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Attention all Americans: taxes explained...
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hypnotoad777

Joined: 05 Apr 2010

Posted: Thu Jun 24, 2010 1:27 pm Post subject:

So does anyone know what happens after two years of having the residency certificate? Are you then to pay American taxes in full? Or is there a way to just pay the much lower Korean taxes? If there is that would certainly be a relief.

naturegirl321

Joined: 18 Jul 2006
Location: Home sweet home

Posted: Thu Jun 24, 2010 4:34 pm Post subject:

hypnotoad777 wrote:

So does anyone know what happens after two years of having the residency certificate? Are you then to pay American taxes in full? Or is there a way to just pay the much lower Korean taxes? If there is that would certainly be a relief.

Basically, if you fulfill the reqs on the 2555 or 2555ez, then no US taxes. First you have to fulfill the reqs. Take a look at the form.

First, you have to file the form in order to get out of Korean taxes, then fulfill all the reqs in the long form 2555, and you get out of both.

EACH year, you have to fulfill the 2555 reqs to get out of US taxes. At the end of two years, then you just pay Korean taxes and file the 2555ez. If you fulfill the 2555ex reqs, then no US taxes, but you'll be paying Korean ones.

It's a loophole, in theory you're not supposed to get out of BOTH taxes, BUT, if you stay out of the US for 330 days or more a year, then you can file the 2555ez. And if you get the Form from the IRS, then no Korean taxes for two years.

hypnotoad777

Joined: 05 Apr 2010

Posted: Thu Jun 24, 2010 4:51 pm Post subject:

Nature girl, I think I'm in love with you. Also, don't you mean if you stay out of Korea (not the US) for that time and return you don't pay Korean taxes?

naturegirl321

Joined: 18 Jul 2006
Location: Home sweet home

Posted: Thu Jun 24, 2010 4:55 pm Post subject:

hypnotoad777 wrote:

Nature girl, I think I'm in love with you.

Also, don't you mean if you stay out of Korea (not the US) for that time and return you don't pay Korean taxes?

Married

No, I mean that in order to file the 2555, there are two things you can do:
1. be a foreign bona fide resident (which you can do if you don't pay Korean taxes)
2. Stay outside of the US for 330 or more days a year. That's the physical presence test.

Fulfill ONE Of those and you don't pay US taxes. Of course you WILL have to pay US taxes on somethings, such as self employment, Soc Sec stuff, or if you make more than 91,400 a year.

Look
http://www.irs.gov/pub/irs-pdf/f2555.pdf

For not paying Korean taxes, you just file the US form. Good for two years. If you're at a PS, it might be automatic. I know for the place I work, it wasn't.

isitts

Joined: 25 Dec 2008
Location: Korea

Posted: Tue Aug 03, 2010 6:19 am Post subject:

carleverson wrote:

This is a bit off-topic, but isn't the 2555-EZ not the 2555 the proper form we need to fill out to get our foreign income excluded??

Also, do we fill out a regular 1040 form for "U.S. Individual Income Tax Return" or another form??

One last question, if we are filing past years' tax returns is there a form we need to fill out to tell the IRS we're filing late???

If anyone could provide some answers, I'd be gateful.

Either the 2555 or 2555 EZ is fine. And the regular 1040. File them together.

On your 1040, you put your foriegn earned income under "other income" (line 21).

If you use TurboTax, all this is very easy.

No need to say you're filing late as long as you don't owe anything.

If you had wanted to play by the rules, then you would have needed to file one or two extentions (before April 15th) in order to pass the physical presence test (for your 2555). But again, as long as you don't owe any money to the IRS, it's fine. I e-filed two days ago and it was accepted.

naturegirl321

Joined: 18 Jul 2006
Location: Home sweet home

Posted: Tue Aug 03, 2010 3:47 pm Post subject:

isitts wrote:

carleverson wrote:

It really depends. If you filed a US residency cert, you CANNOT file the 2555 ez. you'll have to file the 2555 long form. Also, if you have self employed, you can't file the 2555 ez. Look at the instructions. They're not that bad compared to the 1040-.

working title

Joined: 20 Apr 2010

Posted: Wed Jan 26, 2011 9:51 pm Post subject:

Do U.S. Citizens pay a payroll (social security) tax regardless of the foreign income exemption? And, FYI, to get out of California State taxes you must stay out of the state for a minimum of 45 days per 18 months (the 18 months is on a rolling basis), also, keep your contacts in CA to a minimum (Drivers licenses, voting, etc), or else the state of CA can come after you for 10% state taxes.

naturegirl321

Joined: 18 Jul 2006
Location: Home sweet home

Posted: Thu Jan 27, 2011 6:37 am Post subject:

working title wrote:

Do U.S. Citizens pay a payroll (social security) tax regardless of the foreign income exemption?

