Tax Law Changes for Year-end Settlement of Individual Income Taxes for 2012
After the year-end, in February of every year, the tax liabilities of employee's (excluding daily workers) prior year wage and salary are then finalized by its employer through the declaration ofyear-end settlement of exact payroll withholding taxes in Korea.
Based on the results of year-end settlement, the employer shall make necessary adjustments for any overwithholding (or underwithholding) in the February payroll accordingly.
Major tax law changes related to year-end settlement for 2012 are as below:
■ Criteria for housing funds special deduction (Individual Income Tax Law, Presidential Decree (“IITL-PD”) §112 ④, ⑤)
The gross salary ceiling for non-house owning workers is increased from KRW 30 million to KRW 50 million for application of ‘monthly housing rental deduction’ and ‘principal and interest payment of home rental loans’ borrowed from the individual who does not run the rental business.
The head of a household who does not have spouse or dependents can also deduct the above housing funds special deduction.
■ Overseas education expense deduction (ITTL-PD §110-3 ④)
The education expense for students who study abroad should meet the qualification below for claiming the special deduction. The overseas high school and university students do not need to meet the qualification to claim special deduction.
Qualification for overseas education: the preschool children and elementary/junior high school students would be applied.
■ Income deduction rate increased for direct debit card/cash receipt usage (STTCL §126-2)
To encourage a healthy consumption culture, the income deduction rate for direct debit card usage is increased from 25% to 30%.
■ Other changes
The progressive tax rate which was increased as of January 1, 2012 will be applied for the year-end settlement (38% income tax rate is applied for taxable income of Won 300 million or more). The effective income brackets and tax rates are as follows.
(*) Local income tax will be additionally imposed at 10% of the individual income tax liability.
Income tax base (in Won)
Up to 12 million
12 ~ 46 million
46 ~ 88 million
88 ~ 300 million
Over 300 million
The youth (15 years to 29 years of age) who joins/joined small/mid sized companies (defined) during the years 2012/2013 can enjoy 100% income tax credit for 3 years from the joining date.
Notes and Tips
■ When using the receipts provided from simplified year-end settlement service operated by NTS
The simplified year-end settlement service available at www.yesone.go.kr operated by the NTS is a one-stop service where the taxpayers may collect the receipts required for income deduction claim for their year-end settlement.
The simplified year-end settlement service is an internet-based service that shows the allowable amount of deduction that a taxpayer can take for himself/herself and his/her dependents. A print-out of the screen displaying such records is used as a valid supporting document that they can submit to their withholding agent. The taxpayer would need to register his/her dependents in the website first in order to view their deductibility records (such as their medical and insurance fees).
The taxpayer should verify whether those receipts meet the income deduction qualifications under their responsibility.
■ Due care for excessive deduction
Once the year-end tax settlement is filed with the tax office, the tax office reviews whether the taxpayer applied the income deduction excessively over the deduction ceiling and notifies to the taxpayer, in the case of any findings, to file an amended income tax return through the tax withholding agent (the employer).
If a taxpayer applied the deduction excessively over the deduction ceiling, he/she should pay penalty on top of the income taxes. As such, before claiming deductions, each taxpayer needs to review the deduction criteria with due care.
If a withholding agent (the employer) files a considerable number of insincere year-end tax settlement returns for its employees, the tax office may undertake a comprehensive review on the whole withholding tax returns filed by the employer.
<Most frequent cases where the taxpayers claim excessive tax deduction over the limit>
Deduction claims for dependents who have earned income of more than Won 1 million
- Basic/additional/special deductions for the dependents who have earned earned/business/severance income and capital gains in total of more than Won 1 million are not allowed.
Duplicated dependents deduction
- Children dependent deduction by both parents is not allowed.
- Parents dependent deduction by multiple direct descendants is not allowed.
Deceased or overseas emigrant dependents deduction
- Basic deduction for the dependents who are deceased or who emigrated overseas before immediately preceding year (i.e., deceased /emigrated by 2011) is not allowed.
Excessive pension savings deduction
- Deduction of pension savings on behalf of spouse or dependents is not allowed.
- Deduction of pension contributions saved during the year (i.e., 2012) is not allowed if such savings are terminated early during the year (i.e., 2012)
Excessive insurance deduction
- Insurance deduction paid for the dependents who are not listed on the basic deduction dependents is not allowed.
Excessive education expense deduction
- Deduction ofgraduate schooleducation expense paid for direct descendants or siblings is not allowed.
- Deduction of the expenses for preliminary or pre-course education, for overseas university transfer or language study abroad, which is not a regular education course, is not allowed.
Excessive medical expense deduction
- Shared medical expense deduction by siblings is not allowed (only the taxpayer who supports his/her parent may claim deduction).
- Deduction of nursing payment orpostnatalcare center payment as part of medical expense deduction is not allowed.
- Medical expense deduction which was reimbursed by the insurance company is not allowed.
Excessive housing fund deduction
- Deduction of interest payment of loans for long-term housing mortgage for the taxpayer who owns 2 houses or more as of year-end (i.e., 12/31/2012) is not allowed.
Excessive credit card usage deduction
-Deduction of credit card usage on behalf of siblings is not allowed.
- Duplicate deduction of children’s credit card usage by both parents is not allowed.