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If you are US person - you are require do report all your worldwide income - regardless if it was earned in the US or abroad..
Regardless if you are paid in the US or in China - as long as your compensation is earned for work you perform abroad - that is foreign earned income and that income may qualify for the foreign earned income exclusion .
If you qualify - there are additional foreign housing exclusion.
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 for 2012 is $95,100.
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.
That is two steps process to determine exclusion - please consider following as illustration. Assume that you move the foreign country in Jule 2012.
Step 1 - determine your eligibility.
Specifically for 2012 - you will use 12 months qualification period from Jule 2012 to Jule 2013. If you work and reside outside the United States for at least 330 days during that period - you qualify for exclusion,
Step 2 - determine the maximum amount of exclusion.
You will determine the amount of maximum exclusion as $95,100 * 180 (days spent in the foreign country during 2011) / 365 = $46898 - that is the maximum amount you may exclude.
If you claim a foreign earned income exclusion - and that amount is taxed in a foreign country - you may not deduct or claim a credit for the foreign taxes. That is because your income is already excluded from US taxation.
However - if the same income is taxable abroad and in the US - you may claim a credit for taxes paid abroad - so the same income would not be taxed twice. Use the form 1116 - http://www.irs.gov/pub/irs-pdf/f1116.pdf please find instructions here - http://www.irs.gov/pub/irs-pdf/f1116.pdf
The credit is limited by the US tax liability on the same income - the form 1116 is used to calculate the amount of credit. Means - if tax liability abroad is higher - there will not be US taxes on that income, but if tax liability abroad is lower - in the US you will pay the difference after the credit will be applied.
Following are your options:
- claim a foreign earned include exclusion - up to the maximum amount and claim a foreign tax credit on the amount above.
- do not claim a foreign earned include exclusion -but only claim a foreign tax credit on the full amount.
You will need to prepare your tax return both ways and compare which is more beneficial.
Let me know if you need any help.
Be sure to ask if you need any clarification.