Under the Restriction of Special Taxation Act (Article 126-2), certain individuals in Korea can benefit from income deductions based on the amount spent using credit cards, debit cards, and cash receipts. The deductions apply to residents with wage and salary income, their spouses with an annual income of not more than 1 million won, and their lineal descendants and ascendants with an annual income of not more than 1 million won, living together with the resident. However, it's important to note that credit card spending by the filer's siblings is not eligible for these deductions, even if they qualify for basic deductions.
Calculation of Income Deduction
The income deduction can be calculated as follows:
1. Basic Deduction
The basic deduction is the sum of the following amounts:
a. Credit Card Spending:
15% of the amount used for credit card spending after deducting public transportation fare, spending in traditional markets, spending on books and performance tickets for individuals with a gross wage & salary of not more than 70 million won, and expenditures made with debit cards, cash cards, and pre-paid cards.
b. Cash Receipts, Debit Card, Pre-paid Card Spendings:
30% of the amount spent on these categories after excluding public transportation fare, spending in traditional markets, and spending on books and performance tickets for individuals with a gross wage & salary of not more than 70 million won.
c. Spending on Books and Performance Tickets:
30% deduction for individuals with a gross wage & salary of not more than 70 million won.
d. Amount Spent in Traditional Markets:
40% deduction for spending made with credit cards, cash receipts, debit cards, and pre-paid cards.
e. Public Transportation Fare:
40% deduction for spending made with credit cards, cash receipts, debit cards, and pre-paid cards. For expenditures between Jul. 1, 2022, and Dec. 31, 2022, an 80% deduction rate applies.
f. One of the following amount
- Where the minimum amount used (25% of total wages) ≤ amount spent on credit cards:
- Minimum amount used × 15%
- Where the amount spent on credit cards < minimum amount used (25% of total wages) ≤ Amount spent on credit cards + cash receipts + debit･prepaid cards + amount spent on books and performance tickets by taxpayers with total wage not exceeding 70 million:
- Amount spent on credit cards × 15% + (minimum amount used - amount spent on credit cards) x 30%
- Where the amount spent on credit cards + cash receipts + debit･prepaid cards + amount spent on books and performance tickets by taxpayers with gross wage & salary not exceeding 70 million < minimum amount used (25% of gross wage & salary) < The amount spent on credit cards + cash receipts + debit･prepaid cards + amount spent on books and performance tickets by taxpayers with gross wage & salary not exceeding 70 million + amount spent in traditional markets + public transportation fare (Jan. 1-Jun. 30, 2022)
- Amount spent on credit cards × 15% + (amount stated in cash receipts issued + amount spent on debit･ prepaid cards + amount spent on books and performance tickets by taxpayers with total wage not exceeding 70 million) x 30% + (minimum amount used - amount spent on credit cards - cash receipts - debit･ prepaid cards - amount spent on books and performance tickets by taxpayers with total wage not exceeding 70 million) x 40%
- Where the amount spent on credit cards + cash receipts + debit･prepaid cards + amount spent on books and performance tickets by taxpayers with gross wage & salary not exceeding 70 million + amount spent in traditional markets + public transportation fare (Jan. 1-Jun. 30, 2022) < Minimum spending (25% of gross wage & salary)
- Amount spent on credit cards × 15% + (amount stated in cash receipts issued + amount spent on debit･ prepaid cards + amount spent on books and performance tickets by taxpayers with total wage not exceeding 70 million) x 30% + (amount spent in traditional markets + public transportation fare (1H 2022) ×40% + (minimum spending – credit card spending – cash receipts – debit and pre-paid cards – amount spent on books and performance tickets by taxpayers with gross wage & salary not exceeding 70 million – amount spent in traditional markets – public transportation fare (1H 2022) × 80%
g. Additional Deduction for Increased Spending:
(The amount of credit card spending in 2022 increased from the previous year in excess of 5% + the amount spent in traditional markets in 2022 increased from the previous year in excess of 5%) x 20% ⑧
h. Deduction ceiling : the amount according to the following classification
2. Additional Deduction
The additional deduction is the smallest of the following:
- The basic deduction in excess of the deduction ceiling: (a + b + c + d + e - f + g) - h.
- Amount spent in traditional markets × Deduction rate (d) + Public transportation fare × Deduction rate (e) + Amount spent on books and performance tickets × Deduction rate (c) (the ceiling for each shall be 1 million won per year).
- The sum of the year-on-year (YoY) increase in the amount spent on credit cards, etc., in 2022 and the amount spent in traditional markets multiplied by the respective deduction rates (g) (up to 1 million won per year).
Conclusion
The income deduction for credit card expenses in Korea provides eligible individuals with significant benefits. By understanding the calculation process, taxpayers can optimize their deductions and reduce their taxable income accordingly.