Foreign Earned Income Exclusion

• With certain exceptions, "foreign-earned income" means any income you earned while overseas, regardless of whether your employer or client was located in the U.S. The maximum amount you could have excluded from federal taxation in 2008 was $87,600. This amount increases slightly every year, and is pro-rated according to how much of the year you spent overseas. To calculate your time spent overseas, you may use either the "physical presence" test or the "bona fide resident" test. The foreign-earned income exclusion must be claimed on your tax return the first year you use it; otherwise, it is considered waived. This means even if you are able to exclude all your income, to claim the benefits you must file a tax return the first year you claim the exclusion.
  
  

Housing Deduction

• If your employer provides you with overseas housing, you may deduct its cost from your taxable income. You may also deduct housing insurance, utilities and telephone bills. If your family maintains a second residence overseas for certain permissible reasons, such as dangerous conditions in the area where you reside, you may also deduct these expenses. If you want to use the housing exclusion and the foreign-earned income exclusion at the same time, you will be subject to certain limitations. There are also maximum limits on the amount of housing expenses you may deduct.
  
  

Tax Treaties

• The U.S. has entered into tax treaties with most foreign governments. These treaties are bilateral, meaning each one is different. Nevertheless, they all have the same purpose --- to prevent citizens living in one country and working in another from paying full taxes to two governments at the same time. In most cases, you may exclude from your U.S. taxable income all taxes paid to foreign governments. This exclusion is an alternative to the foreign-earned income exclusion and the housing exclusion, meaning that you may not add these three exclusions and deduct them from your income tax. If the foreign-earned income and housing exclusions are not enough to reduce your taxable income to zero, try using the tax treaty exclusion instead.