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Question 1. Will he automatically lose the remaining carryover $36,000 foreign tax credits if he switches to the Form 2555 exclusion of his foreign-earned income? - No he will not automatically lose the foreign tax credits. They start to expire after 10years. "If, because of the limit on the credit, you cannot use the full amount of qualified foreign taxes paid or accrued in the tax year, you are allowed a 1-year carryback and then a 10-year carryover of the unused foreign taxes."(http://www.irs.gov/publications/p514/ar02.html#en_US_2012_publink1000224640)
Question 2. If the credits are not automatically lost, should he still file the Form 1116 carryover statement each year even though he is using the 2555 exclusion to offset his taxable income, and therefore is not utilizing the credits? - No, there is no need to file the 1116 to continue carrying over the credits. Basically you just have to know that you have them. They will not be reported on the future years tax returns by default. You can include a statement in the tax return to show the carryover schedule but it is not required.
Question 3. Is there an advantage in using the carryover credits to offset his US tax on his income rather than excluding his income using Form 2555? - No there is not really any big advantages. Although not claiming the exclusion provides for earned income and thus eligible for items like the child tax credit, child and dependent care credit, Earned income credit, etc.
Question 4. If using Form 2555 doesn't automatically make the accumulated foreign tax credits disappear, is it still necessary to file the Form 1116 carryover statement each year with his future returns so as to prevent the credits from being lost, in case he returns to work in the US in the future at which point the credits would be useful if they haven't yet expired? - As mentioned above it is not required but would be a good idea. I think it is a great idea. This way it is communicated each year. The opportunity for it to be overlooked is greatly diminished.
Thanks for your well-crafted answers. That brings up one more question:
Since the tax software we are using doesn't generate a carryover form of the unused foreign tax credits (we switched software to Turbotax this year to be able to electronically file the return) does adding a statement to the return each year showing the carryover credits as you suggested mean we can't electronically file?
does adding a statement to the return each year showing the carryover credits as you suggested mean we can't electronically file? - Perhaps yes, it may preclude you from efiling the return. I am not familiar with TurboTax to know whether you can attach a statement or not. I would think that you should be able to attach a statement that does not support a number on the return but cannot say for certain. It might be worth a call to customer support to ask. In the event you cannot attach a statement, and you wish to have such a statement attached, then I suppose you are stuck with paper filing....