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Wages are taxable compensation. The credit can then reduce it to the level you don't pay taxes.

Some confusion evident here. Assuming the modified AGI is below the income phaseout limits, only taxable earnings are relevant when it comes to IRAs for expats. Excluded wages are not taxable. Exclude all you wages and you have no taxable earned income. You only qualify for an IRA if you have at least $2000 in taxable earned income. Plain enough?

Now, if the fellow has foreign income above what he can exclude, or $2K of U.S. income, he qualifies for an IRA...

The 401K etc. questions are another question entirely. Comes down to running some numbers and projections, but why set yourself up to pay taxes later on income you may be able to exclude from taxation now? The only benefit would be taxfree earnings in the long term, but expats enjoy a tax advantage on capital gains in the short term, due to their low tax brackets.

All expats deal with this and come to their own conclusions.

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