Tax Law Change for 2013 Year-end Settlement of Individual Income Taxes

An employer paying wage and salary income must withhold income tax monthly from the earnings of their employees based on “the Quick Tax Table” issued by the National Tax Service and the total of these income tax withholding has to be paid over to the district tax office by the 10th day of the following month throughout the year.

After the year-end, in February of every year, the tax liabilities of each 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.

The following explains recent changes of rules for 2013 year-end settlement of individual income taxes.

■ Gross limit income deduction for individual income tax (Article 132-2, STTCL)

To avoid excessive income deduction by high-income earner, nine categories of deductions shall be subject to gross limit of KRW 25 million for 2013.

- Qualified insurance premiums, medical expenses, education expenses, savings for housing purchase qualified, designated donations, qualified housing subscription deposits, contribution to small and medium-sized enterprise start-up investment association, investment in employee's stock ownership association and credit card usage.

■ Revision of income deduction for credit card usage (Article 126-2, STTCL)

Income deduction rate for credit card usage decreased to 15%, down from 20%. But the income deduction rate for electronic cash receipt increased to 30%, up from 20%. The following is a summary of income deduction for credit card usage for year 2013:

① Total spending using credit cards, debit cards, prepaid cards, and electronic cash receipts

② Income deduction = [① - (25% of gross salary)] × 15% (30%*)

(* 30% for amounts paid with debit cards, electronic cash receipts or purchases at traditional markets or for public transportations)

③ Income deduction limit = Lower of 20% of gross salary or KRW 3 million

■ Increase of income deduction rate for monthly rents (Article 52-4, IITL)

Income deduction rate for monthly housing rent (defined) increased to 50%, up from 40%.Rents for residential purpose ‘officetel’ is newly added to the category of deductible rents for the payments made after August 31, 2013.

■ New income deduction for single parent (Article 51-1, IITL)

A ‘single mom’ or ‘single dad’ who does not have spouse, but have children (including adopted children) who are 20 year-old or younger, is eligible to claim income deduction of KRW 1 million per year. Female householder deduction of KRW 500,000 per year will not be allowed if this single mom deduction is applied.

■ Expanded scope of educational expenses for income deduction (Article 110-3 ①, IITL)

Tuition and fees for preschoolers are allowed for income deduction for year 2013. Such expenses for preschoolers include expenses for after-school classes, textbooks and meals at nurseries, kindergartens and private institutions/physical education facilities. Textbooks purchased through the preschools are eligible for income deduction. If textbooks are purchased at other bookstores, confirmation of the principal will be required for income deduction.