As a US citizen now residing another country, please remember that the
United States continues to tax you on all of your worldwide income (one
of the few countries that does so for expats). Thus, as you probably
know, you have to report, and pay taxes upon, your worldwide income, as
long as you retain your US citizenship . . . even if you permanently
live abroad in Mexico.
With respect to Washington state, however, since there is no income tax there, you really don't need to worry about it. That is, you will have no tax return filing obligation there, and you can simply answer all of the relevant TurboTax questions to indicate that you resided abroad, or in a foreign country, during the tax year.
In
order to accomplish this mechanically in TurboTax -- that is to force
the program to only tax your income on a federal level -- simply
indicate that your state of residence is "Foreign or US Possession" in
the Personal Information section of the program, at the very
beginning. This way you will only be prompted to file a federal tax return.
When done correctly it should
look something like the screen-capture images below this text; simply
click the images to open. Note that the address of an historic central
Post Office in Mexico City was used to illustrate how to enter a Mexican
postal address format in
TurboTax. However, you should obviously insert your own current mailing address there instead.
Depending on the amount of capital gain, if any, realized upon selling your Washington home, this may or may not even be a reportable tax event (and it won't be, if your gain falls under the Section 121 "exclusion of gain on sale of a personal residence" . . . the TurboTax program itself will guide you here).
Also,
please don't forget any annual foreign financial account disclosures
that you may have to file, if you keep a bank account or other financial
account outside of the US.
In
fact, there are two
separate disclosure forms that may be required for US citizens with an
account at a Mexican (or overseas) bank; each also has different
reporting rules.
One is known as IRS Form 8938, and can be
attached to the relevant yearly Form 1040 tax return (which you could
file for free using TurboTax, if you have no taxable income).
The other is known as FinCen
Form 114, which can only be filed via the internet. The following
Internal Revenue Service webpage describes them in some detail, and provides
their dollar value reporting levels (called the "Reporting Threshold"):
https://www.irs.gov/businesses/comparison-of-form-8938-and-fbar-requirements
Form 8938 is included in
TurboTax, as indicated; whereas FinCen Form 114 is not included with TurboTax, and you would need to access that reporting
webpage separately. Note that you can get to the FinCen reporting internet site directly
through the above IRS link (a link within a link, essentially).
Thank you for asking this important question, and we hope that you will enjoy living abroad.
