The U.S. is one of the few countries that taxes its citizens living abroad. As an expat, it means you have to file a federal tax return every year, as well as a state return in some cases. The good news is that expats can claim a credit or use deductions to lower their tax bill or not pay any taxes, but they still have to file.
TurboTax is a popular tax return product that makes filing quick and easy. However, you should know that not all TurboTax products will work for expats and digital nomads.
Understanding Your Unique Tax Situation
Before choosing a TurboTax product, it’s essential to look at your finances and assess your unique tax situation.
As a U.S. citizen, you have to pay taxes even if you live abroad. Plus, some states require you to file a tax return. If your last U.S. residence was in California, South California, Virginia, or New Mexico, you’ll have to file state taxes. Other states don’t require you to file a state tax return if you’ve been living abroad for more than six months.
Expats typically don’t owe any U.S. taxes or owe very little. It’s because they can claim the Foreign Tax Credit or use the Foreign Housing Exclusion to lower their tax bill. You can also claim what you paid in foreign taxes as an itemized deduction on Schedule A if itemizing your deductions makes sense for you.
Even if you don’t owe any taxes, you still have to file to report your income. If you don’t file your taxes while living abroad or fail to pay your tax bill, the IRS can report this debt to the State Department, and there have been cases of the State Department revoking passports over tax debts.
You should also know that Americans living abroad qualify for the Economic Impact Payments the government issued during COVID-19. If you didn’t receive one of the stimulus checks, you can claim a recovery rebate credit when filing your taxes.
Which Tax Forms Do Expats and Digital Nomads Usually Need to File?
The best way to choose the right version of TurboTax for your needs is to make a list of all the forms you’ll need to use for your tax return. You can then double-check that the version of TurboTax you choose to use supports all the forms you need.
Here are some of the tax forms you’ll probably need to file:
- Expats should report their foreign income on Form 1040.
- You will have to file Form 2555 to report your foreign income and claim the Foreign Earned-Income Exclusion. Thanks to this exclusion, you shouldn’t owe any U.S. income tax or should only pay income tax on a portion of your foreign income. If your employer gives you an allowance to cover your housing costs while living abroad, you can deduct this allowance from your income by claiming the Foreign Housing Exclusion on Form 2555.
- You can use Schedule A to deduct foreign taxes if you decide to itemize your deductions.
- A majority of expats use Form 116 to claim the Foreign Tax Credit instead. You can take the standard deduction, and claiming the FTC usually results in a lower tax bill compared to deducting foreign taxes.
- Some expats need to file FBAR FinCen Form 114. This form allows you to report the bank accounts you have abroad.
- If you own foreign assets over a certain threshold, you’ll have to file FATCA Form 8938.
Many digital nomads use freelance gigs and other forms of self-employment to support their lifestyles. Whether you live abroad, in the U.S., or were a resident of more than one country during the tax year, you’ll need to report your self-employment income:
- You’ll need to file Schedule SE. This form allows you to report your self-employed income, calculate how much you owe in self-employment tax, and deduct half of the self-employment tax from your taxable income.
- In some cases, you might also need to file Schedule C. If you created a business, you’ll need to file Schedule C. You will also need to use this form to report any expenses or losses.
Which TurboTax Product Is Best for Expats and Digital Nomads?
TurboTax currently offers five different products. Unfortunately, the free edition isn’t a good fit for expats and digital nomads because it only lets you report your income from a W-2 or unemployment benefits. You can use the free edition to claim the EIC and child tax credits, but this edition doesn’t support any of the forms you need to claim the FTC or report self-employment income.
The Deluxe edition of TurboTax is an excellent option for most expats and digital nomads. Here’s why:The Deluxe edition lets you use Schedule A to report foreign taxes as an itemized deduction. You can use it to file Forms 116 and 2555. These two forms are crucial for expats since they allow you to report your foreign income and claim the FTC. It includes Schedule SE to report your self-employment income, but keep in mind that it doesn’t support Schedule C.
If you have created a business or want to report losses or expenses for your self-employed activities, you should use TurboTax Self-Employed instead. This version of TurboTax includes Schedule C, and you’ll get access to Forms 116 and 2555 as well.
There is another version of TurboTax called TurboTax Premier. This edition includes two forms missing from the other products, Schedule D and E. Schedule D allows you to report capital gains from selling a property, and Schedule E is the form you need to file if you have rental income.
If you’re an expat who owns a rental property abroad, or if you sold a property in the U.S. or another country during the tax year, you will need to use TurboTax Premier.
TurboTax Deluxe, Self-Employed, and Premier include the forms you need to file state taxes if the last state you lived in requires expats to file.
TurboTax Deluxe is the best option for most expats and digital nomads. However, TurboTax Self-Employed is a better fit for digital nomads who need to file Schedule C.
You can purchase these different products as CDs or digital downloads. TurboTax also offers a Live version for these different products that allows you to speak with a tax expert and have them take over your return.
If you don’t mind spending more, TurboTax Deluxe Live or TurboTax Self-Employed Live would be good options for making sense of a complex tax situation.