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I have lived overseas for three years now. Maybe I can shed some light on these issues.

1. Yes, you have to live outside the U.S. for 11 of the 12 months, although the regulation breaks it down into days. You would be able to pro-rata the foreign income exclusion in 2003, even if you were out of the U.S. for, say, 3 months in 2003, as long as you are out of the U.S. for 11 of the 12 months. So when you file your 2003 tax return and you are 100% sure that you will be out of the U.S. to meet the 11 of the 12 months, take the deduction, although technically I think you are supposed to refile once you actually meet the test. Be sure you understand what the 11 of the 12 months means. That means that you cannot spend more than 30 days in the U.S. during the 12 months period. That includes vacations to the U.S. or its territories; business meetings in the U.S., or any other reason that would cause you to set your feet in the U.S.

2. Yes, you will have to pay state tax. But the exclusion on your Fed tax usually carries over to your state tax, at least in D.C. anyways.

3. You will also have a small exculsion for housing costs abroad, even if you maintain your resident in the U.S. It is not much but does help. For me it was US$3,000 deduction.

4. You should check with your company as they should be able to address all of these issues. Some U.S. governmental entites are not allowed the foreign income exclusioin. I know Embassy staff cannot take this exclusion.

5. FICA - For some reason I don't pay FICA but I cannot explain why. I was just told that I didn't have to pay it by my company (an international organization).

6. I assume you will be given some benefits for living overseas, say, a housing allowance, education allowance for your children, cost of living allowance, etc. All taxable, mind you.

And yes, you will love living overseas. You will learn to see American through the eyes of others and that is quite revealing. You will also learn patience and how others perceive you. Since I live in a Muslim country, I have also learned that American's perception of Muslims and the real life reality are far apart (fortunately, better than U.S. perceptions). It has been the best experience of my life.

Also, I'm sure 18-months sounds like a long time. I assure you it will pass like it is only 3-months and you will wonder where the time went. So make the best of your time while you are there.
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