[PB Notebook] Smart Tax-Saving Strategies for Financial Income

Shinhan Premier PWM Hannamdong Center Eunhee Dang PB Team Leader

Every May is the month for final reporting and payment of comprehensive income tax.

If your financial income in addition to your earned income or business income from the previous year exceeds 20 million KRW, you must include your financial income in your comprehensive income amount and report it. If you have only financial income and no other sources of income, and your financial income does not exceed 81 million KRW, you will not be subject to additional comprehensive income tax. However, financial income is included in the calculation of health insurance premiums, which may result in losing your dependent status and having to pay approximately 8% of your income as health insurance premiums.

Some people choose not to manage their money and simply leave it in a checking account, thinking, "Any financial income I earn will just go to taxes anyway." However, taxes are just a portion of the income you receive, so earning more income, even if it means paying more taxes, is still advantageous. That said, it is important to take advantage of all available tax-saving strategies.

The first strategy is to make full use of products that generate tax-exempt income.

Capital gains from domestic stock trading are tax-exempt, so you can utilize domestic equity funds or exchange-traded funds (ETFs). Savings insurance is also tax-exempt on insurance gains if maintained for more than 10 years. You can either make a lump-sum payment of up to 100 million KRW or make monthly payments of up to 1.5 million KRW for at least five years through a regular savings plan.

Tax-exempt comprehensive savings accounts, which are available to those aged 65 and older, are also not subject to taxation. Individual Savings Accounts (ISA) are subject to separate taxation, making them advantageous as well. However, if you have been subject to comprehensive taxation on financial income even once in the past three years, you are not eligible to open these products. Therefore, if your financial income has been 20 million KRW or less so far but is expected to exceed this threshold starting this year, it is advisable to open these two products before the end of the year.

In particular, most people open tax-exempt comprehensive savings accounts, which have a limit of 50 million KRW, as time deposits. However, if you are an investor with an aggressive risk profile, it is recommended to allocate your tax-exempt comprehensive savings limit to funds. Due to the nature of funds, you can make additional deposits or partial withdrawals, and since there is no maturity date, even if you become subject to comprehensive taxation on financial income while holding the fund, you can continue to enjoy the tax exemption benefits.

The second strategy is to spread out the timing of when financial income is generated.

The threshold for comprehensive taxation on financial income is 20 million KRW of income earned from January 1 to December 31 of each year. Even if you receive the same amount, if you receive no more than 20 million KRW each year, you will not be subject to comprehensive taxation on financial income. However, if your financial income is concentrated in a single year, you may be subject to comprehensive taxation and additional taxes may be incurred. Therefore, if you can control when your financial income is realized, it is important to spread it out appropriately over time.

You can also use insurance to control the timing of income realization and tax payments. Insurance products offer a mid-term withdrawal function, and withdrawals are considered to come from the principal rather than from gains. As your funds continue to be managed, there will come a time when you have withdrawn all of your principal, which helps mitigate the disadvantage of not being able to use your funds for a long period. Additionally, if you delay starting your annuity as long as possible, the remaining funds can be used as inheritance assets. Even if you do not make mid-term withdrawals, you can control the timing by starting your annuity at a later date. Since the annuity payments are not taxed until they reach the principal amount, delaying the taxation point until your other income decreases can help reduce your overall comprehensive income.

For reference, many insurance products these days offer a fixed interest rate for the first five years, and then a monthly floating declared rate after five years. The fixed rate is higher than the Bank of Korea’s base rate, and the declared rate tends to lag the Bank of Korea’s base rate by about six months. Therefore, now?when interest rate cuts are expected in the future?is a good time to sign up for fixed-rate insurance products.

The third strategy is to distribute financial income among different recipients.

Comprehensive taxation on financial income is calculated per individual, not by family unit. Therefore, if you distribute financial income to your spouse or children, you can reduce each person’s financial income. However, distributing financial assets constitutes a gift, so you need to consider gift tax and devise your distribution strategy accordingly.

Financial income is subject to withholding tax at the time of receipt and is included in the comprehensive income amount if it exceeds the threshold, so you cannot avoid taxes altogether. However, there are ways to reduce your tax burden. It is important to plan wisely through consultation with an expert.

Shinhan Premier PWM Hannamdong Center Eunhee Dang PB Team Leader