In every Feburary, if you are working for a company, the most interesting topic for you will be 'year-end tax settlement' (YEONMAL JUNGSAN in Korean) and you will wonder how much taxes you can get refunded? (or how much you have to pay more taxes?)
Throughout my experiend in this field for almost 10years, I've found out that there some misunderstanding regarding year-end tax settlement process.
So here let's check each of them.
The refund amount is based on the tax you have already paid in advance. Card usage can increase the refund amount indirectly by increasing your tax deductions, but the refund is not calculated as a percentage of your card spending.
The most important rule in the year-end tax settlement is that the maximum refund you can receive is limited to the total tax you have already paid. Taxes are withheld from your gross salary each month, and the total of those payments becomes the maximum possible refund amount.
If you look at the salary income withholding receipt (근로소득원천징수영증) below, the amounts shown in the red boxes indicate the total tax paid during the year, which is the maximum refund you can receive.
->Example of applying card usage deduction
As you can see in the example above, it is true that the amount you spent last year can reduce your taxes, and it works like this:
Your card usage can be claimed as a deduction, which reduces your taxable income (tax base). When the tax base decreases, the calculated tax amount also decreases. Since the refund amount is the difference between the prepaid tax and the final tax amount determined, a lower tax amount can result in a larger refund.
FYI The card-usage deduction is only applied to the portion of your card spending that exceeds 25% of your total salary amount.
For example, if your card usage is KRW 20,000,000 and your total salary is KRW 50,000,000, only KRW 7,500,000 can be applied for the deduction. This is because 25% of KRW 50,000,000 is KRW 12,500,000, and only the amount exceeding this threshold is eligible for deduction:KRW 20,000,000 − KRW 12,500,000 = KRW 7,500,000.
As I explained in ① above, the tax refund amount is based on the taxes you have paid. Similar to the card-usage deduction, the house rent you paid can affect your tax refund indirectly.
The difference from the card-usage deduction is that rent payments are treated as a tax credit, not a deduction.
A deduction reduces your taxable income (tax base), which lowers the calculated tax amount. In contrast, a tax credit is applied to the calculated tax amount, reducing the tax payable itself.
->Example of applying house rent tax credit
As you can see above, the house rent amount is applied as a tax credit, so the calculated tax amount decreases from 2,490,000 KRW to 790,000 KRW after applying the tax credit. As the determined tax amount decreases, the tax refund amount increases (or, if there is additional tax payable, the amount you need to pay is reduced).
FYI The house rent tax credit has contion to meet to apply it. First, the employee who is applying for the year-end tax settlement must be the person named on the lease agreement.Second, the house's property value must be less than KRW 400,000,000 and the size must be 85㎡ or smaller.
Third, employee's total salary who apply this tax crdidt should be less than 80,000,000KRW
