According to the US tax laws, all US citizens and resident aliens are taxed "on their worldwide income, whether the person lives inside or outside of the United States".

But, for certain qualifying U.S. citizens and resident aliens who live and work abroad, there is a provision in the tax law for them "to be able to exclude from their income all or part of their foreign salary or wages, or amounts received as compensation for their personal services."

There is a further tax law provision that applies to the qualifying U.S. citizens and resident aliens who live and work abroad, to also allow them to be able to qualify to exclude or deduct certain foreign housing costs."

Some people think that this is same as exempt income, but this is not the case. The IRS requires that the qualifying individual with qualifying foreign earned income may elect to exclude this income provided that a tax return is filed and the entire income is reported.

Rule's For Qualifying for the Foreign Earned Income Exclusion
To order to qualify for the foreign earned income exclusion, a U.S. citizen or resident alien must:

1. Have foreign earned income (income received for working in a foreign country).
Generally speaking, this is usually considered to be Wages & Salaries, Commissions, Professional Fees or Tips.

2.Have a tax home in a foreign country, and


3.Meet either the bona fide residence test or the physical presence test.
Bona Fide Residence Test
The IRS has established that the bona fide residence test is met if the taxpayer is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.

You can use the bona fide residence test to qualify for the exclusions and the deduction only if you are either a U.S. citizen, or a U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect.

Physical Presence Test
The physical presence test is met "if the taxpayer is physically present in a foreign country or countries 330 full days during a period of 12 consecutive months. The 330 qualifying days do not have to be consecutive. The physical presence test applies to both U.S. citizens and resident aliens."

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