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U.S. Federal Income Tax Obligations For U.S. Expatriates Living/ Working in South Korea

The Basics – South Korea

South Korea’s capital and largest city is Seoul officially the Republic of Korea or ROK is a country in East Asia, constituting the southern part of the Korean Peninsula, and sharing a land border with North Korea

The Korean Empire was annexed into the Empire of Japan in 1910. After World War II when Japan lost the war, Korea was divided into Soviet and U.S.-administered zones, with the latter becoming the Republic of Korea (ROK) in August 1948. In 1950, a North Korean invasion began the Korean War and after its end in 1953, the country’s economy began to soar, recording the fastest rise in average GDP per capita in the world between 1980 and 1990.

The June Struggle led to the end of authoritarian rule in 1987 and the country is now the most advanced democracy and has the second-highest level of press freedom in Asia, after Cyprus. However, corruption and political scandals remain a serious problem, with half of all living former South Korean presidents currently in prison for various crimes ranging from abuse of authority, bribery and embezzlement.

South Korea is a highly developed country with famous home grown companies such as Samsung, Hyundai Motors, Kia Motors, and of course LG Electronics. Its citizens enjoy one of the world’s fastest Internet connection speeds. Since the 21st century, South Korea has been renowned for its influential pop culture, particularly in music (K-pop), TV dramas and cinema, a phenomenon referred to as the Korean Wave.

South Korea comprises a total area of 38,750 sq miles is the 107th largest country in the world by area, has a population of 51,709,098 people and a GDP of 2.293 trillion U.S. dollars. South Korea’s currency is the is the KRW or Won, the South Korea’s time zone is +9 UTC, South Korea’s country telephone dialing code is +82, it’s internet TLD is “.kr” and it operates on a 220 volt electrical grid.

The U.S. and South Korea. share no common languages with South Korea’s speaking officially Korean. As the developing main Asian economy (although Japan and China would disagree) , highly technologically advanced and a key military safe zone for U.S. protectionist policies to guard against a Communist takeover from the North, this makes South Korea a popular destination for Americans to reside and work.

As a U.S. citizen or resident alien (U.S. Expat) living in South Korea, however, there is always the possibility of “double income taxation,” i.e., having to pay taxes to both South Korea and the U.S. on the same income you earned in South Korea. The good news is that there are rules in place to avoid double taxation.

Knowing your obligations as a U.S. Expat are important. The Internal Revenue Code’s (IRC) rules are, however, quite complex, and while this is a simplified, broad overview to familiarize you with your filing obligations and how to avoid double taxation, you should consult a Certified Public Accountant (CPA) expert in U.S. Expat income taxation to learn more. U.S. Expat income taxes are a highly complex niche area of taxation that most CPA’s are not aware of.

U.S. Tax Obligations on U.S. Expats Living in South Korea

The U.S. imposes the same obligations on its citizens and resident aliens living abroad to file and pay U.S. federal income taxes, as it does on its citizens and residents living and working in the U.S. 

Filing deadlines and Extensions Living/Working in South Korea

If you are required to file a U.S. individual income tax return Form 1040, you must file by April 15, however there is an automatic two-month extension until June 15 if you reside in the U.K. on April 15 and meet certain requirements.  There are other extensions beyond June 15 that U.S Expats can utilize, including the filing a Form 4868- for an automatic six-month extension of time to file until October 15, and an additional and little known about white paper IRS discretionary extension to December 15 if you reside in South Korea, but, again, you have to meet the IRS requirements to use this extensions.

However, no matter how many extensions are utilized, any income taxes owed are still due by April 15, as the extensions are only an extension of time to file not to pay your U.S. income taxes!

How to Report Income and Expenses Living/Working in South Korea

The U.S. Form 1040 is always expressed in U.S. dollars, using exchange rates as prescribed or otherwise allowed by the IRS.  Generally, for income or expense items we use the average Ask rate for the calendar tax year in question, and for gains and losses the daily spot rates.

