Innocents Abroad, Beware of the Tax Man

Now here's the biggest thing you need to know about going abroad: As long as you're a U.S. citizen, no matter where you live, most money you earn anywhere in the world is taxable on your U.S. tax return, says Mark Luscombe, a principal federal tax analyst with CCH Inc., a provider of tax and business law information. Even if you don't set foot in our country for the next two years, your earnings are subject to U.S. tax.

Even worse, any wages you earn overseas -- the tax guys call that your foreign-earned income -- most likely will be taxed by your host country as well.

So that means your earnings could be taxed twice!

Thankfully there are a few U.S. provisions that will help offset this double whammy.

Foreign-Earned Income Exclusion

If you lived overseas for long enough in the tax year, you may be able to exclude up to $80,000 of your foreign income from your U.S. tax bill. This foreign-earned income exclusion helps prevent your income from being taxed by both the U.S and your host government.

Your foreign-earned income includes things such as salary, commissions and bonuses.

To qualify for this exclusion, you must pass one of two tests to show that you were in the foreign locale for a sufficient amount of time. The two tests are the bona fide resident test and the physical-presence test.

To qualify as a "bona fide resident," you must take up residence in the foreign locale and remain there for an entire tax year -- Jan. 1 through Dec. 31. Whether you have "taken up residence" is judged on a case-by-case basis, but it generally means you're maintaining a home in the country in which you are working.

So if you lived overseas from Jan. 1 through Dec. 31, and you earned at least $80,000, you exclude the full $80,000 from your U.S. taxable income.