[Practical Finance] How to Claim Deductions for Spouse's Rental Income from Housing?

[Asia Economy Reporter Ryu Tae-min] As the year-end tax settlement schedule for 2022 approaches, interest among office workers aiming for the last tax-saving opportunity is growing. Depending on the tax-saving strategy this month, with only one calendar page left this year, the year-end tax settlement could become a "13th-month salary," but it could also turn into a "tax bomb." In particular, if a spouse's housing rental income is 20 million KRW or less, they may qualify as a basic deduction recipient in the year-end tax settlement.

One of the items that can provide the greatest deduction effect in an office worker's year-end tax settlement is the "personal deduction" for dependents. If certain conditions are met, an income deduction of 1.5 million KRW per dependent can be received, and additional income deductions are available for persons with disabilities, senior citizens, and others.

The income criterion for the personal deduction for dependents is an "annual total income amount of 1 million KRW or less." If the income is only from earned income, the total salary must be 5 million KRW or less to qualify for the deduction. However, if the spouse's housing rental income is 20 million KRW or less annually, this income is subject to separate taxation and is not included in the annual income amount, allowing the spouse to qualify as a basic deduction recipient in the year-end tax settlement.

Under tax law, housing rental income is income earned through the business of housing rental and is therefore taxable. However, since 2019, if the housing rental income is 20 million KRW or less annually, it is subject to separate taxation, and even if only separately taxed housing rental income exists, the basic deduction can be claimed. This is because non-taxable and separately taxed income amounts are excluded when determining the annual income amount for personal deduction eligibility.

Therefore, if a spouse's annual housing rental income is 20 million KRW or less and they have no other income, and if they report it as separate taxation during the comprehensive income tax filing and payment period in May next year, the spouse can also be considered a dependent eligible for personal deduction. By choosing separate taxation, comprehensive income tax is not calculated by combining other incomes, and only the housing rental income is taxed at a 14% rate.

If the total housing rental income exceeds 20 million KRW or is reported under comprehensive taxation rather than separate taxation, the tax rate applied ranges from 6% up to a maximum of 42%. Since factors such as whether the rental housing is registered, other income amounts, and income deduction items vary by taxpayer, it is difficult to uniformly determine which option is more advantageous. However, by using the service provided by the National Tax Service during the May income tax filing period to compare estimated tax amounts under comprehensive and separate taxation, a customized tax-saving strategy can be established.

Meanwhile, if there is non-taxable housing rental income from parents, the basic deduction can be claimed. Housing rental income from owning one house (with a standard market price exceeding 900 million KRW) is non-taxable, so if only such non-taxable income exists, it qualifies for the basic deduction. When determining whether housing rental income is taxable, the number of houses is combined for the couple only; the number of houses owned by direct ascendants or descendants is not included.