Gift Tax for Expats in Japan: What Are the Thresholds and Limitations for Those Married to Non-US Persons?

Benjamin Franklin once said that two things are certain: death and taxes. This statement continues to apply today, so we are going look at the gift tax and how it impacts US persons in Japan who have married a non-US person. The good news is that the US tax code doesn’t impose income tax on the first set amount of dollars that you give away, but there’s a little more about the gift tax code that you need to know if you plan on making a sizeable gift.

What Is the Gift Tax? What Exclusions Apply to Expats in Japan?

Before we look at the specifics of gift tax for expats in Japan, let’s break down exactly what the gift tax is. The US gift tax is a tax imposed on the transference of money, property, or rights to property made to anyone, with the exception of US charities and political organizations. The tax is imposed on the donor — i.e., the person that made the gift.

There are several laws in the code that will protect your gift from taxation. The first provision is known as the gift tax exclusion and is the annual amount that you are allowed to gift without paying tax. You can gift $15,000 in 2019. If the gift is made to your spouse, then the gift tax exclusion amount is unlimited, so there is no limit on how much you can give to your spouse.

However, this unlimited exclusion only applies to a spouse that is a US citizen, which can complicate matters for expats in Japan or other countries. For non-US citizen spouses—for example, if your spouse is a Japanese citizen—you can gift $155,000 in 2019 without being taxed. The exclusion is subject to inflation, so the exclusion can increase. The tax code has a lifetime gift-giving limit as well, so even you exceed the exclusion there will not be tax until you gift $11.400 million in 2019.

How to Use Lifetime Gift Limits to Reduce Taxes

For the lifetime gift limit, you look at any taxable gift you made in excess of the annual gift tax exclusion. So, for example, in 2019 if you gifted $160,000 to your non-US citizen spouse, then the taxable amount is $5,000 and this reduces the lifetime limits.

If, while living in Japan, you make large transfers to a non-US spouse, then gift tax can only be avoided with careful planning. The first advisable action is to take advantage of the annual gift tax exclusion. This amount will reset each year so, if possible, spread your gifts out.

Remember: the tax code allows you to pay an unlimited amount of medical expenses if they are paid directly to the service provider. The same applies to tuition paid directly to colleges and universities. The education exclusion applies to tuition and no other educational costs, such as room and board, books, and equipment. The lifetime limit for gift tax can be used to protect amounts that exceed these tax-saving techniques. Once you are subject to gift tax, then that taxation rate ranges from 18%-40%.

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