I frequently get questions about what happens when your wages exceed the amount of the Foreign Earned Income Exclusion ($91,400 for 2009). A common misconception is that you will then need to pay “double” tax – to the US and also to the Netherlands.
This is incorrect. The tax laws and tax treaties are specifically designed so that you only pay tax once on each item of income (either to the US or to the Netherlands). If your wages exceed the exclusion amount, the remaining income is eligible for Foreign Tax Credits (to the extent that it was earned outside of the US). What this means is that you are allowed to use the Dutch tax that you pay to offset the US tax on the same income. As long as the Dutch taxes you paid are higher than the US taxes, you should not owe any additional US tax.