Congress made two changes to the foreign earned income exclusion in 2005. They increased the maximum exclusion and instituted an inflation adjustment, plus they changed the calculation of the tax for the year such that any income that is not excluded is taxed as if it was earned in addition to the excluded amounts when applying the progressive tax rates. This increases the tax for some, while having little or no impact on others. This report analyzes the differences between workers in host countries with low, moderate and high income tax rates. The authors then identify opportunities for planning.
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