And, FYI, to get out of California State taxes you must stay out of the state for a minimum of 45 days per 18 months (the 18 months is on a rolling basis), also, keep your contacts in CA to a minimum (Drivers licenses, voting, etc), or else the state of CA can come after you for 10% state taxes.

If you make over $91,500, then yes.
If you have self employment income, then yes.
If you have other income, like inheritance, interest, CDs, stocks, bonds, SOc security income, rental, etc, then yes.

sundizz

Joined: 17 Dec 2009

Posted: Thu Feb 10, 2011 8:15 pm Post subject:

When using TurboTax do you know if it is necessary to file STATE and FEDERAL taxes (for USA)??

naturegirl321

Joined: 18 Jul 2006
Location: Home sweet home

Posted: Mon Feb 14, 2011 7:43 pm Post subject:

sundizz wrote:

When using TurboTax do you know if it is necessary to file STATE and FEDERAL taxes (for USA)??

I don't file state, just federal. It depends on your tax situation, if you have property, etc, you might need to pay state as well.

emmahearst

Joined: 10 Jan 2011

Posted: Tue Feb 15, 2011 10:14 am Post subject: Re: Attention all Americans: taxes explained...

Thanks for info.

Konglishman wrote:

I have noticed that there are now several threads asking very basic questions about paying taxes while working overseas. Further, I have become concerned because it seems that there is lot of misinformation floating around in these threads. Hence, I have decided to create this thread which I might add has helped clarify my own understanding of how the IRS taxes foreign income.

Note that for your convenience, I will be showing quotes from the IRS website. Also, keep in mind that this original post has been edited a number of times in order to make sure that it is fully accurate and comprehensive.

First of all, it is very easy to contact the IRS directly and get your answers straight from the horse's mouth so to speak. So, I am going to leave all of their relevant contact numbers below. This way, if you doubt what I tell you later in this post, you can easily call the IRS yourself and confirm what I have written. By the way, it will be easiest if you just call the first number. If you are already in South Korea, as most of you probably are, then you can call the number on skype. Also, based on my experience, I have found that you are more likely to get someone who on the phone if you call in the morning (Eastern Time Zone).

Quote:

Live Telephone Assistance
When calling, you may ask questions to help you prepare your tax return, or ask about a notice you have received.

Telephone Assistance for Individuals:
Toll-Free, 1-800-829-1040
Hours of Operation: Monday � Friday, 7:00 a.m. � 10:00 p.m. your local time (Alaska & Hawaii follow Pacific Time).

Telephone Assistance for Businesses:
Toll-Free, 1-800-829-4933
Hours of Operation: Monday � Friday, 7:00 a.m. � 10:00 p.m. your local time (Alaska & Hawaii follow Pacific Time).

Telephone Assistance for Exempt Organizations, Retirement Plan Administrators, and Government Entities:
Toll-Free, 1-877-829-5500
Hours of Operation: Monday � Friday, 7:00 a.m. to 5:30 p.m. Central Time.

Telephone Assistance for people with hearing impairments:
Toll-Free 1-800-829-4059 (TDD)
Hours of Operation: Monday � Friday, 7:00 a.m. � 10:00 p.m. your local time (Alaska & Hawaii follow Pacific Time).
For further information, see Tax Topic 102.

Telephone Assistance for Individuals who believe they may be a victim of Identify Theft: No Tax Administration Impact - Did not receive a notice from the IRS. Toll-Free 1-800-908-4490 (Automated and live assistance)
Hours of Operation: Monday � Friday, 8:00 a.m. � 8:00 p.m. your local time (Alaska & Hawaii follow Pacific Time). For additional information, refer to our Identity Theft and Your Tax Records page.

Telephone Assistance for people who live outside the United States
Hours of availability vary by location. Please see our International Services page.

Face-to-Face Assistance
In certain areas, IRS also has local offices you may visit to receive assistance.

http://www.irs.gov/help/article/0,,id=96730,00.html

Second, lets discuss the Form 2555 (Foreign Income Exclusion). This allows any foreign income at or below $91,400 to be nontaxable. If your foreign income is more than $91,400, then you will only be taxed as if you were making $91,400 less. In other words, your first $91,400 of foreign income is excluded for tax purposes. Of course, for the majority of you, this means that you will not owe any taxes. But once again, you are still required to file your taxes with the IRS.

