This is a guest post by David Reed. (Thanks David!)
Taxes can be daunting, but luckily in this day and age there are several outlets for getting assistance. Before we get started I have to tell you first and foremost, I am NOT a tax professional. The information included in this post should not be taken as authoritative or all-inclusive. If you have questions about your taxes or are unsure in any way contact a tax professional. For this post I will be using the IRS information posted here: http://www.irs.gov/pub/irs-pdf/p54.pdf All page numbers listed are from this document.
Now that the legal bit is out of the way lets get to work. I am going to assume you have filed your taxes before in the States and understand the general process. I will assume you know how to fill out a general 1040 or 1040EZ form using an online program (Like Turbotax) before and don’t need a step by step walk through. The purpose of this post is to take you through the Expatriate process which is just a couple of extra steps.
First, the federal government states that there are only five different programs that they approve for doing your taxes online. However, they don’t tell you which programs these are. I have found two of these: Turbotax and Taxact. I have used Turbotax in the past and found it very simple and intuitive but it costs $30 to file your state taxes. This year I used Taxact and although it only costs about $15 to file your state taxes, it isn’t quite as intuitive as Turbotax.
When you are filing your taxes you will go through all of the normal steps associated with the Form 1040. This is the form you most likely filed with in the States. After the 1040 you are faced with a choice. You can either file for a Foreign Income Tax Credit (Form1116) (Page 32) or Foreign Income Exclusion (Form 2555) (Page 22). Both of these forms have different pros and cons.
The tax credit is a credit to your income for the amount of tax you paid to a foreign government. This credit allows you to lesson your U.S. income. With this credit you can still claim any other tax credits you normally would (Like school loan interest). However, in order to get this credit you must claim your foreign income as U.S. income, which will likely cost you thousands in tax! In my opinion… a bad idea.
Option two is to exclude your foreign income. You can exclude up to $92,900 for single and $185,800 for married couples. I know what you’re thinking: “We barely squeaked through that one.” By filing Form2555 (or 2555EZ) you don’t allow the government to charge you on the income you earned while abroad. This is very nice when you are trying to not pay taxes; however, there is a catch. If you exclude your income, you can’t use it to get any tax breaks from America. What this means is if you used your Korean income to pay student loan interest, don’t expect to claim a tax break on that interest. That would be like keeping all of the cookies to yourself and then telling your brother he owes you half of his because he should share. You can, however claim charitable contributions to U.S. charities and churches made with your income. You cannot write off contributions to Korean churches and charities.
After you choose which form you will be filing you may have to do a search on your tax program for the appropriate forms. For tax act there is a search bar on the right side middle of the page. Just type in Form 2555 then click “Go To Form2555.” If you do file form 2555 then when you are filing your 1040 DO NOT enter an income amount. You have no W2 anyway so this will be easy to skip.
But wait, there’s more! There is also a foreign housing write off for taxes if you are paying for your own housing (Page 12). You can also choose to exclude that amount instead of deduct it (Page 21). I will let you read about that for yourself. You can also right off moving and storage expenses incurred because of work… as long as you didn’t get reimbursed for them and they were paid with US income and not excluded income. Typically if you paid for them with the money you earned before moving then you may be able to get a break.
“I didn’t know about the income exclusion last year when I did my taxes. What can I do?” You can turn back the hands of tax time by contacting the IRS (See page 20).
“I am a REALLY good teacher and I get paid more than $92,900 a year… is there any help for me?” Maybe. Contact an IRS agent and ask them about the tax treaty with South Korea for teachers and professors under TIAS 9506 citation 1979-2 C.B. 435 (Page 34).
“Oh, No! It is April 16th and I didn’t do my taxes!” No worries, you get an automatic 2 month extension, but you must include a written statement saying you have been a bona fide resident of South Korea for the past year (Page 4).
“The two month extension wasn’t enough! I need more time!” You can apply for an additional four month extension but you must make an estimated tax payment within the original 2 month period (Page 4).
“The IRS is trying to charge me Social Security, Help!” First, stop yelling at me… then politely mention the Totalization Agreement with South Korea (We can’t be charged by both countries) (Page 10).
If you have any more questions or concerns read through the document listed at the beginning of this post. This is Pub. 54 from the IRS so it is authoritative. (I am not.) In summary, file Form 2555 and don’t claim tax breaks for foreign money. God Bless!