US Expat Taxes for Americans Living in South Korea – What You Need to Know
It has been estimated that there are 150,000 Americans living in South Korea.
Americans living in South Korea, whether for work or with the military, will enjoy many local highlights including the exotic culture, the delicious food, the excellent health care and education options, and the friendly locals. As an American expatriate living in South Korea though, what exactly do you need to know regarding filing US expat (and South Korean) taxes?
All US citizens and green card holders are required to file a US federal tax return and pay taxes to the IRS, regardless of where in the world they live or their income is generated.
The good news is if you are paying income tax in South Korea, there are various exclusions and exemptions available to prevent you paying tax on the same income to the IRS too.
US taxes – what you need to know
If your annual income is more than $12,400 (in 2020, or $12.550 in 2021), or just $400 for self-employed individuals, or just $5 for Americans married filing separately with a foreigner, then you have to file form 1040. While any tax owed is still due on April 15th, expats get an automatic filing extension up until June 15th. This can be extended further until October 15th.
If you have overseas assets worth over US$200,000 per person, excluding your home if it is owned in your own name, you also have to file form 8938 to declare them.
If you had a total of at least US$10,000 in one or more foreign bank and/or investment accounts at any time during the tax year, you also have to file FinCEN form 114, otherwise known as a Foreign Bank Account Report or FBAR.
“Foreign residents who have stayed in Korea for longer than five years during the last ten year period are taxed on their worldwide income.
Thankfully, there are several exemptions you can claim that allow you to pay less or no US income tax to the IRS. The two primary ones are the Foreign Earned Income Exclusion, which allows you to exclude the first around US$110,000 from US income tax if you can demonstrate that you are resident in South Korea, and the Foreign Tax Credit, which gives you a dollar tax credit for every dollar of tax you’ve already paid in South Korea.
The Foreign Tax Credit is typically a better option if you pay more tax in South Korea than you would owe in the US, as you can carry the excess tax credits forward for future use.
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.
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.
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.
South Korean taxes – what you need to know
South Korean income tax rates range from 6% to 45% of net income after deductions, although foreign workers can opt to pay a 19% flat tax on their gross income. There is also a local income tax of 10% of the national income tax rate paid. Capital gains are taxed separately.
Foreigners are considered residents in South Korea for tax purposes if they spend at least 183 days in South Korea within a tax year.
The South Korean tax year is the same as the American, and tax returns are due by May 31st. The South Korean tax authority is called the National Tax Service.
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.
We strongly recommend that if you have any doubts or questions about your tax situation as a US expat living in South Korea that you contact a US expat tax specialist.