What is foreign earned income exclusion?
If you are a US citizen or a resident alien of the United States and you live abroad, you are still taxed by the IRS on your worldwide income.
But, if you earn wages as an employee or have self-employment income while working in a foreign country as an ex-patriate or expat, you might be able to exclude up to $99,200 as tax-free income (or 2 x $99,200 or $198,400 if married to another foreign income earner) for the 2014 tax year. This would save you well over $30,000 in taxes (or over $60,000 for couples who both qualify). Extra cheese on your Whopper at the new Tibetan BK.
So, it’s a big deal. It’s an even bigger deal that you take the necessary steps to qualify for the foreign earned income exclusion and its cousins the foreign housing exclusion and foreign housing deduction.
Also, note that it is earned income that may be excluded- wages and self-employment income are the typical examples of earned income. So, dividends, interest, rental income, pensions, etc. are not considered earned income, and therefore do not qualify for the foreign earned income exclusion. More on the definition of earned income later (see What is considered foreign earned income?)