The Foreign Earned Income Exclusion (FEIE) is a
The Foreign Earned Income Exclusion (FEIE) is a great tool that can be used to limit (or even eliminate) dual taxation while living abroad. With the FEIE, qualified expats can exclude over $97,000 (for 2013 tax year) of earned income from being taxed in the US!
In order the qualify for the FEIE you must pass one of two tests; either the Bona Fide Resident Test (live fully in the country and have no intentions of returning to the US) or the Physical Presence Test (living abroad for over 330 days in any 365 day period).
If you pass one of these tests, you can then exclude up to $97,600 from being taxed in the US (up to $195,200 for Married couples filing Jointly). Just fill out Form 2555 and attach it to your US Federal return.
Unfortunately, foreign income from sources such as dividends, interest and rental income are not included since this income is not “earned” in the IRS’s view. In addition, US based income from things such as pensions will not qualify for this exclusion because it was not earned inside a foreign country.