For the person to qualify for the foreign earned income exclusion - he/she should: -- Work and reside outside the United States for at least 330 days during the year(Physical Presence test), or -- Meet either the Bona Fide test.If the person qualifies, he/she may exclude up to $92,900 (2011) in foreign wages. The amount of foreign earned income exclusion fro 2012 is $95,100
To receive that exclusion - the taxpayer should file either form 2555 or 2555EZ. Here are forms you likely need:Form 2555 Instruction 2555
Please be aware that - the exclusion above will not affect self-employment taxes - only income taxes. Only earned income is excludable - income from wages and self-employment. For instance - dividends, investment income, rental income, pensions, etc - are not excludable.
You absolutely may deduct your qualified travel expenses including per diem.
Once you have determined that you are traveling away from your tax home, you can determine what travel expenses are deductible.
You can deduct ordinary and necessary expenses you have when you travel away from home on business. The type of expense you can deduct depends on the facts and your circumstances.
To determine whether you are traveling away from home, you must first determine the location of your tax home. Generally, your tax home is your regular place of business or post of duty, regardless of where you maintain your family home. It includes the entire city or general area in which your business or work is located.
If your assignment or job away from your main place of work is temporary, your tax home does not change. You are considered to be away from home for the whole period you are away from your main place of work. You can deduct your travel expenses if they otherwise qualify for deduction. Generally, a temporary assignment in a single location is one that is realistically expected to last (and does in fact last) for 1 year or less.
However, if your assignment or job is indefinite, the location of the assignment or job becomes your new tax home and you cannot deduct your travel expenses while there. An assignment or job in a single location is considered indefinite if it is realistically expected to last for more than 1 year, whether or not it actually lasts for more than 1 year.
That means - your employer will be required to report your per diem as wages on W2 form if your assignment will be more than a year..
It does not make a difference because your are claiming your tax home out of the US but your income to claim for US purpsoes should include all amounts.
The fair market value of property or facilities provided to you by your employer in the form of lodging, meals, or use of a car is earned income and should be included with your wages when you complete your US tax return.
The housing exclusion will then apply to amounts considered paid for with employer-provided amounts, which includes any amounts paid to you or paid or incurred on your behalf by your employer that are taxable foreign earned income to you for the year (without regard to the foreign earned income exclusion).
So although you will need to include the amount in wages you can use the housing exclusion which will help you in not paying US tax especially if your total earned income is over the limit to exclude ($95,100 for 2012).
I think with what Lev has advised and the additional info I have given you, the understanding about your situation should be clearer.
The source of your earned income is the place where you perform the services for which you received the income. Foreign earned income is income you receive for performing personal services in a foreign country. Where or how you are paid has no effect on the source of the income. For example, income you receive for work done in France is income from a foreign source even if the income is paid directly to your bank account in the United States and your employer is located in New York City.