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Simple Tax Guide for Americans in Japan

Simple Tax Guide for Americans in Japan

At TFX we have been preparing taxes for Americans in Japan since 1995.

Taxes for US Expats Explained - Japan

Japan has been an Asian economic hub for many years. It is an attractive destination for expats trying to find business opportunities and a unique culture. But, it is vital to understand the impact that living in Japan has on your expat taxes in the United States, and the taxes you pay to Japan while you live there.

US Expat Taxes - Japan

US citizens, as well as permanent residents, are required to file expatriate tax returns with the federal government every year no matter where they reside. Along with the typical tax return for income, many people are also required to submit a return disclosing assets which are held in bank accounts in foreign countries by using FinCEN Form 114 (FBAR).

The United States is among only a few governments who tax international income earned by their citizens, as well as permanent residents, residing overseas. There are, however, some provisions that help protect from possible double taxation situations. These include:

  • The Foreign Earned Income Exclusion. This exclusion allows one to exclude USD 101,300 (this amount is for 2016 taxes) in earned income from foreign sources.
  • A tax credit allowing tax on remaining income to be reduced based on the taxes paid to foreign governments.
  • An exclusion on foreign housing that allows additional exclusions from their income for some amounts paid to cover household expenses due to living abroad.

Preparing a quality tax return following proper tax planning should allow one to use these, as well as other strategies, in minimizing or possibly eliminating tax liability. Note that in most cases the filing of a tax return is required, even if taxes are not owed.

Who Qualifies as a Resident of Japan?

Everyone in Japan pays taxes regardless of their residency status. How the tax is imposed is different depending on residency status. Japan has 3 residency categories:

  • A Permanent Resident - Japanese nationals along with expats who have had a domicile and home in Japan at least 5 of the previous 10 years.
  • A Non-Permanent Resident - Expats with a home and domicile in Japan a minimum of 1 year, but haven’t exceeded 5 of the last 10 years.
  • A Non-resident - People who are not in either category above. Usually, foreign employees are granted Non-Permanent Resident status after they organize the paperwork required to begin their employment.

Tax Rates for Japan

The tax rates in Japan are:

Tax Rate   Income
5% On Under JPY 1,950,000
10% JPY 1,950,001 - JPY 3,300,000
20% JPY 3,300,001 - JPY 6,950,000
23% JPY 6,950,001 - JPY 9,000,000
33% JPY 9,000,001 - JPY 18,000,000
40% Over JPY 18,000,000

Expats also pay Inhabitants Tax. This tax is combined by the municipality and prefecture where the person lives. The rate is dependent on the particular municipality, but is often 10%.

Tax Treaty

An approved tax treaty between Japan and the United States is in place. It helps a taxpayer decided which country to pay taxes to, when the taxes are due, and helps prevent dual taxation. In most cases, residency status is what determines the country that receives the taxes. Tax treaties can be complex, so it is always advisable to consult a professional tax advisor.

When Are Japanese Taxes Due?

The tax year in Japan is identical to the US tax year - January 1 - December 31. There are not many other similarities between the two tax systems, though. Tax returns must be submitted to the Ministry of Finance no later than the 15th of March. There are not any provisions for extending this deadline. Remember that this deadline occurs before the US deadline.

There are two deadlines for tax pre-payments. These payments happen on July 31st and November 30th of each year after the year the taxpayer first arrives. In the case that there is still a balance due on the 15th of March, the remainder is due on that date.

Japanese Social Security

Usually, expats pay taxes into the Japanese Social Insurance system after they start employment with any Japanese company. This tax funds things like welfare, health insurance, workers compensation, unemployment insurance, and pension plans.

Expats on temporary assignments must pay into the US Social Security system too. The self-employed must pay their social security tax to the place where they spend the most time. It is Social Security that can sometimes lead to double taxation.

Does Japan Tax Foreign Income?

Whether or not an expat pays income taxes on earned income from foreign sources depends on the residency status they hold. Permanent residents must pay income tax, plus municipal and prefectural taxes, on all their income globally. Non-permanent residents only pay tax on Japanese sourced income, with an exception for foreign income paid in Japan or sent to Japan. Taxpayers who are classified as non-residents only pay taxes on income earned inside Japan. Additionally, they only pay the inhabitants tax if they are owners of property or Japanese companies.

Japanese Taxes

Along with income taxes, there are also other types of taxes in Japan that expats should be informed about. These taxes are similar to the taxes US citizens are familiar with back in the US, but understanding them is still a good idea.

All people who live in Japan pay the inhabitant tax to local municipalities and prefectures. The rate is generally 10% of income, but does vary by municipality.

Any compensation is taxable, including non-cash forms of compensation. Some items that are included are relocation expenses, housing stipends, club memberships, meal allowances, clothing allowances, education reimbursement, payments for home leave, and commuting costs. There are some exceptions, but most expats should be prepared to pay tax on any compensation in non-cash form.

Japan does tax capital gains, including sales of antiques, art, equipment and machinery by entrepreneurs, memberships, bonds, and patents. These taxes get filed separately, although capital losses (if any) can offset other income.

Foreign nationals pay estate taxes on the condition that they were a Japanese resident at the point in time of the donor’s death, and this tax is on all property - whether inside Japan or outside. If the estate beneficiary isn’t a Japanese resident, the tax is only on properties within Japan.

Japanese gift tax is similar to US gift taxes. The donee pays the applicable taxes on the gift. The donor is relieved of tax responsibility. Gift taxes are only levied on non-residents for property that was located within Japan.

