[Yoon Administration Tax Law] Exemption of Vehicle Acquisition Tax for Parents with Multiple Children... Credit Card Income Deduction Extended for 3 More Years

[Asia Economy Sejong=Reporters Kim Hyewon and Son Seonhee] #Good news came to Mr. A (45), a father of three children aged 3, 13, and 15. The government announced that it will exempt individual consumption tax up to 3 million KRW when purchasing a passenger car for families with three or more children under 18 years old. Including education tax and value-added tax, the maximum support amounts to 4.29 million KRW. For vehicles priced at about 80 million KRW or less (assuming a flexible tax rate of 3.5%), this means a full exemption benefit. Thanks to the possibility of overlapping this with other individual consumption tax reduction programs for eco-friendly vehicles (hybrid, electric, hydrogen cars), if Mr. A buys a hybrid car next year, he will not have to pay individual consumption tax up to a limit of 4 million KRW. The individual consumption tax reduction program for eco-friendly vehicle purchases has been extended for two more years.

This content was included in the ‘2022 Tax Reform Plan’ announced for the first time on the 21st under the Yoon Suk-yeol administration. Alongside ‘enhancing corporate vitality,’ the ‘livelihood stabilization’ section, a major pillar of this reform plan, highlights several measures to reduce tax burdens on the lower and middle classes, which President Yoon emphasized.

In particular, the income deduction system for credit card and other usage amounts was extended for the 10th time while strengthening support. This policy was temporarily introduced in 1999 to increase credit card usage, prevent tax evasion by self-employed individuals through cash transactions, and reduce the tax burden on wage earners. It has been extended for three more years until the end of 2025. Although tax evasion has improved significantly in the meantime, the income deduction for credit card and other usage amounts has become a core part of the ‘13th-month bonus,’ making it impossible to abolish the system, resulting in repeated sunset extensions.

Starting from next year’s year-end tax settlement, the Yoon administration reformed the system so that money spent on traditional markets, public transportation, and cultural activities using credit cards, etc., can be integrated without item distinction for income deduction. The total salary brackets will be reduced from three to two. For the bracket under 70 million KRW in total salary, a basic deduction of 3 million KRW applies, and for the bracket exceeding 70 million KRW, 2.5 million KRW applies. By integrating the previous bracket of over 120 million KRW, the basic deduction amount for high-income earners has been expanded from 2 million KRW to 2.5 million KRW. When credit card usage falls under any of the three categories?traditional markets, public transportation, books/performances?an additional deduction of 1 million KRW each is supported; however, in this reform plan, for the bracket under 70 million KRW, these are integrated. In other words, without item distinction, the usage amounts are combined to receive a maximum deduction of 3 million KRW. For public transportation usage in the second half of this year (July to December), the deduction rate will be significantly increased from 40% to 80%. This aims to encourage public transportation use and reduce the burden on the lower class in response to high oil prices. If one spends 500,000 KRW on public transportation in the first half and 500,000 KRW in the second half, the public transportation deduction amount will be 200,000 KRW for the first half plus 400,000 KRW for the second half, totaling 600,000 KRW.

To strengthen old-age income security, the annual tax credit limit for pension savings contributions will be expanded from the current 4 million KRW to 6 million KRW. The combined annual tax credit limit including Individual Retirement Pensions (IRP) will increase from 7 million KRW to 9 million KRW. To reduce retirement income tax burden, the length-of-service deduction will also be expanded. For example, if one retires after 20 years of service with a retirement payment of 50 million KRW, the retirement income tax will be reduced from 590,000 KRW to zero. The tax credit rate for monthly rent paid by a household without a home will be raised from 12% to 15% for total salaries under 55 million KRW, and from 10% to 12% for the bracket between 55 million and 70 million KRW. University entrance exam fees and the College Scholastic Ability Test (CSAT) fees will be added to the education expense tax credit (15%), and value-added tax on diapers and baby formula will be permanently exempted.