[Income Tax in Korea] - Understanding Global Income Deductions

Global Income Deductions

Global income deductions are an essential aspect of income tax calculations in Korea. In this blog post, we will explore the various types of deductions available for residents with global income, which help reduce their taxable income. These deductions play a crucial role in determining the tax base for global income. Let's delve into the details!

 

Global Income Deduction Overview

The tax base for global income is calculated by subtracting the amount of global income deduction from the global income amount.

The same rules for calculating the income tax base and income tax amount of a resident shall apply to non-residents. However, a non-resident is not entitled to personal deduction (basic deduction and additional deduction) for persons other than the filer and special deduction ( Article 122). Therefore, only basic deduction and additional deductions (for elderly persons and the disabled) to the filer shall apply.

 

The following is a brief overview of global income deduction:

Basic Deduction (Article 50, Income Tax Act)

A resident with global income is eligible for a basic deduction of 1.5 million won per person. This deduction applies to the resident and their dependent family members. The dependent family members include:

• A spouse with income of not more than 1 million won per year (Where he/she only has wage & salary income, the total annual pay should be not more than 5 million won.) 
• A dependent falling under any one of the below living together with a resident, whose annual income does not exceed 1 million won (Where he/she only has wage & salary income, the total annual pay should be not more than 5 million won.)

Basic deduction

Additional Deduction (Article 51, Income Tax Act)

In addition to the basic deduction, certain conditions may lead to an additional deduction. The following scenarios warrant an extra deduction: 

• ⅰ) Where a person is 70 years old or older (for persons born on or before Dec. 31, 1952, income attributable to 2022): 1,000,000 won per capita
• ⅱ) Where a person is handicapped: 2,000,000 won per capita
• ⅲ) Where a person has global income of 30 million won or less and is a female with no spouse and the head of a household with dependents, or a female with a spouse: 500,000 won a year
• iv) Where a person has no spouse and has lineal descendants or adoptees: 1 million won a year (If the person also falls under 'iii, iv shall apply.)

Pension Contribution Deduction (Article 51-3, Income Tax Act)

A resident with global income can deduct pension contributions paid in the relevant taxable period as prescribed by public pension-related laws.

Special Deduction (Article 52, Income Tax Act)

The special deduction applies to insurance premiums and housing purchase funds and is applicable only to residents with wage & salary income (excluding daily workers).

(a) Deduction of Insurance Premiums:

• Insurance premium borne by an employee according to the National Health Insurance Act, Employment Insurance Act, or Long-Term Care Insurance for the Aged Act can be deducted from wage & salary income.

(b) Deduction of Housing Purchase Funds:

• Repayment of principal on housing lease loan for employees who do not own any housing or did not receive housing-related deductions.
• Deduction of repaid interest for long-term housing mortgage loans for eligible households.

For owners of two or more houses, the application of income deduction shall be restricted.

(c) Deduction of Donations (Carried Forward)

Donations made up to 2013 and carried forward can be applied as income deduction, following changes to tax credits for donations made from 2015 onwards.

 

Income Deduction for Long-term Collective Investment Security Savings (Article 91-16, Restriction of Special Taxation Act)

Employees with gross wage & salary not exceeding 50 million won can benefit from this deduction. By investing in a collective investment scheme, an amount equivalent to 40% of the total investment can be deducted each taxable period for 10 years (subject to a maximum of the wage & salary income of the relevant taxable period). The annual payment ceiling is 6 million won, and the contract period should be at least 10 years with no withdrawal of principal, interest, dividend, or securities within the first 10 years of the subscription date.

 

Income deduction for the amount spent on credit cards, etc. ( Article 126-2, Restriction of Special Taxation Act)

 

[Income Tax in Korea] - Income Deduction for Credit Card Expenses

Conclusion

In conclusion, understanding global income deductions is crucial for accurate tax planning in Korea. By taking advantage of these deductions, residents can significantly reduce their taxable income, leading to potential tax savings.