I would use it if people went into too much detail when describing something which is uncomfortable/not pleasant to imagine or hear about. For example, if they described how they got an injury in very strong, detailed language. Also I personally would say "too much information" rather than abreviate it to "TMI".

You can use TMI in an email or sms but not talking face to face with someone. Example: Person A: Well my boyfriend and I had a really hot encounter under the sheets last night..... let me tell you what happened...... Person B: Too much information!!! I'm not interested.

Well, I say "TMI" to my friends a lot, and they say it as well. Maybe it's an American, teenager thing? Haha, I don't know. But, it's definitely not suitable outside of that. Say "too much information" if you're not sure. Jura's example is perfect. Use "TMI / too much information" if someone is talking about something gross, uncomfortable, or inappropriate.

Never! It's not a commonly-known acronym (I never knew it). EDIT: what I mean is, saying "too much information" is fine, but you can't say "TMI".