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Foreign Earned Income Exclusion
Excluding Foreign Wages from US Taxes

By William Perez, About.com Guide

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Nov 3 2009

Generally speaking, if you live and work outside of the United States, then you can exclude all or part of your foreign wages from US taxation. To qualify for the foreign earned income exclusion, you must :

Work and reside outside the United States.
Meet either the Bona Fide or Physical Presence tests.

If you qualify, you will be eligible to exclude up to $91,500 annually in foreign wages. The amount of the foreign earned income exclusion changes each year, and here's the maximum allowable exclusions for various tax years.

You may also be able to exclude an additional amount for housing using the foreign housing exclusion or deduction. Self-employed taxpayers have additional tax considerations. The foreign earned income exclusion will reduce your regular tax liability, but not your self employment tax. Also, you'll have to take the foreign housing deduction instead of the housing exclusion. There's more details at Self-Employment & Foreign Exclusions.

One final tax planning tip. Starting with the year 2006, taxpayers claiming the foreign earned income exclusion will pay tax at the tax rates that would have applied had they not claimed the exclusion. That means, instead of having their income taxed starting at the 10% rate, most expatriates will be taxed starting at the 25% tax bracket.