Korea broadens tax breaks for low-income households, renters and youth

Korea will expand tax credits and deductions for low-income households, renters without a home and young people, as part of the government's tax revisions unveiled Monday.

The centerpiece is an expansion of the earned income tax credit (EITC), which is a refundable tax credit given to workers to help them stay in the work force rather than merely depending on state welfare without labor. It is designed to encourage employment among low-income workers by relaxing income thresholds and increasing benefit payments.

For single-person households, the annual income ceiling for EITC eligibility will rise to 26 million won ($18,170) from the current 22 million won. The threshold for single-income households will increase to 37 million won from 32 million won, while that for dual income households will be raised to 52 million won from 44 million won.

The maximum amount of EITC payment will also increase by about 9 percent, the first adjustment since 2022, to reflect inflation. The maximum benefit will rise to 1.8 million won from 1.65 million won for single-person households, to 3.1 million won from 2.85 million won for single-income households and to 3.6 million won from 3.3 million won for dual income households.

About 730,000 additional low-income households will become eligible for EITC next year. The program will cover 4.89 million households, up from 4.16 million. The government expects total payouts to reach 5.9 trillion won, up from 4.7 trillion won.

The government will also expand the tax credit ceiling for the monthly housing rent, which is offered to workers earning up to 80 million won a year.

The government will raise the annual cap on rent payments eligible for the tax credit from 10 million won to 12 million won. The tax credit rate is set on 17 percent for workers with annual gross pay of 55 million won or less, and 15 percent for those earning more than 55 million won and less than 80 million won. The rate itself has not been changed. 

For example, a renter without a home earning 50 million won a year and paying 1 million won in monthly rent currently receives a tax credit of 1.7 million won. Under the revised rules, the refund would increase by 340,000 won to 2.04 million won.

A higher 17 percent tax credit rate will be applied to tenants aged 15 to 34 regardless of income. It would allow some to receive up to 540,000 won more in tax refunds than under the current system.

The government will also broaden eligibility for the basic personal deduction under the comprehensive income tax system. The basic personal deduction is a tax deduction available to taxpayers who financially support eligible dependents, such as a spouse, children or elderly parents who are unable to work.

Taxpayers will be able to claim the 1.5 million won basic deduction for a spouse or dependent whose annual income is up to 3 million won, up from the current limit of 1 million won. For dependents with only income earned by wages, the eligibility threshold based on gross annual salary will rise to 7.5 million won from 5 million won.

As a result, a spouse earning 500,000 won a month, or 6 million won a year, through employment will become eligible for the deduction beginning next year.

Tax incentives for young people will also be expanded. The income tax credit for contributions to individual retirement pension accounts, or IRPs, will increase to 15 percent from the current 12 percent for eligible young contributors.

The government will also introduce a youth-focused individual savings account for people below a certain income level. In addition to existing tax-exemption benefits, participants will be eligible for an additional income deduction equal to 10 percent of their contributions.

The proposal also includes measures to encourage marriage and childbirth.

Both spouses of a homeless married couple will be allowed to claim income deductions for principal and interest payments on loans used to finance jeonse (lump sum) deposits or monthly rental deposits. The deduction covers 40 percent of repayments, up to 4 million won a year. Currently, only one member of a household can claim the deduction, a rule that has been criticized as creating a "marriage penalty" for couples who maintain separate residences for work.

The government will also expand the tax exemption for employer-provided childbirth support payments. The current exemption, which applies to benefits received within two years after childbirth, will be extended to include support payments made during pregnancy before the child is born.

New tax incentives are planned to encourage investment outside the greater Seoul area. The government will apply a so-called regional preferential coefficient ranging from 1.1 to 1.5 to the basic tax support scheme for research and development and capital investment. It intends to facilitate larger tax benefits for investments in economically disadvantaged regions.

The government will extend the period during which young employees at small- and medium-sized enterprises can receive a 90 percent earned income tax reduction. The length of the tax break will vary by work location. The current five-year benefit, regardless of region, will increase to six years for those working in noncapital metropolitan cities and to 10 years for those employed in officially designated depopulation areas.

BY NAM SOO-HYOUN [[email protected]]