Parents' Financial Support to Adult Children May Face Gift Tax, South Korea's NTS Clarifies

South Korea's National Tax Service (NTS) has moved to correct widespread misunderstandings about gift tax regulations, particularly concerning financial support provided by parents to their adult children. Recent online trends, including viral YouTube videos, have promoted "tax-saving tips" that suggest certain transfers are tax-exempt, such as labeling monthly payments as "living expenses" or using a parent's credit card for personal spending. The NTS clarified that these popular tips often misrepresent tax laws and can lead to significant tax liabilities.

One prevalent myth is that monthly transfers of 1 to 2 million won (approximately $730 to $1,460) from parents to working children, if labeled "living expenses," are exempt from gift tax. The NTS stated this is incorrect and such transfers can indeed be subject to gift tax. The tax law's exemption for living expenses applies only when the child cannot support themselves with their own income. The NTS will assess the actual use of funds and the recipient's financial capacity, regardless of the "living expenses" memo. If a child with independent income receives parental support, it can be taxed. Furthermore, if a child uses gifted money for savings, investments, or purchasing assets instead of daily living, gift tax may apply.

The NTS also addressed the notion that families can lend money interest-free using a loan agreement. While loans below a certain interest threshold (calculated at 4.6% annually) might avoid gift tax if the interest is under 10 million won, the NTS stressed that the loan must be legitimate. This requires clear proof of repayment ability, a valid loan agreement, and documented repayment history. The agency actively monitors family financial transactions, including loan repayments, to ensure compliance.

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The NTS will collect fund sourcing plans from the Ministry of Land, Infrastructure, and Transport and analyze taxpayer data such as occupation, age, income, and asset status to thoroughly verify the source of housing acquisition funds.

Another misconception involves parents' credit cards. Using a parent's card for a child's expenses is treated the same as a cash gift, and the NTS may investigate the source of funds if a child's spending significantly exceeds their income or if they repay large debts. This could result in gift tax and penalties. Similarly, when parents provide funds for a child's home purchase, and this is declared as a loan on the "fund sourcing plan" submitted to the Ministry of Land, Infrastructure, and Transport, the NTS verifies these claims. They analyze taxpayer data, including occupation, age, income, and assets, to confirm the source of housing funds. Misrepresenting fund sources or failing to provide adequate proof can trigger an investigation and lead to gift tax and penalties.

Finally, the NTS corrected information regarding "burden-sharing gifts" of apartments with existing mortgages. While this can reduce gift tax for the child by subtracting the mortgage debt from the gifted asset's value, the parent may be liable for capital gains tax on the debt they transfer. The agency also warned against withdrawing large sums of cash before death for medical or funeral expenses to reduce inheritance tax, stating that such withdrawals, if unexplained and exceeding certain thresholds (200 million won within one year or 500 million won within two years before death), are presumed to be inherited assets and included in the taxable estate.

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In the future, we plan to continue providing essential tax information in familiar and diverse ways so that citizens can understand tax laws more easily and accurately. We will continue to expand user-centered guidance to actively resolve citizens' tax-related questions and misunderstandings in their daily lives, beyond simply introducing laws.