Taxes for Expats – The US – Korea Tax Treaty
The US – Korea tax treaty was signed in 1976, and ratified in 1979. The purpose of the treaty is to prevent double taxation for Americans living in Korea and Koreans living in the US, however it doesn’t prevent US citizens living in Korea from having to file US taxes.
US taxes for expats in Korea
The US taxes based on citizenship, meaning that all US citizens and green card holders, including US expats living in Korea, with worldwide income of over $12,200 a year (in 2019), or just $400 of self-employment income, are required to file a US tax return each year.
Korea on the other hand only requires Americans to file Korean taxes if they spend at least 183 days in Korea in a year.
This leaves many US expats living in Korea having to file two tax returns, and also puts them at risk of double taxation.
Expats receive an automatic filing extension for their US taxes until June 15th, and they can request a further extension until October 15th if they need to, giving them plenty of time to file their Korean taxes first (due by July 7th) .
US expats in Korea may also have to file a Foreign Bank Account Report (FBAR), if they have over $10,000 in total in non-US based bank, investment, and other financial accounts at any time during the year (and including any accounts that they have signatory authority or control over, even if not in their name).
The United States – Korea Tax Treaty
The United States – Korea Tax Treaty covers double taxation with regards to income tax, corporation tax, and capital gains tax, however, a clause called savings clause in Article 4 paragraph 4 states that the US can still tax its citizens living in Korea as if the rest of the treaty didn’t exist!
However, the treaty allows US expats to avoid double taxation on their income taxed in Korea by allowing them to claim US tax credits when they file their US tax return to the same value as Korean income taxes that they’ve already paid, when they file their US tax return.
“Living in Korea offers expats a culturally rich life in a country that has a fascinating history.” – Expat info Desk
For income arising in the US, Americans in Korea can claim Korean tax credits against income US taxes paid to the IRS.
To claim US tax credits against Korean taxes paid, expats must file Form 1116 when they file their federal tax return. By doing this, the vast majority of US expats in Korea won’t end up owing any US income tax.
Alternatively, expats can claim another exemption called the Foreign Earned Income Exclusion by filing Form 2555, which simply allows them to exclude the first around $100,000 of their earned income from US taxation. Which exemption is most beneficial depends on each expat’s circumstances (e.g. their types of income, residency status, income levels, where their income originates, etc).
It is possible in some circumstances to claim both the Foreign Earned Income Exclusion and the Foreign Tax Credit, although they can’t both be applied to the same income.
The US – Korea Tax Treaty also allows the Korean government to share US expats’ Korean tax information with the IRS, as well as their Korean bank and investment account details and balances.
Some Americans in Korea, for example students and trainees, and professors and government workers may be able to claim a provision in the United States – Korea Tax Treaty (besides claiming US tax credits). Expats should consult a US expat tax specialise to check. Expats who can claim a provision in the treaty can do so by filing IRS Form 8833.
The US-Korea Totalization Agreement
A separate agreement called a Totalization Agreement helps US expats in Korea not to pay social security taxes to both the US and Korean governments. Expats’ contributions made while in Korea can be credited to either system. Which country they pay depends on how long they will be living in Korea.
Expats in Korea who are behind with their US tax filing because they were unaware that they had to file from abroad can catch up without facing penalties under an IRS amnesty program called the Streamlined Procedure, so long as they do so before the IRS contacts them about it.