Yes, the FEIE exempts the first $126,500 per person. You can adjust your W2 withholding to account for that. You have to either show “bonds fire” residency in a foreign country or physically stay out of the US for 335+ days in a one year period. The FEIE does not apply to Social Security or Medicare taxes, or to state taxes.
You can deduct taxes paid to a foreign country if the US has a tax treaty.
> The FEIE does not apply to Social Security or Medicare taxes, or to state taxes.
I never figured out the payroll tax thing. I was working for the overseas affiliate of an American company, but never had SS/medicare withheld for anything but my dividend income. I also paid Chinese payroll taxes, and they obviously don't have a totalization agreement with the US.
As far as state income tax goes, the only state you really need to worry about is CA, who doesn't recognize foreign residency as an excuse against paying CA tax, especially if they claim you are still a resident because you own a home in CA.
You can deduct taxes paid to a foreign country if the US has a tax treaty.