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.
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.pdfThe 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.
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Extraterritorial income is the gross income of the taxpayer attributable to foreign trading gross receipts (defined below). The taxpayer reports all of its extraterritorial income on its tax return. It then uses Form 8873 to calculate its exclusion from income for extraterritorial income that is qualifying foreign trade income.
The American Jobs Creation Act of 2004 repealed the exclusion provisions generally for transactions after 2004, subject to transition rules. Thus you may only claim the exclusion with respect to transactions in the ordinary course of a trade or business under a binding contract if such contract is between the taxpayer and an unrelated person (defined below) and such contract was in effect on September 17, 2003, and at all times thereafter.