As a U.S. citizen working and living outside of the US and its territories, you are entitled to take advantage of the Foreign Earned Income Exclusion.
United States citizens, resident aliens, and green card holders that work and live outside of the U.S. can exclude all or part of their foreign earned income when filing their U.S. federal tax return. You also qualify to exclude compensation for personal services or certain foreign housing costs.
To qualify for the foreign earned income exclusion, a U.S. citizen, resident alien, or green card holder must have a tax home in a foreign country and receive income for working in that foreign country. (Foreign Earned Income). You must meet either the bona fide residence test or the physical presence test.
The foreign earned income exclusion is adjusted annually for inflation. The maximum exclusion per qualifying person is $91,400 for 2009, $91,500 for 2010, and $92,900 for 2011. This can be increased through use of the housing exemption.
The foreign earned income exclusion and the foreign housing exemption are claimed using Form 2555 – Foreign Earned Income Exclusion and becomes a part of Form 1040. A shorter version is Form 2555-EZ – Foreign Earned Income Exclusion.
The foreign tax credit cannot be claimed on the excluded income.
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