Every year, from late October to early November, the National Tax Service launches its ‘Year-End Tax Settlement Preview’ service. By reviewing your credit and debit card spending from January to September, you can significantly influence the refund amount deposited into your account in February based on your spending habits in the remaining months of November and December. It's crucial to understand that maximizing tax deductions from card usage isn't just about swiping more; it requires a clear grasp of the ‘25% of total income’ threshold and the varying deduction rates for different payment methods.
1. The Fundamental Principle of Card Tax Deductions: Understanding the ‘25% Income Threshold’
The most critical rule of the credit card tax deduction system is that ‘deductions begin only on amounts exceeding 25% of your total annual income’.
- Definition of Total Income: This refers to your annual taxable income after excluding allowances such as meal expenses, non-taxable driving subsidies, and childcare benefits.
- Benefits Below 25% Threshold: For the first 25% of your total income, whether you use a credit card, debit card, or cash, the tax deduction benefit is exactly ‘$0’.
- Calculation Example: If your total income is 40 million won, you won't receive any tax deductions until you spend over 10 million won, which is 25% of your total income. Only amounts exceeding this threshold will be considered for deductions.
2. Comparing Deduction Rates by Payment Method: Switch Immediately After Surpassing 25%
Once you exceed the 25% threshold, the deduction rates can differ by up to 2.6 times based on the payment method used. The National Tax Service considers that the amounts charged to credit cards with lower deduction rates fill the 25% threshold first, and then applies the deduction rate to subsequent spending.
| Payment Method / Item | Tax Deduction Rate | Features and Usage Tips |
|---|---|---|
| Credit Card | 15% | Priority spending to meet the 25% threshold |
| Debit Card · Cash Receipts | 30% | Focus on all daily expenses after exceeding 25% (double the credit card rate) |
| Books · Performances · Museums · Art Galleries | 30% | Additional limits apply for those with total income below 70 million won |
| Traditional Markets · Public Transport | 40% | An additional limit of 1 million won is recognized if the basic limit is exceeded |
3. Tax Deduction Limits by Total Income and Actual Refund Amounts
Spending endlessly on cards won't continuously reduce your taxes; there are legal basic deduction limits based on your income.
- Total Income Below 70 Million Won: Basic limit of 3 million won
- Total Income Between 70 Million and 120 Million Won: Basic limit of 2.5 million won
- Total Income Above 120 Million Won: Basic limit of 2 million won
For instance, if a worker with a total income of 50 million won utilizes the full 3 million won basic limit under a 15% tax rate (including local income tax, approximately 16.5%), the actual refund amount deposited would be around 495,000 won. By merely switching one payment method to a debit card, they could receive nearly an additional 500,000 won.
4. Year-End Tax Saving Strategies for November and December: A 3-Point Checklist
Log in to the National Tax Service's HomeTax and check your card usage from January to September, then plan your spending for the remaining months of November and December as follows:
- If you have already exceeded 25% of total income: From now until December 31, switch all daily expenses like food, groceries, and household items to debit cards, ZeroPay, or cash receipts, putting your credit card away. This allows the 30% deduction rate to apply fully, speeding up the process of reaching the deduction limit (3 million won).
- If you have already maxed out the basic limit (3 million won): Using a regular debit card will not increase your tax deduction limit any further. In this case, it’s more rational to use traditional markets or public transport (subway, city and intercity buses, KTX), which offer additional limits of 1 million won each, or revert to credit cards that provide better points and discounts.
- If you have not yet reached the 25% threshold: Avoid excessive spending in the remaining two months. If you have essential expenses planned for year-end, such as replacing appliances or medical treatments, focus on using a credit card to surpass the 25% threshold first.
- New car purchase costs (however, 10% of the purchase price for used cars is deductible)
- Apartment management fees, electricity bills, city gas fees, water bills, highway tolls
- Tuition for elementary, middle, high school, and university, as well as public daycare fees (preschool children's academy fees can overlap with education tax credits)
- Taxes, local taxes, national pension, health insurance premiums, employment insurance premiums, and other taxes
- Purchases of gift certificates and gift cards, lease fees, overseas payments, and duty-free purchases
5. Card Allocation Strategy for Dual-Income Couples: Whose Card Should You Use?
It is commonly believed among dual-income couples that it is advantageous to use the card of the partner with the higher income. However, depending on the situation, the opposite result may occur.
- If the combined spending of the couple is low (allocate to the partner with the lower threshold):
If the husband has a total income of 70 million won (25% threshold = 17.5 million won) and the wife has a total income of 35 million won (25% threshold = 8.75 million won), but their total spending for the year is around 15 million won, what happens? If they use the husband’s card, they won’t exceed the 17.5 million won threshold, resulting in zero deductions. Conversely, using the wife’s card allows them to claim deductions on the 625,000 won spent over her 8.75 million won threshold. - If the combined spending of the couple is sufficiently high (allocate to the partner with the higher income):
If both partners exceed the 25% threshold significantly, it is optimal to allocate spending to the higher-income partner, as they will have a higher marginal tax rate (in the 24% tax bracket), maximizing the overall refund amount for the household.
- Up to 25% of your total income, any payment method yields a deduction of $0, so focus on using credit cards that offer points and discounts.
- If you confirm that you have surpassed the 25% threshold in the HomeTax preview, switch to debit cards (30% deduction rate) for November and December.
- For dual-income couples, allocate spending to the lower-income partner when spending is low, and to the higher-income partner when spending is high to maximize tax savings.