Taxes - Here and at home

ESL TEACHERS: Many teachers have a few questions about paying income taxes. I'm not a fan of CYA disclaimers but it's only fair to say that I'm not an expert on this subject. However, I did some research and I will share with you what I have learned. I am a US citizen so some of this won't apply to teachers from the UK, Ireland, South Africa or Canadia.

The Korean income tax is 4% of your gross pay. Your school will take it out of your paycheck and you don't need to do anything else. Americans can be exempted from paying the Korean income tax for their first two years here. I have no idea why this is true, my guess is that it's an attempt to encourage young Americans to come here and teach.

In order to be exempted, you need to provide your Korean employer with proof that are a US resident for tax purposes.
The IRS will provide you with a letter stating that you pay US income taxes. The form letter (Form 6166) is pretty simple. It has your name and social security number on it and simply reads:

I certify that, to the best of our knowledge, the above-named taxpayer is a resident of the United States of America for purposes of U.S. taxation.

In order to get this letter, you need to send the IRS form 8802 'Application for US Residency Certification'. It costs $35 to submit the form, but it saves you about $80 a month in Korean taxes so it's worth it. If your contract in Korea spans two tax years, say 2009 and 2010, you should technically submit separate 8802 forms for each year. However, once you show your Korean employer the first one they probably won't ask you for the second because your payroll information will already be in the computer. So, it's likely that one 6166 form letter will work for an entire year.

Now the form 6166 says you are a US resident for tax purposes. It does not mean (obviously) that you are living in the US nor that you will pay any US income taxes on the money you earn in Korea. All Americans are exempt from US income taxes on roughly the first $80,000 they earn abroad if they meet the requirements. However, YOU STILL MUST FILE A US TAX RETURN. The major requirement for not paying US taxes is that you are living/working outside the US for either the entire calendar year or 330 of the last 365 days.

Let's say you arrive in Korea on an EPIK contract on August 31, 2009. You will be paid in September, October, November, and December of 2009. Let's also assume that you were in college and earned no income in the US prior to August 31st. So, now it's early 2010 an you need to file your US 1040 income tax return. As of December 31, 2009 you have not been in Korea for 330 days so you should file your return showing your Korean income as taxable. However, once you reach day 330 sometime in 2010 you can go back and amend your 2009 tax return. Essentially what you're saying to the IRS is 'hey, at the time I filed for 2009 I didn't meet the 330-day requirement but now I do so give me back the taxes I paid on that money'.

Let's say you go back to the US after your one year contract is up. When you file in early 2011 for the 2010 tax year, the Korean paychecks you received in January, February, March, April, May, June, July, and August will not be taxable income because you will have met the 330-day rule. When you file your 2010 return you will report the money earned as 'foreign earned income' and then fill out the section for a 'foreign earned income credit'. I use Turbotax so this is a little easier. The net result is that you won't pay US income taxes on that money.

Another question you might have is what address you use on your tax returns. I think the general rule is to go with the state where your US driver's license is issued. By the way, I intentionally typed Canadia above to tick off the Canadian teachers.