Quote:

If you are a U.S. citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. However, you may qualify to exclude from income up to $91,400 of your foreign earnings. In addition, you can exclude or deduct certain foreign housing amounts.

http://www.irs.gov/businesses/small/international/article/0,,id=97130,00.html

Now, lets move on to the exact requirements that you will need to fulfill in order to qualify for the foreign income exclusion. Note that using the physical presence test is the most convenient requirement to fulfill. Also, for reasons that I will discuss later, you probably do not want to file as a bona fide resident.

Quote:

To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you must have foreign earned income, your tax home must be in a foreign country, and you must be one of the following:

-A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year
-A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or
-A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months

http://www.irs.gov/businesses/small/international/article/0,,id=96817,00.html

Also, if you lived overseas for part of a given tax year after having previously passing the bona fide residence test or the physical presence test during the previous tax year, then the Foreign Income Exclusion for the given tax year will be prorated. Pages 19 to 20 show how the Foreign Income Exclusion is prorated in this type of situation.
http://www.irs.gov/pub/irs-pdf/p54.pdf

Next, lets discuss the Korea Income Tax Treaty. As many of you already know, if you work for a public school or university, this usually allows you to be exempt from paying the Korean income tax for the first two years. It is also interesting to note that this allows Korean teachers teaching in the USA, to be exempt from paying the Federal Income Tax for the first two years.

Quote:

(1) Where a resident of one of the Contracting States is invited by the Government of the other Contracting State, a political subdivision, or a local authority thereof, or by a university or other recognized educational institution in that other Contracting State to come to that other Contracting State for a period not expected to exceed 2 years for the purpose of teaching or engaging in research, or both, at a university or other recognized educational institution and such resident comes to that other Contracting State primarily for such purpose, his income from personal services for teaching or research at such university or educational institution shall be exempt from tax by that other Contracting State for a period not exceeding 2 years from the date of his arrival in that other Contracting State.

http://www.irs.gov/pub/irs-trty/korea.pdf

Presumably, after two years, someone could leave Korea for an extended period of time and then qualify again for the Korean tax exemption. However, it is unclear to me how that might work. For example, it might be as simple as getting a new job in Korea after two years and leaving for a short period of time. Or perhaps, the regulations prevent one from taking advantage of the tax treaty in such a scenario. As I am not personally intending to be in Korea beyond another two years, it has not occurred to me until now to ask the NTS (Korean National Tax Service) about this. Perhaps, when I get around to it, I will a Korean friend ask them about this specific question.

Now, in order to be allowed to take advantage of the Korea tax treaty, you must apply for the Certificate of Residency from the IRS. When I talked to the IRS, I was told that it takes 45 days for the application to be processed. You will find the application and instructions below.
http://www.irs.gov/pub/irs-pdf/f8802.pdf
http://www.irs.gov/pub/irs-pdf/i8802.pdf

Also, it is worth noting that if you did not file your taxes when you were supposed to, this can potentially prevent you from getting the Certificate of Residency. So, file your taxes!
You will find this disqualification on page 3 of the 8802 instructions. Note that being a nonresident U.S. citizen is not considered as a possibility. Therefore, simply living outside of the U.S., is not a disqualification.

Quote:

Who Is Not Eligible for Form 6166
In general, you are not eligible for Form 6166 if, for the tax period for which your Form 6166 is based, any of the following applies:
-You did not file a required U.S. return.
-You filed a return as a nonresident (including Form 1040NR, U.S. Nonresident Alien Income Tax; Form 1040NR-EZ, U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents; Form 1120-F, U.S. Income Tax Return of a Foreign Corporation; Form 1120-FSC, U.S. Income Tax Return of a Foreign Sales Corporation; or any of the U.S. possession tax forms).
-You are a dual resident individual who has made (or intends to make), pursuant to a tie breaker provision within an applicable treaty, a determination that you are not a resident of the United States and are a resident of the other country. For more information and examples, see Reg. section 301.7701(b)-7.
-You are a fiscally transparent entity organized in the United States (that is, a domestic partnership, domestic grantor trust, or domestic LLC disregarded as an entity separate from its owner) and you do not have any U.S. partners, beneficiaries, or owners.
-The entity requesting certification is an exempt organization that is not organized in the United States.

http://www.irs.gov/pub/irs-pdf/i8802.pdf

I have noticed that a number of posters on this forum, seem to think that using the Korean tax exemption disqualifies one from using the Foreign Income Exclusion. In fact, I initially thought the same thing. However, after my upcoming employer asked me to get the Certificate of Residency, I decided that I had better find out for sure. So, I called the IRS and to my pleasant surprise, was told that the Korean tax exemption in no way disqualifies one from using the Foreign Income Exclusion. Now, I have found a very good quote from the IRS which directly implies this to be the case. You can find the quote on page 34 of Publication 54.

