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Many people dream of being able to work abroad. While most would-be foreign workers focus on the chance to live in an exotic location, the tax benefits of working abroad can be quite substantial. Thanks to IRS Form 2555 and the foreign earned income exclusion, many workers who have jobs overseas don't have to pay U.S. income tax on their earnings. Let's take a closer look at exactly why Americans who work in foreign countries get such a valuable tax break from the IRS and what you might be able to do to take advantage.

How to qualify for favorable tax treatment
In general, the rule that governs U.S. citizens is that all of your income is subject to U.S. tax, wherever it was earned. However, the foreign earned income exclusion lets you avoid tax on the first $100,800 you make in 2015, with future amounts adjusted for inflation.

That might seem like a big boon for foreign workers, but in actuality, it tends to simplify what would otherwise be an even more arduous tax-return process. Most foreign workers pay income taxes to the country in which they work, and would then be entitled to a foreign tax credit under U.S. law. The forms to obtain the foreign tax credit are even more difficult for ordinary taxpayers to understand than Form 2555 is, though, so electing the foreign earned income exclusion can make it easier for foreign workers to avoid any unnecessary double taxation.

In order to be eligible to elect to have your foreign earned income untaxed, you have to have a tax home in a foreign country, and you have to be a resident of that foreign country for the entire tax year or be physically present in a foreign country for at least 330 days out of a 12-month period. The idea behind the requirements is that the exclusion isn't intended to help short-term temporary workers but rather those who permanently relocate overseas.

Getting a foreign housing exclusion
In addition to the exclusion for foreign earnings, the tax laws also allow you to claim an additional exclusion for amounts your employer pays that go toward the costs of housing. The first 16% of the maximum exclusion amount is treated as a base housing amount for which no exclusion is available. Above that amount -- $16,128 for 2015 if you worked abroad the whole year -- you might be able to get a housing exclusion.

Further limits apply to the housing provisions. Overall, only up to 30% of the maximum exclusion amount is available for the housing exclusion, or $29,760 for 2015. Those who live in certain high-cost areas, however, can claim housing expenses that exceed the standard limit, with separate ceiling amounts applying.

When the foreign income exclusion is the most valuable
As a planning tool, the foreign income exclusion can make certain moves by high-income taxpayers attractive. Those who work in high-tax countries don't get much benefit from the provisions, but those who work where taxes are low -- or who choose to set up self-employed business arrangements in low-cost tax havens -- can get the benefit of the exclusion for U.S. income taxes without having to pay correspondingly high taxes to their foreign jurisdiction. Certain expatriates can structure their affairs in a way to take maximum advantage of these provisions and shelter as much income from U.S. income tax as legally possible.

Because you can't take both the foreign tax credit and the foreign income exclusion on the same earnings, it can make sense to run your taxes under both scenarios and see which one saves you the most money. Depending on the specifics of your job, especially where you work and what your tax burden is, answers can be much different even for people in what appear to be similar situations.

Those who work overseas face a number of unique challenges that most U.S. workers never have to address. The foreign earned income exclusion might look like a nice tax break, but in actuality, it merely takes away the sting of potentially having to pay taxes twice on the same income.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.