Taxes and U.S. Expats in South Korea

South Korea is a small country in East Asia that has risen from the ashes of the Korean War. The Korean peninsula was split into two countries as a consequence of the war, but citizens of South Korea are optimistic that the North and South can once again be reunited into a single nation.

If you are planning to become a U.S. expat in South Korea, or have been one for a while, it’s important to know the tax laws of the country and the potential impact on your U.S. tax return. Expat taxes can get complicated. Fortunately, we have outlined the key points below.

Photo by: Emmanuel DYAN

Taxation in South Korea

Let’s start by understanding who is required to pay taxes in South Korea. Residents are taxed on worldwide income while non-residents on South Korean-source income only. Foreigners who maintain a domicile or residence in South Korea for one year or longer are generally considered residents for tax purposes.

The tax system in South Korea is progressive. The income tax rates are as follows:

• Employment Income: Progressive 6% to 38% (additional resident tax of 10% applies) – Separate rates exist for non-residents without a place of business in Korea;
• Interest Income: Same as employment income;
• Dividend Income: Same as employment income;
• Capital Gains: Tax rate varies (depending on asset classification).

South Korea and the U.S. have an income tax treaty in-place. International tax treaties clarify tax jurisdiction. These treaties can provide U.S. citizens and residents with reductions in foreign income taxes. However, a reduction in U.S. taxes is generally not available under these treaties as a result of “tax saving” clauses that allow the U.S. government to impose taxes on U.S. expats as if there were no treaty.

Note that South Korea and the U.S. have a social security tax agreement in-place. Therefore, you can avoid dual-taxation.

How Living in South Korea Impacts US Taxes

As a U.S. citizen or permanent resident (Greencard), you are required to file U.S. taxes even if you live in South Korea. Plus, if you have assets in foreign financial accounts (e.g., foreign banks), there are informational reports you may be required to file. For example, U.S. Expats Living in South Korea with $10,000 or more in foreign banks must file the FBAR (now known as FinCen 114).

Fortunately, the U.S. government provides various forms of tax relief that can lower or eliminate U.S. tax obligations

• The Foreign Earned Income Exclusion – It allows you to exclude a certain amount of income earned outside the U.S.
• The Foreign Housing Exclusion/Deduction – This one relates to additional income that can be excluded for household-related expenses tied to living abroad.
• The Foreign Tax Credit – It allows you to offset foreign taxes paid against U.S. tax obligations.

In most cases, the foreign earned income exclusion is preferable to the foreign tax credit if you live in a country with a lower tax rate than the U.S. (assuming your income is not above the applicable threshold). However, it’s a good idea to speak with an expat tax specialist to discuss the best application of these tax reliefs.

FATCA and South Korea

The U.S. government is increasingly interested in knowing about the foreign assets held by its citizens and residents. As a result, it has been busy inking deals with other countries whereby foreign financial institutions (FFIs) will be required to:

• Identify accounts of U.S. persons;
• Report certain information to the IRS regarding those accounts;
• Withhold a 30% tax on certain payments to non-participating FFIs and account holders unwilling to provide the required information

As of the publication of this article, roughly 100 countries have either signed intergovernmental agreements with the United States or are in discussions. It is important to know that South Korea does have a FATCA agreement in-place with the U.S.

If you have any questions regarding your U.S. expat taxes, contact us today. We are here to help.