U.S. citizens and resident aliens abroad
The U.S. requires its citizens to file tax returns
reporting their earnings wherever they reside. However, there are some measures designed to reduce the international double taxation that results from this requirement.
First, an individual who is a bona fide
resident of a foreign country or is physically outside the United States for an extended time is entitled to an exclusion (exemption) of part or all of their earned income
(i.e. personal service income, as distinguished from income from capital or investments.) That exemption is $91,400 for 2009, pro-rated.
(See IRS form 2555.)
Second, the United States allows a foreign tax credit
by which income taxes
paid to foreign countries can be offset against U.S. income tax liability attributable to foreign income. This can be a complex issue that often requires the services of a tax advisor
. The foreign tax credit is not allowed for taxes paid on earned income that is excluded under the rules described in the preceding paragraph (i.e. no double dipping).