U.S. citizens or U.S. resident aliens living in a foreign country are subject to the same U.S. tax laws as those living in the U.S. However, if you lived and worked overseas for most of the year, you might qualify for the foreign earned income exclusion. If you qualify, you can exclude up to $85,700 per year in income that you earned while working overseas. You can't exclude more than you earned, though.
To qualify, you must satisfy all of these requirements:
You must have foreign earned income. Earned income includes compensation such as salaries, wages, and commissions.
You must either be a bona fide resident or satisfy the physical presence test. A bona fide resident is someone who has resided in a foreign country for the entire tax year (January 1 to December 31) without interruption. To pass the physical presence test, you must be present in a foreign country for at least 330 full days within a 12-month period.
You must satisfy the tax home test. Your tax home must be in a foreign country throughout your period of bona fide residence or physical presence, whichever applies.
If you lived and worked abroad for most of 2007, use the Interview to see if any or all of your foreign earned income can be excluded from tax.
If you're an employee of the U.S. government or its agencies, you don't qualify to take the exclusion.
For more information, see IRS Publication 54: Tax Guide for U.S. Citizens and Resident Aliens Abroad.