Americans working abroad must report their earnings to the IRS, but they are allowed to avoid paying federal income taxes on an amount adjusted for inflation, which is just over $100,000 as of 2016.

Americans working abroad often enjoy a few tax advantages. One of which is the Foreign Earned Income Exclusion. The reasoning is that they are probably paying some form of tax in the county in which they are working, even though this is sometimes not the case.

The worker must report his or her earnings to the IRS but is allowed to exclude the first $100,000 (approximately, as of 2016) from Federal income taxes. You can also take another exclusion for foreign housing amounts, which can be up to $30,000 or even higher for places with very high costs of living.

The remaining amount will be taxed at federal income tax rates for the bracket(s) that the individual would fall into in the United States if the entire amount of earnings were included. That is unless the worker files for a tax deduction or tax credit (they have a choice) for the taxes they have paid internationally on amounts above the exclusion amount.

What are Federal Tax Brackets?
What is a Foreign Tax Deduction?
What if I Want to Retire Abroad?
What is Form 4563: Exclusion of Income for Bona-Fide Residents of American Samoa?