Avoiding Double Taxation

If you meet the annual income tax filing thresholds referred to above, you are technically required to file and report worldwide income for U.S. income tax purposes on the same income you are also obligated to pay taxes on to South Korea.  The good news is that, if you pay income taxes to South Korea on income you earned there, the U.S. IRC has provisions in place to let you avoid double income taxation, using both:

  • Use a Foreign Earned Income Exclusion (FEIE) thereby excluding earned income –income earned in South Korea when determining U.S. income taxes and / or
  • Obtaining a Foreign Tax Credit (FTC) for the taxes you paid, or have accrued, to South Korea against the taxes you owe to the U.S.

The Exclusions – HE and HD

As a U.S. Expat living in South Korea, you may also qualify for the:

  • “Housing Exclusion” (HE) if employed or
  • “Housing Deduction” (HD) if self-employed.

Both Housing mechanisms referred to above allow U.S. Expats to exclude additional FEI from their U.S. Federal income taxation in reference to actual, qualified, foreign, housing expenses paid for by themselves or by their employers either directly or by reimbursement in South Korea.

Qualified foreign housing expenses can include, but are not limited to such items such as South Korea:

  • Rent,
  • The fair market value of employer provided housing,
  • Furniture rental, and
  • Temporary living expenses.
  • Real estate/ property taxes
  • Etc…

However, to take either the HE or the HD you must first be qualified to take the FEIE, and the IRS sets annual limits- a base or housing Norm/ or Deductible and a Cap- on either of the Housing Exclusions or Deductions, which are determined in reference to the FEIE itself. 

The U.S. FTC

In addition to the FEIE, HD and HE, U.S. Expats living / working in South Korea can also claim the U.S. Foreign Tax Credit (FTC) on Form 1116 for taxes paid or accrued to South Korea on the FEI above but not on that already excluded using the FEIE and HE or HD.  In other words, there is no double counting the U.K. income or South Korea foreign tax that can be used in hybrid with both he FEIE / HE/ HD and the FTC. 

The maximum FTC credit you can take is limited to the lower of:

  • Actual taxes paid or accrued to South Korea on that South Korea FEI or
  • The U.S. Federal Income tax you would have paid on that South Korea FEI.

Note that you may also take the FTC on passive income, using a different category and Form 1116- FTC.

However, remember that since the U.S. FTC is limited as explained above, according to the limitation above you will always end up paying the higher of the two income taxes, which in this case is to South Korea.

The Form 114 FBAR and Form 8938 FFA

Not to forget or marginalize the fact that all U.S. persons must consider their obligation annually to file Form 114 Report of Foreign Bank and Financial Accounts (FBAR) and Form 8938 Statement of Specified Foreign Financial Assets (FFA) , the former of which is specifically referenced on Schedule B – Interest and Dividends- that accompanies Form 1040, the fact that if you are required to file both the FBAR and FFA Forms as a U.S. Expat living and/ or working in South Korea the amounts on both forms  must sync and of course that both forms carry a mind boggling non-willful violation penalty of $10,000 per account/ FFA per annum

The Bottom Line

Because South Korea sets income taxes on income at much higher rates than the U.S., if the U.S. income tax compliance is done correctly, in general assuming no U.S. source income- no U.S. passive income and no U.S. workdays- you should never have to pay any additional U.S. Federal Income taxes on income you earned in South Korea.

As you can see, however, the rules are complex, and it is easy to get overburdened if you do not hire the correct CPA firm U.S. Expat specialists.

At Protax, our primary goal and objective is to analyze the interplay of the FEIE, HD, HE and FTC to find the optimum strategy to limit the world-wide taxes you pay. While of course at the same time making sure that you are in full U.S. tax compliance.

Protax is the world’s leading U.S. individual international tax firm, specializing in the delivery of world class professional services to U.S. Expats. For more information, fill out our contact form to speak to one of our expert tax consultants.


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