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The US tax law requires US citizens - regardless where they live - to file the tax return and report all worldwide income. As an US citizen you have certain tax responsibilities with US taxing authorities. These responsibilities are separate from your responsibilities in a foreign country.To to claim foreign earned income exclusion - the taxpayer should file either form 2555 or 2555EZ. Here are forms: 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. Please also be aware that this credit is not granted automatically - you need to file a tax return and claim the credit. If the person bona fide resident of a foreign country - he/she may qualify for the foreign earned income and foreign housing exclusions and the foreign housing deduction. ($92,900 for 2011). To qualify for the foreign earned income exclusion - that should be a compensation for work done in a foreign country. If your workplace was in the US - the compensation doesn't qualify for the foreign earned income exclusion.