I frequently get questions about what happens when your wages exceed the amount of the Foreign Earned Income Exclusion ($87,600 for 2008).  A common misconception is that you will then need to pay "double" tax - to the US and also to the country where you are living. 

Assuming you live in a country which has entered into a treaty with the United States (click for a list of tax treaties), the tax laws and tax treaties are specifically designed so that you only pay tax once on each item of income (either to the US or to the foreign country).  If your wages exceed the exclusion amount, the remaining income is eligible for Foreign Tax Credits (to the extent that it was earned outside of the US).  What this means is that you are allowed to use the foreign tax that you pay to offset the US tax on the same income.  As long as the foreign taxes you paid are higher than the US taxes, you should not owe any additional US tax.

Source:  Maxim Global Wealth Advisors, By David Colvin, CPA, CFP - 2008

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