Applicability

• If you are a U.S. taxpayer, you must report your worldwide income to the IRS, but your tax burden will be reduced by applicable exclusions, deductions and credits. You are a U.S. taxpayer if you are a U.S. citizen or permanent resident. If you are not a U.S. taxpayer, you will only be taxed on your U.S.-source income. Income is considered sourced from a particular country if the taxpayer was physically present in the country at the time it was earned, regardless of the location of the payer or the location of the taxpayer at the time the income was actually received. U.S. taxpayers with foreign-source income must file IRS forms 1040 and 2555.
  
  

The Foreign-Earned Income Exclusion

• If you are a U.S. taxpayer and earned foreign-source income during the tax year, you can exclude up to $91,500 of this income (for the 2010 tax year) if your tax home was outside the U.S. during the tax year. Your tax home is outside the U.S. if you meet either the "physical presence test" or the "bona fide residence test" with respect to one or more foreign countries. If you spent at least 330 days abroad during the tax year, you probably qualify. The amount of your exclusion is pro-rated according to the portion of the tax year you spent outside the U.S.
  
  

The Housing Deduction

• The housing deduction is available to a taxpayer whose employer provided him with housing in another country during the tax year. The amount includes both the value of the housing provided and certain related expenses such as utilities, insurance and telephone bills. However, you cannot simply add the housing deduction to the foreign-earned income exclusion and subtract the total from your taxable income -- complex rules determine the extent to which you can add these two benefits together. Nevertheless, if you lived abroad in employer-provided housing during the tax year, it is likely to benefit you to some extent.
  
  

The Foreign Tax Credit

• The foreign tax credit is an alternative way to reduce your tax burden if you earned income from abroad during the tax year, and you can use it even if you were located in the U.S. when you earned the income. You cannot use it in conjunction with the foreign-earned income exclusion or the housing deduction, however. You may subtract the amount of any taxes you paid to foreign governments from your U.S. federal income tax burden, as long as a bilateral tax treaty exists between the U.S. and the foreign government to which you paid taxes. The U.S. has entered into a bilateral tax treaty with almost every country.