Understand changes and trim tax liability
This year, there are a handful of clever ways to get more.
Since the revised income tax law will be applied to this year’s tax settlement, taxpayers need to watch carefully what has changed. Last year, the government stuck to its principle of not raising tax rates, but it turns out people in high- and middle-income brackets will pay more income taxes starting next year after tax credits are slashed.
The government decided to reduce credits in order to maintain current tax rates, while at the same time expanding tax revenue to pay for President Park Geun-hye’s welfare promises.
To increase refunds, those who invested in financial products need to look at what type of deduction the products offer.
There are two types of tax-cutting tools: exemptions or deductions from income, and tax credits.
Under the exemption or deduction system, a taxpayer gets a deduction on total income before taxes. With credits, the taxpayer gets a deduction after calculating the taxes owed.
Those who hold pension savings products will be eligible for a 12 percent tax credit on up to 4 million won (about $3,600) of savings a year for a maximum refund of 480,000 won.
People with so-called income deduction funds will get a 40 percent refund on up to 6 million won for a deduction of up to 2.4 million won. People with housing application savings will also get a 40 percent deduction on income of up to 1.2 million won a year.
One thing to note is that those holding pension funds must keep their accounts for 10 years in order to qualify for the tax refund. If they cancel their accounts, an additional 16.5 percent income tax will be imposed. The income deduction fund is available only for people with annual incomes of 50 million won or less.
People who have been using both credit cards and debit cards for the past 11 months should use debit cards more this month to boost their tax refunds. Debit card payments offer deductions on up to 30 percent of spending, compared to 15 percent for credit cards.
In addition, the government pledged to raise the deduction rate for debit cards to 40 percent for consumers who double their debit card spending compared to last year. The debit card deduction includes payments at traditional markets and public transportation fees for up to 1 million won each. The total deduction limit is 5 million won.
Koreans living on monthly rental contracts can get refunds from what they paid in rent. For up to 7.5 million won, 10 percent will be refunded from the total tax payment this year. The maximum amount a tenant can get is 750,000 won. Those who are eligible for the rent tax refund must have an annual income of 70 million won.
Due to the income tax revision, high earners will receive less in refunds. Although the overall income tax rates have not changed, those who earn more than 50 million won to 300 million won will be subject to a higher rate of 38 percent, up from 35 percent, because the total amount of income deduction benefits has been reduced for people in that income bracket.
Special spending that used to be subject to income deductions will now be subject to tax credits.
Until last year, those who adopted one child received a 2 million won deduction in their total income. Taxpayers with one child under the age of 6 received a 1 million won deduction. From this year, parents will get 150,000 won in credit.
Spending on medical services, education, and charitable and political contributions will receive 15 percent tax credits. They were all excluded from taxation last year.
BY PARK JIN-SEOK, SONG SU-HYUN [email@example.com]
More in Finance
Korea catches green-bond fever for money and market cred
Data harvesting plus weak credit equals high rate loans
Corporations rush to bond market to lock in the low rates
Social distancing to be eased for shareholder meetings