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!
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