US Taxes for Americans in South Korea – What Expats Need to Know

Expat Living In South Korea

The Korean peninsula extends out from the Asian continent into the Sea of Japan. South Korea commonly known as the Republic of Korea has been reported as home to Paleolithic humankind for over a million years. US Expats need to consider how this truly ancient lineage and the Sea of Japan on three sides of the country have forged an unusually strong sense of national identity and ethnicity; the Koreans refer to themselves as Dan-il minkok guk ga or “the single race society”. Foreign nationals in recent years have migrated to this land because of a decline in the Korean pool of workers as compared to populations in other countries around the world.

The short monsoon season in June and July brings heavy rains to the Korean four-season subtropical climate; temperatures range from a comfortable 30 °C (86 °F) in the summer to sub-zero lows in the inland areas during the winter season.

Below is our top 10 list of cities in South Korea for expats (in no particular order):

• Seoul
• Busan
• Incheon
• Daequ
• Daejeon
• Gwanqiu
• Suwon-si
• Goyang-si
• Seongnam-si
• Ulsan

Expats quickly learn to love the Korean cuisine that is both appealing to the eye as well as the belly. Kimchi is a well-known side dish that complements the palate and provides valuable nutrients. This country, with technological and economic development in areas of transportation, commerce, and information technology shadowed only by Hong Kong, Taiwan, and Singapore, is governed as a constitutional democracy. The education system is known for its emphasis on math and problem-solving as well as social education that emphasizes human relationships and family. The Republic of Korea is one of the G-20 world economies.

Guide To US Expat Tax In South Korea

The Tax Samaritan country guide to US expat tax in South Korea is intended to provide a general review of expat tax in South Korea and how that will impact your U.S. expatriate tax return as a U.S. Expat In South Korea.

As a U.S. taxpayer, all worldwide income is subject to taxation and reporting and for most expatriates you are required to file a U.S. tax return on an annual basis due on April 15 each year (June 15 if you are residing overseas on the April 15 deadline). The tax treatment for different classes of income can vary greatly from South Korea and the U.S. For example, certain benefits may be tax free or excluded from taxable income in South Korea, but in the U.S. these benefits are likely to be non-qualified benefits that are subject to being included as taxable income in U.S. As such, there are a number of considerations related to US expat tax in South Korea and this brief article will address a few of those considerations.

South Korea Expat Income Taxes

Who Is Liable For Income Taxes In South Korea

Residents of the Republic of Korea pay income tax on all their worldwide income and shows a similarity to the United States tax code. Residency is defined as residing or maintaining a home in the country for at least one year. Non-residents are taxed only on Korean-source income. A foreign national who resides in Korea for 5 or less years in the last decade is taxed only on foreign-source income if it is either paid from or sent to Korea. While inheritance and gift taxes can be levied on the worldwide assets of Korean residents, non-residents may be subject only to those specific assets located in the country.

Tax Year In South Korea And Tax Filing And Payment Rules

The Korean government divides personal income into three categories: composite income (including employment income, interest, dividends, pension, etc.), severance income, and capital gains. Composite income, taxed at a progressive tax rate, is subdivided into Korean and non-Korean business entities. Korean entities report wages and withheld social security contributions for employees. In contrast, an individual employed by non-Korean business entities, is responsible for reporting their own income information. Some composite income like employer-related automobile and meal allowances are non-taxable. It is also noteworthy that there are different income tax exemptions for foreign employment income.

Legitimate expenses can be deducted from business and self-employment income which are both classified as composite income. There are also special tax exemptions for a variety of small and medium-sized businesses. Financial income (interest and dividends) is included in composite income. Capital gains, however, is considered a different income category and thus receives a separate tax treatment.

Composite income tax returns and full payment of any tax balance due must be filed between May 1 and May 31 in the year following the previous tax (calendar) year. There are no tax filing extensions in the Korean tax code. Self-employed individuals are required to make periodic interim payments during any specific tax year to offset a tax liability. A foreign national is required to file their tax return at least one day before they leave the country.

Expat Tax Withholding In South Korea

Under the Korean National Pension Law, any workplace with one or more employees must contribute to a mandatory pension program shared by both employer and employee. There are also national health, accident, and unemployment insurance plans. Foreign nationals can request an exemption from the Korean health program if they can provide acceptable documentation.

What You Need To Know About US Expat Tax In South Korea

When dealing with US expat tax in South Korea, there are a number of preferential expat tax treatments that may benefit your U.S. expatriate tax return. In fact, for many U.S. expats, the Foreign Earned Income Exclusion (IRS Form 2555) and other deductions will reduce your U.S. taxes to zero.

Some of these preferential tax treatments or benefits for US expat tax in South Korea include:

• If you are a U.S. citizen or a resident alien of the United States and you live in South Korea, your US expat tax in South Korea is based on your worldwide income and as such you must file a U.S. return for all the years that you are residing in South Korea. However, as a U.S. expat you may qualify to reduce your U.S. taxable income up to an amount of your foreign earnings that is adjusted annually for inflation ($99,200 for 2014). In addition, you can exclude or deduct certain foreign housing amounts. This is known as the Foreign Earned Income Exclusion and foreign housing exclusion.
• When it comes to your US expat tax in South Korea, most US expatriates worry about “double taxation” – paying taxes to two different countries – the U.S. and South Korea. A U.S. taxpayer working overseas in South Korea may be able to reduce U.S. taxable income and “double taxation” by claiming the Foreign Tax Credit on Form 1116. Should any foreign income not be fully offset by the foreign earned income exclusion, housing exclusion or housing deduction, the foreign tax credit paid or accrued may be used as a deduction or credit on the U.S. tax return. Taxpayers can elect to either deduct the taxes as an itemized deduction on Schedule A or claim a credit against tax. In most cases, it is to your advantage to take foreign income taxes as a tax credit.

