American Expats in Japan: How to Prepare for the Upcoming Tax Deadline

For American expats living in the “Land of the Rising Sun” (more formally known as Japan), their Japanese tax deadline is quickly approaching.

The Japanese tax year is a calendar one – meaning it runs from January 1st through December 31st, like the US. Those who are required to file a tax return (see below), must do so at the local tax office (zeimusho), by mail or online (e-Tax) between February 16 and March 15 of the following year. For example, the tax return for 2019 must be filed between February 16 and March 15, 2020.

In Japan, taxpayers are classified into three categories:

1.) Non-Resident

A person who has lived in Japan for less than one year and does not have a primary base of living in Japan. Non-residents pay taxes only on income from sources in Japan, but not on income from abroad.

2.) Non-Permanent Resident

A person who has lived in Japan for less than five years but has no intention of living in Japan permanently. Non-permanent residents pay taxes on all income except on income from abroad that does not get sent to Japan.

3.) Permanent Resident

A person who has lived in Japan for at least five years or has the intention of staying in Japan permanently. Permanent residents pay taxes on all income from Japan and abroad.

If you are required to pay taxes in Japan, you’re also required to file a tax return in Japan if you:

  • Leave Japan before the end of the tax year
  • Your employer does not withhold taxes (e.g. employer outside Japan)
  • You have more than one employer
  • Your annual income is more than 20,000,000 yen
  • You have side income (i.e., self-employment) of more than 200,000 yen

Types of Taxation

Although there are several tax regimes in Japan, such as vehicle, consumption, property, etc., the two primary income taxes that expats will want to be aware of are:

Income Tax

Income tax is paid annually by individuals on the national, prefectural (similar to a state or province) and municipal (similar to a city) levels. This is also known as “resident tax” on the prefectural and municipal level. The amount is calculated based on the net income of the individual person.

Enterprise Tax

Enterprise tax is a prefectural tax paid annually by self-employed individuals engaged in business activities. The amount is calculated based on the person’s net income and the type of business.

Japan May Tax Foreign Income

In Japan, expats may be required to pay income tax on earned income from foreign sources, depending upon the residency status held. For permanent residents, income tax must be paid on all their income globally (including and the prefectural and municipal levels). For non-permanent residents, income tax must be paid only on Japanese-sourced income, although there remains an exception for foreign income paid in or sent to Japan. Taxpayers who are classified as non-residents only pay taxes on income earned inside Japan.

Things to Know About Expat Taxes in Japan

If you’re a citizen or permanent resident of the US, you must file a US tax return each year, no matter what country you happen to live in at the time. While the US taxes the international income of all citizens and permanent residents who live overseas, fortunately, it does provide several provisions to help protect you from double taxation on your US tax for expats. These include:

  • The Foreign Earned Income Exclusion, which allows you to exclude up to $105,900 in foreign earned income from your 2019 US taxes ($107,600 for 2020)
  • The Foreign Tax Credit, which allows you to offset the taxes you paid in your host country with your US expat taxes dollar for dollar
  • The Foreign Housing Exclusion, which allows you to exclude certain household expenses that occur as a result of living abroad

Note that in addition to your US tax return for expats, you may also be required to file an informational return on your assets held in foreign financial accounts called a Foreign Bank Account Report (FBAR), otherwise known as FinCEN Form 114.

Finally, there is a tax treaty between the US and Japan. This treaty helps determine to which country different types of US tax for expats should be paid and at what point they should be paid. The purpose of the treaty is to ensure taxes are paid to the right country. Navigating the treaty on your own can be a bit complicated, so it’s a good idea to consult with an expat tax professional if you’re unsure of the requirements for your situation.

By planning ahead, you should be able to take advantage of the strategies above in order to minimize or eliminate your US tax obligation.

Need Help Understanding Your US Expat Tax Obligations?

Our team of expat-expert CPAs and IRS Enrolled Agents are here to provide you with the knowledge and resources you need in order to fulfill your tax obligations with the IRS. Contact us today and enjoy the easiest expat tax prep possible!