How to properly apply Foreign Tax Credit on Federal and State tax returns?

Thanks for explaining! For option 1 about California non-residency, what exactly would qualify me as a non-resident? I haven't been physically in California for over a year, but I still have a California driver's license and my permanent address is my parents' house there. Would Germany be considered my "domicile" now since I've been living/working there?

For California non-residency, the key is establishing that you've changed your domicile (permanent home) to Germany. Physical presence outside California for 18 months helps your case, but California looks at several factors: where you're registered to vote, your driver's license state, where you have bank accounts, and your social ties. Having your permanent address at your parents' home in California could be problematic. California has a particularly tough "leaving the state" test. You might want to consider formally changing your domicile indicators - register to vote in Germany if possible, get a German driver's license, establish bank accounts there, and possibly change your permanent address if feasible. Document these changes carefully to support your non-residency claim.

Does it work for self-employed people too? I'm a freelancer splitting time between Texas and Mexico, and I'm completely lost on how to handle the foreign income part. My CPA wants to charge me an extra $800 just for the international portion!

I'm skeptical about these tax tools for expat situations. How does it handle tax treaties? I work in France and there are specific provisions in the US-France tax treaty that most software doesn't understand. Does it actually know all the details of country-specific tax treaties?

Yes, it definitely works for self-employed people! It has specific modules for Schedule C income earned abroad and helps determine how to properly allocate income between countries. It'll also help you figure out if you should be using the Foreign Earned Income Exclusion, Foreign Tax Credit, or a combination of both based on your specific situation. For tax treaties, the system actually does have country-specific treaty provisions built in. I know they cover major countries like France, Germany, UK, and many others. It specifically flags articles from the relevant tax treaty that might apply to your situation and explains them in plain English. Much more comprehensive than I expected for a digital tool.

Wait, so how does this actually work? Does it just autodial the IRS for you? I don't understand how this would get you through any faster than calling yourself.

This sounds like a paid ad. There's no way you got through to the IRS in 20 minutes during tax season. I've been calling for 3 weeks about my foreign tax issue and can't get a human being. I'm supposed to believe this service magically gets you through?

It's not just auto-dialing - they have a system that navigates all the complex IRS menu options and keeps redialing if it gets disconnected. The key difference is they have software that holds your place in the queue, so you don't have to sit on hold. You just get a call when an agent is ready to speak with you. I was skeptical too when I first heard about it. What convinced me was how specific they are to different IRS departments. I needed the international tax division specifically, and they had that as an option. And yes, it really did get me through in about 20 minutes once they started the process. This was in early February, so not the absolute peak season, but still pretty busy.

Thanks for mentioning this! I was actually considering changing my residency to Nevada (no state income tax) since I don't have any real ties to California anymore besides my parents' address. Do you know if there's a minimum time I need to establish residency in Nevada before I can claim it on my tax return?

Nevada doesn't have a specific day count requirement like some states do, but you'll want to establish as many residency indicators as possible before claiming it. This includes: getting a Nevada driver's license, registering to vote there, opening local bank accounts, getting a local address that's not just a P.O. box, and spending at least some physical time there during the year. The biggest challenge you'll face is proving to California that you're NO LONGER a resident. California is notoriously aggressive about maintaining tax residency claims on people who leave. Document your departure carefully, including your move to Germany, and be prepared to show that you've genuinely cut ties with California. If your only connection is parents living there, make sure you're not listed on any of their accounts, utilities, or property documents.

I've used both in different years. The FEIE (Form 2555) is great if you're in a lower tax country where you pay less foreign tax than you would in the US. You can exclude about $120,000 for 2024 from your US income completely. BUT if you're in a higher tax country like Germany where OP is, the Foreign Tax Credit is usually better because you can carry forward excess credits for 10 years. Also, with FEIE, you lose some benefits like the child tax credit because your income is reduced.

Foreign taxes don't count toward the $10,000 SALT deduction limit. The SALT cap only applies to state and local taxes paid within the US - property taxes, state income taxes, etc. Foreign taxes are handled separately through either the Foreign Tax Credit (Form 1116) or as part of the Foreign Earned Income Exclusion process (Form 2555). This is actually one advantage of working abroad - your foreign taxes don't get caught in the SALT limitation that was introduced in the 2017 tax reforms.

This is really helpful advice about documentation! I'm just starting to navigate this whole foreign tax situation myself. Quick question - when you mention getting documentation from German tax authorities, do you know if the standard tax assessment notice (Steuerbescheid) that Germany sends is sufficient? Or do you need some special form translated into English? I'm worried about getting audited and not having the right paperwork format that the IRS expects.

The German Steuerbescheid is generally sufficient for IRS purposes, but you'll want to make sure it clearly shows the income tax portion separate from social security taxes. The IRS doesn't require official translations, but it's helpful to have a summary in English that maps the German terms to their US equivalents. What I've found works well is creating a simple spreadsheet that shows: the German tax line items, English translations, and which ones qualify for the Foreign Tax Credit. Keep the original Steuerbescheid with your tax records, and attach the English summary to Form 1116. One gotcha to watch for: if your Steuerbescheid shows withholding taxes paid during the year vs. final assessment, make sure you're only claiming the actual tax liability, not double-counting withholdings that get refunded. The IRS has gotten pickier about this in recent years during audits.