A common but dangerous mistake is the assumption that if there are zero taxes owed with these tax benefits that a return for US expat tax in South Korea does not need to be filed. That is not true. If you are working overseas, it is likely that you meet the filing requirements to file a tax return and must do so. It is important to note that the preferential tax treatments, such as the foreign earned income exclusion and foreign tax credit are not applicable to the outcome of your tax liability until they are claimed on a filed tax return.

When faced with US expat tax in South Korea there are many tax items to consider, but the above are by far the most common preferential tax benefits. With top-notch experienced and knowledgeable expat tax preparation from Tax Samaritan, you can be assured that you are paying the minimal amount of U.S. taxes that you are legally obligated for.

South Korea Foreign Bank Account Reporting – The FBAR (FinCen Form 114)

Another important tax deadline that frequently applies to US expat tax in South Korea is in regards to the disclosure of foreign assets on the FBAR (Foreign Bank Account Report – Form 114 – formerly known as TD F 90-22.1).

The FBAR filing deadline is June 30th (or the preceding business day if June 30th falls on a weekend). Unfortunately, requesting an extension on your individual return does not extend the FBAR due date – there is no extension available for the FBAR deadline. Any reports filed after this date are considered a delinquent FBAR. In addition, the FBAR is different than many other tax forms in that it must be received by the deadline date (and not postmarked by the deadline date).

The FBAR must be filed with the Treasury Department (it is not filed with your federal income tax return) whenever you meet the FBAR filing requirements, which in a nutshell is whenever a U.S. person has a financial interest in, or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust or other type of foreign financial account (including an insurance policy with a cash value such as a whole life insurance policy) maintained with a financial institution, with an aggregate value of over $10,000 at any time during the calendar year based on the highest value of each foreign account during the tax year.

If you have bank accounts at Bank of Korea (central bank), Busan Bank, DGB Financial Group (holding company for Daegu Bank), Industrial Bank of Korea (IBK), Hana Financial Group, Korea Exchange Bank (KEB), and KB Kookmin Bank (retail) or at another bank in South Korea or any other foreign country, you may meet the filing requirement to disclosure your foreign accounts on the FBAR. Please don’t hesitate to contact Tax Samaritan to learn more about your filing requirements.

U.S. – South Korea Social Security Totalization Agreement

The United States has entered into agreements, called Totalization Agreements, with several nations for the purpose of avoiding double taxation of income with respect to social security taxes. These agreements must be taken into account when determining whether any alien is subject to the U.S. Social Security/Medicare tax, or whether any U.S. citizen or resident alien is subject to the social security taxes of a foreign country. As of this time, South Korea has entered into a Totalization Agreement with the United States thus there is no opportunity to avoid double taxation of social security income for US expat tax in South Korea.

U.S.- South Korea Tax Treaty And Tax Relief For US Expat Tax In South Korea

The United States does has a separate tax treaty with South Korea. The US Internal Revenue Code offers tax credits against any South Korea income tax. See our Tax Samaritan Takeaways below for other valuable references.

Request A Tax Preparation Quote

Our goal at Tax Samaritan is to provide the best counsel, advocacy and personal service for our US expat tax in South Korea. We are not only tax preparation and representation experts, but strive to become valued business partners to American expatriates in South Korea. Tax Samaritan is committed to understanding our client’s unique needs; every tax situation is different and requires a personal approach in providing realistic and effective solutions.

Click the button below to request a Tax Preparation Quote today to get started with the preparation of your return for US expat tax in South Korea or to request a free 30-minute tax consultation.

Tax Samaritan Takeaways

Please click on the hyperlinks below for additional takeaways for your expat tax in South Korea:

Tax Samaritan Expat Tax Services

2014 IRS Publication 54, Tax Guide for US Citizens and Resident Aliens Abroad

US Embassy in Seoul

Republic of Korea Consulate – Washington, DC

Korea.net

Tax Samaritan is a team of Enrolled Agents with over 25 years of experience focusing on US expat tax in South Korea and throughout the world. We maintain this tax blog where all articles are written by Enrolled Agents. Our main objective is to educate US taxpayers on their tax responsibilities and the selection of a tax professional. Our articles are also designed to help taxpayers looking to self prepare, providing specific tips and pitfalls to avoid.

When looking for a tax professional, choose carefully. We recommend that you hire a credentialed tax professional such as Tax Samaritan that is an Enrolled Agent (America’s Tax Experts) that is experienced and knowledgeable about US expat tax in South Korea. If you are a US taxpayer overseas, we further recommend that you seek a professional who is experienced in expat tax preparation, like Tax Samaritan (most tax professionals have limited to no experience with the unique tax issues of expat taxpayers).

Randall Brody is an enrolled agent, licensed by the US Department of the Treasury to represent taxpayers before the IRS for audits, collections and appeals and experienced with US expat tax in South Korea. To attain the enrolled agent designation, candidates must demonstrate expertise in taxation, fulfill continuing education credits and adhere to a stringent code of ethics.

Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional US expat tax in South Korea advice based on your individual needs.