I'm a US citizen filing taxes whilst living 100% of the year in UK. I work for a UK company and pay UK taxes. So does my spouse. When I enter the numbers into Turbotax, it comes out that I owe a large amount of money in US taxes. Why is this the case when I already pay UK taxes?
To avoid double taxation, you will need to input your UK wage information into the Foreign Earned Income and Exclusion select. (Please note that your wages need to be reported in USD and need to be reported on a calendar year (Jan 1st through Dec 31) basis:
If you met the Bona Fide Residence Test, you will be able to claim an IRS - Foreign Earned Income Exclusion that would exclude a portion of your foreign source income (up to $101,300 for 2016). Your spouse will also be able to claim this exclusion (that would be 2 separate exclusions), if your spouse qualifies. You may also be able to take advantage of the foreign housing deduction. TurboTax will guide you on taking the foreign earned income exclusion and foreign housing deduction.
If your income is more than the foreign earned income exclusion amount and if you paid foreign taxes on your foreign income then you will be allowed an offset for these foreign taxes on your US tax return. If you take a foreign tax credit, your US tax liability will be reduced by the amount of taxes that you would have paid if the transaction took place in the US (see this link Claim Foreign Tax Credit). If you take a foreign tax deduction on Schedule A, you will be allowed to deduct the full amount of the foreign taxes paid but you will need to itemize (which could limit your ability to take the full deduction). The TurboTax software will help you determine which of these options will lower your overall tax liability.
Please note : If you have foreign bank accounts, you may be required to file a Report of Foreign Bank and Financial Accounts (FBAR) if are a US citizen or resident and:
To be directed to the US Treasury Government Website to prepare a Report of Foreign Bank and Financial Accounts, click FBAR (TurboTax does not support this form)