Income Deductions: How to Lower Your Taxable Income
Income Deductions: How to Lower Your Taxable Income
Start with the wage & salary income deduction, then personal (basic + additional) deductions—plus housing, pension, and card-spend deductions.
1) Why deductions matter (progressive tax)
Korea’s individual income tax is progressive (about 6% → 45% plus local income tax). Reducing your taxable income moves more of your money into lower brackets. That’s why the first job is to shrink the tax base with income deductions.
2) Step zero: Wage & salary income deduction
An automatic deduction just for being a worker. Applied as a percentage of gross wages with a maximum of KRW 20 million.
| Gross wage & salary | Deduction |
|---|---|
| Up to KRW 5 mil. | 70% of gross |
| Over KRW 5 mil. ~ ≤ KRW 15 mil. | KRW 3.5 mil. + 40% of excess over KRW 5 mil. |
| Over KRW 100 mil. | KRW 14.75 mil. + 2% of excess over KRW 100 mil. |
3) Personal deduction (basic)
Deduct KRW 1.5 million per eligible person (including the taxpayer) from global income.
- Taxpayer & spouse: Spouse must have global income ≤ KRW 1 mil. (or wages ≤ KRW 5 mil.).
- Parents/grandparents: Age ≥ 60.
- Children/adoptees: Age ≤ 20.
- Siblings: Age ≤ 20 or ≥ 60.
- Disabled persons: No age limit for eligibility.
4) Additional deductions (elderly, disabled, single-parent, etc.)
| Category | Deduction | Criteria |
|---|---|---|
| Elderly person | KRW 1,000,000 / person | Eligible person aged 70+ |
| Disabled person | KRW 2,000,000 / person | Eligible person is disabled |
| Single parent | KRW 1,000,000 / year | No spouse + has a lineal descendant/adoptee eligible for basic deduction |
| Female household head | KRW 500,000 / year | Woman as head with a dependent, or married woman with global income ≤ KRW 30 mil. |
5) Other major income deductions
- Pension insurance premiums: Employee contributions to public pensions (e.g., NPS) deducted from global income.
- Housing fund:
- Housing purchase savings: Up to 40% of contributions, ceiling ~ KRW 3 mil.
- Long-term mortgage interest: Deductible if requirements met (e.g., house value ≤ KRW 600 mil.).
- Credit/debit cards & cash receipts: If total spend exceeds 25% of annual wages, the excess gets an income deduction.
- Indicative rates: 40% (traditional markets, public transit), 30% (cash receipts, books), 15% (credit cards).
- Typical basic ceiling around KRW 3 mil. (varies with income).
Exact rates/ceilings can change by year and conditions; confirm the current-year rules.
6) Quick example calculation
Example — Single employee, annual gross wages KRW 40,000,000
| Step | Illustration |
|---|---|
| 1) Wage & salary deduction | Apply statutory formula → yields an automatic deduction (subject to the overall KRW 20 mil. cap). |
| 2) Personal deduction | KRW 1.5 mil. (taxpayer). Add eligible dependents if any. |
| 3) Other deductions | Pension contributions, card/cash receipts excess over 25%, housing fund, etc. |
| → Tax base | Gross − all income deductions = lower taxable income |
Lower tax base → less tax at progressive rates. Tax credits (next episode) reduce the remaining tax directly.
7) Pitfalls & quick checks
- Unreported dependents: Missed basic/extra deductions → higher tax.
- Age/income tests: Parents 60+, children ≤20; spouse income thresholds matter.
- Mixed spending proof: Keep receipts split by credit/debit/cash, markets, transit for correct rates.
- Mortgage conditions: Check loan type, house value limits before claiming interest deduction.
8) Summary & next topic
- First line of defense: Income deductions shrink your tax base before rates apply.
- Start with the wage & salary deduction, then personal (basic + additional).
- Add housing, pension, and card/cash receipt deductions for extra savings.
9) Disclaimer
This post is for general information only and not legal/tax advice. Figures and scopes change by year; outcomes depend on your facts. Consult a qualified professional.
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