How to read Japanese Tax Statement (Gensen Choshu Hyo)

  • Taxpayer’s Address

  • Taxpayer’s Name

  • Total Salary earned during the year

    • Gross Salary - Report the total amount of the annual Gross Salary in Earned Income section of our Tax Questionnaire. (TQ: Main>Earned Income>Foreign Sourced Income Section)

  • Income after employment income deduction

  • Total income credit

  • Income tax withheld at source

    • Income Tax - Amount of foreign income tax paid or withheld. Can be utilized as a foreign tax credit to offset U.S. tax liability. Report tax imposed on the particular income type in the same section of our Tax Questionnaire where you reported that income.

    • Note: Resident tax should be added to income tax when reporting foreign income tax paid/withheld.

  • Marital status and spousal exemption

  • Number of dependents including children in each category: specific dependents (16-22yrs old), elderly dependents (70 and over). Report dependent children and other dependents on Main Tab of TQ.

  • Details of income credits (social insurance, life insurance, earthquake insurance, mortgage, spouse’s income, personal pension, long-term accident insurance.)

  • Date of Employment and Date of Termination

  • Taxpayer’s DOB

  • Employer’s Address

    • Report your employer’s address in the tax questionnaire under the Earned Income tab in the Foreign Sourced Income section.

  • Employer’s Name

    • Report your employer’s name in the tax questionnaire under the Earned Income tab in the Foreign Sourced Income section.

Questions About Japanese Taxes?

With so many different taxes applied to expats who live or work in Japan, you should make sure to apply any available deductions, credits, and exclusions to your taxes in the United States. Understanding the taxes you must pay while in Japan is one key to enjoying the experience.

Contact us! We have an expert team to provide tax advice to expats, and give you all the information you need to know to file your United States expat tax return while living outside the country.

Japanese Frequently Asked Questions

1. My salary gets paid by an employer in Japan. Do I need to file?

Yes, you do. This certainly adds a bit of work to you or your tax accountant, but the effect on your taxes is likely to be minimal. For salaries less than USD $100,300 (for 2016) there is a zero net effect. It is placed on the form first as a positive, and then later on down the form as a negative.

2. My spouse is not a resident and has no U.S. income. Do I need to get a US tax ID number for them?

No, but there are situations where it may be beneficial to do so. Secondly, unlike Japan, they cannot be claimed as a dependent on your Tax return.  However, it is important to note that if you are married you are not allowed to file single. You don’t have to declare your non-US spouse’s information, but you cannot file single on your tax return.

3. My filing status is head of household. Am I required to report income from my Japanese spouse?

No. The only time you must report your spouse’s income is if you file using married filing jointly status. Please see www.taxesforexpats.com/expat-tax-advice/foreign-spouse.html

4. What about my spouse’s parents? Can they be claimed as dependents?

There are rules that must be met to qualify as dependents. One of the key rules is that your parents or your spouse’s parents must have US Social Security numbers or live in the US. Then other conditions such as their income may be further considered to qualify them as your dependents.

5. My Japanese spouse has accounts that don’t have my name on them. Am I required to report these?

No. You must report financial accounts on form FBAR which is an informational form - no tax due generated. If you are not a signatory on the account, you do not need to report them. See www.taxesforexpats.com/expat-tax-advice/FBAR-Fincen-114.html.

6. I have interest from Japanese post office and bank accounts. How is the interest reported?

The entries for regular post office accounts will show gross income, along with withholding tax (20.315%). Passbooks for bank accounts usually only show the net, so you must divide by 0.79685. For the United States, report the gross amount as income, then claim the foreign tax credit for the Japanese withholding tax.

7. I own stocks that are held in a brokerage account in Japan. Am I required to report this to the Internal Revenue Service?

Simply holding the stocks does not generate a tax obligation, but a taxable event occurs (ie if you receive dividends or sell stock) you must report this on your tax declaration.

8. Am I required to pay taxes on my Japanese pension (kōsei-nenkin)?

If you receive these payments, you must report it on your U.S tax return. However, if you pay tax in Japan on these distributions, the payments will count as foreign tax credit towards your US tax obligations.

9. I own a home in Japan and pay property taxes and mortgage interest. Am I allowed to claim a deduction?

Yes. The rules are the same as for homes in the United States. You can itemize deductions or claim the standard deduction (whichever is higher). Please see https://www.taxesforexpats.com/articles/tax-rules/standard-vs-itemized-deductions-on-the-us-tax-return.html.

10. I pay tuition to a Japanese school. Am I allowed to claim a tuition deduction?

No. There are no provisions for this.

11. I am an owner of a KK (Kabushiki Gaisha) - what does this mean for my U.S tax filing requirement?

This may require the filing of Form 5471 which is submitted with your U.S. tax return.

Please see the following information which may be useful for you.

12. Am I subject to double taxation in Japan and the United States?

If your return is prepared correctly there should be no double taxation in most cases. There are tax treaties involved, and any tax paid to Japan should be applied to your U.S. tax liability.

13. What exchange rate should I use?

Optimizing currency for the benefit of the client is a tool we use to help mitigate tax due. The Internal Revenue Service allows any published rate to be used, as long as it is consistently used throughout the return. There are some rates published by the IRS as guidance, though.

Unlike the tax return which allows more flexibility, the rates for form 8938 and FBAR must be the treasury rate.