Quote:

Saving clauses. U.S. treaties contain saving clauses that provide that the treaties do not affect the U.S. taxation of its own citizens and residents.

http://www.irs.gov/pub/irs-pdf/p54.pdf

In short, it does not matter what kind of benefits you are getting from a tax treaty. It will have no effect on how you are taxed by the U.S. government. Therefore, you can still file the Foreign Income Exclusion even if you are exempted from paying the Korean income tax.

However, if you are a legal resident or a bona fide resident of South Korea, then you will likely not qualify for the 6166 (Certificate of Residency). In this case, a legal resident would be a F series visa holder. Note that E series visa holders do not count as legal residents since they are only considered to be guest workers.

You could also be determined to be a bona fide resident if you have been in South Korea for a year or longer and clearly do not intend to go back to the U.S. In short, you would have established a permanent home in Korea. And of course, the IRS will consider you a bona fide resident of South Korea if you filed the Foreign Income Exclusion as a bona fide resident.

The reason that you could be denied due to being a legal resident or bona fide resident of Korea is because you would be arguing that you are a dual resident if you are applying for the Certificate of Residency. However, it is still possible that you could qualify. If so, you will need to provide evidence and explain why you qualify according to the provisions of the Korea Income Tax Treaty.

Also, I should mention the more common situation of a nonresident worker who files the 2555. Note that many if not most E series visa holders fit into that category. If you fit into this category, then you will need to provide a statement explaining why you should still be considered a resident of the U.S. Also, you will need to provide documentation of things such as your driver's license, bank account, etc.

Finally, read the following below which is on page 3 of the instructions for 8802.

Quote:

Individuals With Residency Outside the United States
If you are in any of the following categories for the year which certification is requested, you must submit a statement and documentation, as described below, with Form 8802.
1. You are a resident under the internal law of both the United States and the treaty country for which you are requesting certification (you are a dual resident).
2. You are a green card holder or U.S. citizen who filed Form 2555, Foreign Earned Income.
3. You are a bona fide resident of a U.S. possession.

If you are a dual resident described in category 1, above, your request may be denied unless you submit evidence to establish that you are a resident of the United States under the tie breaker provision in the residence article of the treaty with the country for which you are requesting certification.

If you are described in category 2 or 3, attach a statement and documentation to establish why you believe you should be entitled to certification as a resident of the U.S. for purposes of the relevant treaty. Under many U.S. treaties, U.S. citizens or green card holders who do not have a substantial presence, permanent home, or habitual abode in the United States during the tax year are not entitled to treaty benefits. U.S. citizens or green card holders who reside outside the United States must examine the specific treaty to determine if they are eligible for treaty benefits and U.S. residency certification.

http://www.irs.gov/pub/irs-pdf/i8802.pdf

Now, in order to determine if you qualify for the Certificate of Residency as a dual resident, you must examine what the Korea Income Tax Treaty says. Note that the treaty shows that you qualify if it determines that for purposes of avoiding double taxation, you will be considered only a resident of the U.S. You will find the rules that determine whether or not this is true under Article 3 Fiscal Domicile.

Quote:

(2) Where by reason of the provisions of paragraph (1) an individual is a resident of both Contracting States:
(a) He shall be deemed to be a resident of that Contracting State in which he maintains his permanent home;
(b) If he has a permanent home in both Contracting States or in neither of the Contracting States, he shall be deemed to be a resident of that Contracting State with which his personal and economic relations are closest (center of vital interests); (c) If his center of vital interests is in neither of the Contracting States or cannot be determined, he shall be deemed to be a resident of that Contracting State in which he has a habitual abode;
(d) If he has a habitual abode in both Contracting States or in neither of the Contracting States, he shall be deemed to be a resident of the Contracting State of which he is a citizen; and
(e) If he is a citizen of both Contracting States or of neither Contracting State the competent authorities of the Contracting States shall settle the question by mutual agreement.
For the purpose of this paragraph, a permanent home is the place where an individual dwells with his family.

http://www.irs.gov/pub/irs-trty/korea.pdf

Of course, if you have not worked abroad before or not within the last year, then you would not have filed the 2555 (Foreign Income Exclusion). So, if you are applying applying for a university or public school job in Korea, then you can very easily apply for the 6166 (Certificate of Residency) without any extra documentation.

Once again, let me emphasize that in all situations in which you were able to get Korean tax exemption, you are still able to file the Foreign Income Exclusion.

While I believe that I have been very comprehensive in this post, I think some examples are in order.

Edit: Okay, everyone. Originally, I said that I was going to add some examples to this post. However, this post is already very long. So, I will put some examples in a separate post later in the thread.

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