U.S. citizens or U.S. resident aliens living in a foreign country are subject to the same U.S. tax laws as those living in the U.S. However, if you lived and worked overseas for most of the year, you might qualify for the foreign earned income exclusion. If you qualify, you can exclude up to $91,500 (for 2010) in income that you earned while working overseas.
To qualify, you must satisfy all of these requirements:
You must have foreign source earned income. Earned income includes compensation such as salaries, wages, and commissions for services performed in the foreign country while the taxpayer satisfies the bona fide resident or physical presence test. It does not include compensation paid by the US government or its agencies paid to members of the military or civilians working abroad. Earnings while self-employed in industries where capital is a material income producing factor (activities that involve labor, inventory, etc.) may be considered earned income only to the extent that the value of the services rendered or 30% of net profit, whichever is less.
You must either be a bona fide resident or satisfy the physical presence test.
You must satisfy the tax home test. Your tax home must be in a foreign country throughout your period of bona fide residence or physical presence, whichever applies.
Foreign earned income means wages, salaries, professional fees, and other compensation received for personal services you performed in a foreign country during the period for which you meet the tax home test and either the bona fide residence or physical presence test. It does not include compensation paid by the US government or its agencies paid to members of the military or civilians working abroad. Earnings while self-employed in industries where capital is a material income producing factor (activities that involve labor, inventory, etc.) may be considered earned income only to the extent that the value of the services rendered or 30% of net profit, whichever is less.
Don't include:
Value of meals and lodging excluded from income because it was furnished for the convenience of the employer.
Pension and annuity income, including social security benefits.
Wages paid by the U.S. government or one of its agencies.
Payments received after the end of the tax year following the tax year in which the taxpayer performed the services that earned the income.
Any portion of your 2010 moving expense deduction allocable to 2011 that's included in your 2011 gross income.
For more information, see IRS Publication 54: Tax Guide for U.S. Citizens and Resident Aliens Abroad.