom of Form 2555 (line 45) into line 12a1 of Form 1116. Then copy your total FEI (less deductions if you have any—I didn't) to line 12a2. If you have no deductions, this is just your salary. TurboTax will do the rest.

If you had tax withheld on interest income, you need to fill out a second 1116 for that income. In general you need a different form for each category of income. Salary is ``general category'', interest is ``passive category''.

Other Forms

Form 8938 and TDF 90-22.1: Foreign Accounts

If you have more than $10,000 in foreign bank accounts at any time during the tax year—even if no single account has more than $10,000—you may have to report them to the IRS (under FATCA, passed by Congress in 2010) and separately to the Treasury department (under FBAR, an older regulation). There are two forms where you enter more-or-less the same information (at least in my simple case). Report all your accounts, including accounts holding any apartment deposit. You will need account numbers, the addresses of the banks, and the maximum value in each account over the year, converted to US dollars. I used the exchange rate on the last day the account had the maximum value in Swiss francs. For all my accounts, this was Dec 31. Technically, this was not necessarily the day with the maximum value in dollars over the year, but I figure it's reasonable enough.

For Form 8938, if you have more than one account, you need to attach a separate sheet. Be sure to check ``If you have attached additional sheets, check here'' at the top of the form. If you don't, even though you've filled out the form, TurboTax won't print it.

In Part III of Form 8938, you need to report your income for these foreign accounts. For example, you would enter your interest income from the foreign accounts here, noting that they are reported on Form 1040, line 8. Annoyingly, TurboTax will not prompt you to fill out this section.

Form 8938 only needs to be filed if your foreign assets meet a certain threshold, described here. The threshold is higher if you live abroad. It turns out I don't meet the threshold (not even close), but TurboTax printed the form anyway.

Error checking

During Error Check, TurboTax reports having a foreign address as an error. This is fine, just ignore it. It's just telling you that you have to file your return by mail, not electronically.

I found that exiting TurboTax and reloading will cause it to detect missing entries that it wouldn't otherwise report. This is how I noticed that I had not filled out Part III of Form 8938.

Corrections, Comments, and Suggestions

If you find any errors in the above or have corrections or comments, send me an email at . Please direct questions about your particular tax situation to someone competent to answer them.

TurboTax for Expats by Nate Nystrom is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License. Creative Commons License