Things to Prepare for the 13th Month Salary... Easily Overlooked Year-End Tax Settlement Items [Heotdari Economy]

Check Carefully for Increased Items Since Last Year

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With the launch of the National Tax Service's year-end tax settlement simplification service on the 15th, the full-fledged year-end tax settlement season has begun. Although 2 out of 10 people face a tax bomb during year-end tax settlement, various deduction benefits have been added due to tax law revisions, such as increased child tax credits and additional deductions, raised limits on monthly rent tax credits, and expanded credit card income deduction limits, widening the path to receive the so-called '13th month salary.'

The Hometax Year-end Tax Settlement Simplification Service will be launched on the 15th. Yonhap News

Things Easily Missed During Year-End Tax Settlement Season

Year-end tax settlement is a process of comparing the taxes prepaid from your salary throughout the year with the actual taxes owed; if you paid less, you pay the difference, and if you paid more, you get a refund. Even workers earning the same salary may have different refund outcomes and amounts depending on how much they receive in 'deductions,' so it is important to check that no documents are missed.

Income Deduction and Tax Credit

In year-end tax settlement, income deduction and tax credit are methods to reduce the tax burden on workers, but they differ in application and calculation methods. Income deduction reduces the taxable base (income amount) on which tax is calculated. This includes earned income deduction, personal deductions for dependents, and deductions for card (check/credit) usage. Tax credit is an amount that can be subtracted from the tax calculated after income deduction. Examples include child tax credit, medical expense deduction, and monthly rent deduction.

Starting from this year’s year-end tax settlement, the child tax credit amount has been increased to ease the burden of raising multiple children. For families with two or more children aged between 8 and 20, the deduction amount increases by 50,000 KRW each compared to before. The non-taxable limit for childbirth and childcare allowances has also been raised from 100,000 KRW to 200,000 KRW per month, applicable to children aged 6 and under (born between 2018 and 2024).

Movie ticket fees are now included as an income deduction item. Workers with an annual total salary of 70 million KRW or less can classify movie ticket expenses as cultural expenses and receive an income deduction of up to 1 million KRW (deduction rate 40%). A marriage tax credit has also been added. Couples who registered their marriage last year can receive a combined tax credit of 1 million KRW. This applies for three years from marriages registered after January 1, last year. It is available only once in a lifetime regardless of age, first marriage, or remarriage.

Be sure to claim tax credits for pension savings and Individual Retirement Pension (IRP). Employees with an annual total salary of 55 million KRW or less or business owners with comprehensive income of 45 million KRW or less can receive a 16.5% credit. For those exceeding 55 million KRW, a 13.2% credit rate applies. The tax credit limit for pension savings and IRP has been raised from 7 million KRW to 9 million KRW annually. Eligible pension savings accounts include funds, trusts, insurance, and retirement pensions. However, money that the company mandatorily deposits into defined benefit (DB) or defined contribution (DC) retirement pension accounts is excluded from tax credit eligibility.

Monthly rent tax credit is now available for workers with a total salary of 80 million KRW (comprehensive income 70 million KRW) or less, allowing a 15% tax credit on the annual rent paid, up to a limit of 10 million KRW. The deduction limit for housing subscription savings and other housing preparation savings has been raised from 2.4 million KRW to 3 million KRW annually. Additionally, if the amount spent on credit/check cards and cash receipts increased by more than 5% compared to last year, 10% of the increase can be additionally deducted up to a limit of 1 million KRW.

Foreigners Should Not Ignore Year-End Tax Settlement

Foreign workers who earned domestic employment income last year (excluding daily workers) must complete their year-end tax settlement by the end of February (before receiving their salary), regardless of nationality, length of stay in Korea, or income level. The schedule, deduction items, and tax calculation methods are the same as for Korean nationals. However, income deduction for housing subscription savings is excluded because foreigners cannot qualify as household heads under the 'Resident Registration Act.'

The number of foreigners earning employment income in Korea has steadily increased every year. Last year, 611,000 foreign workers filed year-end tax settlements. By nationality, Chinese workers (190,000) accounted for 31.1%, Vietnamese (52,000) 8.5%, and Nepalese (45,000) 7.4%. The average total salary for year-end tax settlement was 32.78 million KRW, and the average determined tax amount was 1.91 million KRW.

For tax special cases applicable only to foreigners, unless employed by a related company, they must choose between a flat tax rate (19%) special case or the basic comprehensive income tax rate. When choosing the flat tax rate, non-taxable, deduction, exemption, and tax credit provisions under the Income Tax Act do not apply, so caution is required.

Meanwhile, year-end tax settlement is known as an opportunity for workers to receive a '13th month salary,' but 2 out of 10 people end up paying additional taxes instead of receiving refunds. According to the National Tax Service’s Tax Statistics Portal (TASIS), among 20,852,000 workers who filed year-end tax settlements in 2023, 3,544,000 (17.0%) paid additional taxes. During the same period, 14,899,000 (71.5%) received tax refunds.