"The 13th-Month Salary Is Not Automatic"... Three Misunderstandings About Year-End Tax Settlement [Misunderstandings About Money]

Editor's NoteMoney-related issues are among the things we most frequently encounter in everyday life, yet in many cases it is difficult to know the exact rules. There are also many cases where people suffer unnecessary losses because of practices taken for granted or misinformation that has spread over time. [Misunderstandings About Money] organizes the misconceptions people commonly have about everyday financial matters such as taxes, fees, contracts, and refunds, based on public data and official standards. Rather than offering investment or financial-planning advice, it aims to help readers establish their own criteria for judgment by providing information that corrects these misunderstandings.

As the end of the year approaches, there is a phrase that always comes up among office workers: the "13th-month salary." However, there is often a considerable gap between expectations and reality when it comes to year-end tax settlement. Some people receive a refund, but many end up paying additional tax instead. Here are some of the most common misunderstandings about year-end tax settlement, which returns every year yet remains difficult to fully understand.

Is year-end tax settlement always a system where you get money back?

Year-end tax settlement is fundamentally an "adjustment," not automatically a "refund." The principle is to compare the tax withheld at source during the year with the tax that should be paid: if the withheld amount exceeds what is due, you receive a "refund," and if it falls short, you make an additional "payment."

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Because income tax, local income tax, and the four major social insurance contributions are withheld every month from your salary, many assume there will be little need for additional payment. This is a misconception. Bonuses, performance incentives, and various other forms of pay that are separate from fixed monthly salary are often paid without appropriate withholding, and this shortfall effectively shows up as tax to be paid at year-end settlement.

For this reason, if your income has increased or your deductible items have decreased, you may end up facing a "13th-month tax bill" instead of a "13th-month salary." For example, consider an employee with annual income of 40 million won: if one person claims deductions for dependents while another lives alone, or if there is a difference in how much they can claim for credit card spending or tax credits, one is likely to receive a refund while the other is likely to owe additional tax.

Does the company take care of year-end tax settlement for you even if you do nothing?

Although the company handles the year-end settlement procedure, the responsibility for determining which deductions you are eligible for and making sure you claim them lies with the employee. The company merely files on your behalf based on the simplified data from the National Tax Service and the documents you submit; it does not check every potentially omitted deduction item one by one.

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Medical expenses, education expenses, donations, and housing-related deductions are among the items most frequently omitted. In the case of hospital bills, amounts paid not only in your own name but also in the names of dependents may be included, and there are items such as the cost of purchasing glasses or contact lenses and infertility treatment expenses that require separate supporting documents. Private academy fees and university tuition are also subject to different deduction rules, so you cannot assume they will be automatically reflected simply because they are "education expenses."

Not all data are available through the National Tax Service year-end settlement simplification service. There are cases where information from certain hospitals or clinics, charitable organizations, or financial institutions is missing; in such cases, you must submit receipts or certificates yourself in order to claim the deduction. If you give up on claiming a deduction just because it does not appear in the simplification service, your refund amount may be reduced.

Deductions for dependents also require careful attention. The outcome differs depending on whether parents or children meet the income requirements and on which family member claims the deduction. In the case of dual-income couples, only one spouse can claim a deduction for the same child, and it is often more advantageous for tax savings if the spouse with the higher income claims it.

For those living in rental housing and paying monthly rent, it is important to provide proof of the rent paid. If the monthly rent you have paid is not reflected in the simplification service, you need to submit separate documentation such as bank transfer records showing the rent paid to the landlord, the lease agreement, and a resident registration certificate in order to claim the deduction.

Is it always advantageous for year-end tax settlement to use credit cards as much as possible?

From December, when year-end settlement season begins, through February of the following year, many posts appear claiming that "using credit cards a lot is advantageous for year-end tax settlement." This is only half true. The system is not designed so that deductions automatically increase just because you spend a lot.

Credit card deductions apply only to the portion of spending that exceeds 25% of your total salary, and the deduction rate for debit cards and cash receipts is higher than for credit cards. In other words, rather than concentrating spending at the end of the year, it is often more advantageous for deductions to diversify the means of payment throughout the year.

To further enhance tax-saving effects, the use of financial products is also important. A prime example is the Individual Savings Account (ISA). Within a certain limit, interest and dividend income generated in an ISA can receive tax exemption or be taxed at a lower rate, making it a widely cited tool for reducing tax burdens over the long term.

Donation deductions are also a representative tax-saving measure. Political donations and statutory or designated donations are eligible for income deductions or tax credits, and some categories have relatively high deduction rates. Even one-off donations made at the end of the year can be reflected in year-end settlement, but you must make sure that donation receipts are issued.

In particular, the Local Love Donation Program has recently been attracting attention. You can receive a tax credit for the full amount of donations up to 100,000 won and 16.5% of the portion exceeding that amount, and these donations are also automatically reflected in the simplification service. In addition, local governments offer a wide variety of return gifts when you donate to them.