There is an important downside for expat Americans failing to report US Social Security -- it leads to overstatement of our tax credits.
For American expats living in Canada, for example, the two major means for reducing double taxation of passive income on their US tax return are (1) the tax treaty, and (2) tax credits. It's usually best to use (1) first, reserving (2) for income that is taxable in the US.
For example, if 2/3 of your income is not taxable in the US because of the tax treaty and 1/3 is, then you'd apply your tax credits to the 1/3 portion. However, only about 1/3 of your taxes paid in Canada could be applied to the 1/3 of your income taxable in the US. This is fair and makes sense, and it explains why the IRS asks for the actual income amounts as well as the amounts that are taxable in the US. If you only report income that is taxable in the US, then all of your passive income taxes paid in Canada would be applicable to the 1/3 of your income taxable in the US. Clearly, the IRS doesn't want people doing this because it results (intentionally or not) in an illegitimate reduction of their US tax.
That said, TurboTax does not allow us to enter taxable income (which is zero) on the Social Security worksheet, even though the spot for it is on the form! Given the chance, we would use the 1040 worksheet ( Schedule 1, line 24z) to report the amount not taxable, which is copied to line 6 of the 1099 Social Security worksheet. But TurboTax won't let us enter the amount not taxable in either location. Yes, LET'S HOPE THIS IS FIXED.
I hope this helps explain why we hope TurboTax will let us deal with this issue properly. Do keep in mind, though, that I am not a tax accountant but merely an expat tax payer in the same boat you are.
May you and yours be well. Terry
