Taxes. Did you know that the United States is the only major power that requires all its citizens to report their worldwide income? If you’ve moved down to Antarctica, built yourself an igloo, and trade snowberries for penguin toenail clippings, you have to report just how many clippings you’ve collected to the United States by June 15th. Why June 15th and not April 15th? Well, I have some information for you that will help you report your foreign income and file your U.S. taxes while abroad. I just finished mine.
First, I have to say that I am not a licensed tax preparer, nor am I certified in any way to give sound advice :) Using what I say here cannot exempt you from penalties should you make a mistake. So here we go!
Breathe a sigh of relief! You probably qualify for a full exemption from taxes on your foreign income, and you probably qualify for an automatic extension to June 15th! Here are the details on both:
If you are living abroad on April 15 (the date that those living in America have to file their taxes), you are automatically granted a 2 month extension (to June 15th) on filing your U.S. taxes. You do not need to file for an extension. If you need time beyond June 15th, you must file for an extension. Simple as that. Really. Look here.
Expats in South Korea (or anywhere else (even the moon, probably (Grr))) must report their worldwide income. However, if you meet either the Bona Fide Residence Test or the Physical Presence Test, you do not have to pay taxes on up to $97,600 of your foreign earned income. If you’re taking a one year contract in a foreign country, you probably do not qualify for the Bona Fide Residence test. It’s a little complicated, so I didn’t bother researching it too much because it’s easier to qualify for the Physical Presence test. The IRS gives this information on qualifying for the Physical Presence Test:
“You meet the physical presence test if you are physically present in a foreign country or countries 330 full days during a period of 12 consecutive months. The 330 qualifying days do not have to be consecutive.”
Note that the instructions do not say that the 330 days must be in the same calendar year. If your year began in 2012 and ended in 2013, you still meet the 330 days in 12 consecutive months.
[Side note: If your year began in 2013 and you do not YET meet the presence test, you'll have to wait until after you qualify for the presence test to file your taxes. If you'll meet the 330 days after June 15th, you should probably file for an extra extension. Here’s a good site with more information about many issues about filing taxes from abroad including extensions.]
First, I spent about 3 days trying to understand and fill out the forms myself. Although I wasn’t successful, I ended up reading the instructions to Form 1040 and Form 2555 thoroughly, which helped in later steps. You can find those forms here and the instructions here and here. (Extra info: Form 1040 is the basic tax form almost everyone must file. Form 2555 is the Foreign Income form that compliments Form 1040.) It’s important to understand why I failed at filling these out myself. Essentially, I came across problems and formed questions that I couldn't solve or answer even with the internet's help. You’re bound to come across a unique situation that you can’t find help for. What did I do then? I went to TurboTax.
TurboTax was a dream come true, at least for a short while. After signing up and selecting to file your federal taxes, the online software simply asks you question after question about your tax-related activity over 2013. The questions and fields are comprehensive. After answering the questions in the right areas including the foreign income and foreign income exclusion sections, the program generates your Form 1040 and 2555 completed! There was a problem when I got to the end, however. TurboTax wanted to charge me almost $140 just to get access to and file the forms! Apparently, TurboTax charges more for using its Home and Business program, which is the only one that has Form 2555. So, I closed the TurboTax window and looked for alternatives.
I only mention TurboTax because its help section is very thorough. When I didn’t understand one of TurboTax’s questions, its help section always had a clear answer. I was really disappointed that the program was so expensive when I found a very similar service for MUCH cheaper. Introducing TaxAct! The downside to TaxAct is that its program is a little more complicated and its help section much less thorough. I eventually had to call their support number to find my mistake. I recommend using both programs to find which one suits you best.
TaxAct only charged me about $20 to file my 1040, 2555, and another form I had to fill out for mysterious reasons I won’t tell you about. I advise that you go slow with Taxact and triple check all your answers. If you still have issues with it, buy some cheap Skype credits and make a phone call to their very helpful support line.
Can you skip reading the 1040 and 2555 instructions and TurboTax, and just go straight to TaxAct? I suppose. But you might have a harder time understanding the questions if you haven’t done research already. It’s not an easy process, but taxes are the only other sure thing in life besides death. Just do it.
A couple other things to keep in mind:
Be honest and accurate. Some foreign banks do report some information to the IRS. You may think that Uncle Sam has no way of knowing how much you made at a little private school on top of a Chinese mountain, but these are crazy days; and they’re only bound to get crazier. It’s best to be as accurate as you can when reporting your income to the IRS so something doesn't come back to bite you in the butt.
Also, if you haven't reported your taxes for previous years, you can always file them now. I had to file an amendment to my 2012 taxes because when I filed my taxes last year, I didn't know you had to report foreign income. I was able to file my amendment on TurboTax for free.
Lastly, verify what I've written here and other things you read online with multiple sources. One of the frustrating things about this process is that some of the information you find online is outdated. Make sure you’re reading tax info about the year you’re working on. For example, I just finished my 2013 taxes. I found lots of useful information about 2012 taxes, but I used that info as a guideline before verifying from another website that what I read about 2012 still applies to 2013. Your best source of verification is going to be the IRS.
Well, I hope this helps in some small way at least. Feel free to post questions in the comments below about what I've written here. I'll reply with any resources I've found along this journey. Good luck!
Currently residing an hour outside of Seoul, South Korea, Sergio Cabaruvias is doing his utmost not to appear lost or confused. So far, he’s managed. After graduating with degrees in English and journalism and after working with underprivileged youth, Serg embarked from Southern California for Pyeongtaek, South Korea to gain experience as an amateur adventurer. Since arriving he has swung on vines in the jungles of Taiwan, scaled mountains in the rocky city of Busan, driven a scooter along the edge of a massive, marble gorge, and explored some of Tokyo’s seedier areas. Moving to South Korea has been the best decision of his life.