Year-End Tax Settlement's Top Improper Deduction: Personal Exemption... Prioritize Identifying 'Income Amount of 1 Million Won'

29,000 Individuals Overclaimed Personal Deductions for the 2017 Tax Year Detected

[Asia Economy Reporter Kwangho Lee] Many workers are being caught for improper deductions after mistakenly applying the 'income amount of 1 million won' standard for personal exemptions during year-end tax settlements, so caution is advised.

The Korea Taxpayers Federation stated on the 16th, "Due to the complex and difficult concept of the 1 million won income amount, more than 20,000 workers each year are subject to penalties such as additional taxes for excessive personal exemptions," revealing this situation.

According to the 2019 National Assembly audit data identified by the Taxpayers Federation, the number of people who claimed excessive personal exemptions in year-end tax settlements was 34,000 in 2015, 24,000 in 2016, and 29,000 in 2017.

Income amount refers to the total income of dependents such as parents or spouses, excluding non-taxable income, separately taxed income, and necessary expenses. If the income amount exceeds 1 million won, the basic exemption for dependents cannot be claimed during year-end tax settlement.

If a worker has a dependent whose total salary (annual income) is 5 million won or less, the basic exemption is applicable.

On the other hand, financial income such as interest and dividends is subject to separate taxation if it is 20 million won or less annually, allowing the basic exemption. Pre-tax interest income of 20 million won (based on an interest rate of 1.9%) corresponds to the amount earned from depositing 1 billion won. Capital gains from listed stocks are non-taxable regardless of the amount of profit, so the basic exemption can be claimed.

In the case of real estate rental income, if the rental income amount is 20 million won or less and separate taxation is chosen, the basic exemption can be claimed.

The income amount of business income earners is the amount after deducting necessary expenses from the total annual revenue. Since the exact income amount of a business owner can only be known after filing the final income tax return in May, it is helpful to check whether the comprehensive income amount on the previous year's May comprehensive income tax return exceeds 1 million won. Generally, businesses with a certain level of sales exceed the 1 million won income amount.

Especially, small-scale business owners who do not keep books must apply the simplified expense rate, which recognizes a certain percentage of income as necessary expenses, to check if the income amount exceeds 1 million won. For example, for a private tutor, a total revenue of 4 million won, an insurance agent 4.46 million won, and a shopping mall operator 7.14 million won or less correspond to an income amount of 1 million won.

Daily workers employed for less than 3 months (1 year for construction sites) have labor income classified as separately taxed income, which is not included in the 1 million won income amount, so dependent exemptions can be claimed.

For temporary lecture fees, manuscript fees, prize income, and other miscellaneous income, from payments made in 2019, the income amount is the amount after deducting 60% of necessary expenses. If the revenue is 7.5 million won, the income amount corresponds to 3 million won. Miscellaneous income amount of 3 million won (revenue 7.5 million won) can be subject to separate taxation, allowing the basic exemption.

If a parent's public pension income is 5.16 million won or less, or if they retired by December 31, 2001, and receive a government employee pension, the pension income is classified as fully non-taxable, so the basic exemption is also possible. However, survivor's pension, disability pension, and veterans' pension are classified as non-taxable income regardless of the amount. In the case of the National Pension, the pension amount is generally low, corresponding to an income amount of 1 million won or less, and inquiries to the National Pension Service will provide immediate information.

Additionally, if you retire from your job this year and the total severance pay exceeds 1 million won, you cannot claim the basic exemption. Also, in most cases, if capital gains tax was paid due to real estate capital gains, it is excluded from income deduction. Furthermore, if your parents farm rice paddies or dry fields in the countryside, it is considered non-taxable and not included in the 1 million won income amount.

The Taxpayers Federation stated, "It is not easy for ordinary wage earners to understand the concept of the 1 million won income amount required to qualify for dependent exemptions in year-end tax settlements," and argued, "It is unfair to shift the responsibility for excessive deductions caused by misunderstanding complex tax laws and difficult terminology onto taxpayers."

Kim Seontak, chairman of the Taxpayers Federation, pointed out, "While the 1 million won income amount standard is too low for wage and business income, which may fall below the minimum living expenses for one person, the current tax law applies a broad scope of separate taxation for capital income such as interest, dividends, stocks, and real estate rentals, deepening discrimination among income classes."

Chairman Kim added, "It is urgent to revise the unfair and unreasonable tax laws by raising the harsh 1 million won income amount standard for wage and business income and reducing the privileges for capital income."

This content was produced with the assistance of AI translation services.