U. S. taxpayers' exclusion of income earned abroad -- Rules and limitations;

              U. S. Taxpayers' Exclusion of Income Earned Abroad—Rules and Limitations
by WILLIAM ROGER ABBOTT II Senior Accountant, Caracas Office
Presented before an interested group of U.S. citizens, under the auspices of the American Chamber of Commerce, Caracas, Venezuela—November 1965
THE RIGHT of a U. S. taxpayer to exclude foreign income from gross income is subject to several types of limitations, the most important one being that the income excluded must have been income earned by the taxpayer. The next limitation is that the earned income must relate to the services the taxpayer renders in a foreign country. This relationship is established by the fact of residency or physical presence in a foreign country. These two limitations have been features of the Internal Reve­nue
Code for many years.
The third limitation, relating to the amount of the exclusion, has also been part of the Code for many years, but it has not affected a great number of taxpayers until the last few years. Until 1963, only the U. S. citizen qualifying under the 17-month rule was subject to limitation on the amount of his exclusion, and it has always been $20,-000. However, the Revenue Acts of 1962 and 1964 extended monetary limitations to the U. S. citizens who qualified under the bona fide resi­dence
rules and established limitations on two levels. From 1963 on, a taxpayer qualifying as a bona fide resident with less than three years' residence may not exclude more than $20,000 a year of his foreign-source earned income. This rule is still in effect under the 1964 Act. However, taxpayers who either have been bona fide residents for more than three years before 1963 or complete this term of residence at any time after 1962 enjoy a higher limitation. For the tax years 1963 and 1964 this limitation was $35,000, but the Revenue Act of 1964 reduced it to $25,000. As a result, most taxpayers will be concerned with either the $20,000 or the $25,000 limitation, unless they are contemplating the filing of amended returns relating to years before 1965.
PRORATING UNDER RESIDENCE RULE
These are the broad general limitations. They are subject to special rules created by special circumstances of the taxpayer. The most com­mon
situation requiring special rules is that of prorating the exclusion limitation. It is not ordinarily possible for the taxpayer to begin or end his presence or residence in a foreign country at midnight of December
290