Dear Bev,OK, if you want the "official" explanation of all this, go to the IRS website and download Publication 54, which is what they send out to overseas residents.
Actually, the calculation is a bit different from what you indicate and it will depend on how you set up your business. Depending on the local laws wherever you wind up, you may do better to set up your business as a "company" there under the business rules and then set yourselves up as employees of the business. Then, there is no question about your salaries being "earned income" and subject to the earned income exemption. (Actually, you can just pay yourselves the amount of the exemption if you want and leave the rest of the money in the company or to cover company expenses.)
As a local employee, you'll be subject to local taxes and social insurances (health, retirement and whatever else there is) - which is actually not a bad idea at all. The good news is that the company itself is NOT a US resident and so is not subject to US taxes - just to the local business taxes.
If you set things up so that you're "self-employed" things get a bit more complicated, as there is the question of whether or not you have to pay US social security (at self-employed rates). Then again, some countries won't allow you to be "self-employed" for a serious business if you're going to be hiring other people and whatever.
In any event, if your earned income exceeds the current limit (and remember, if your wife is employed by the company she gets her own income exclusion in the same amount), you then take foreign tax credits for what you pay in income tax locally. The trick here is that foreign tax credits put you in line for the AMT (alternative minimum tax) calculation, which can lead to you paying tax to the US.
Basically, if you set it all up right, you shouldn't have much, if any, problem with double taxation.
I like your comments that setting up a company in Singapore is not considered a us resident, hence, no income tax is due. Can u double check on that?
my wife and I are trying to setup business in HK but were told there is company income tax to be due in additional to salary tax, similar to the us.
Is that true as long as this company is not affiliated with us or making money from US is ok?
Can u elaborate more? Thanks!