Kon’nichiwa! Welcome to Japan. As one of the more than 55,000 American expats living and working in Japan you are enjoying the traditional side of Japanese culture while being blown away by the speed at which Japanese technology is evolving. It is quite a unique environment, that makes it a definite “must see” for many. While it is so easy to get caught up in the wonder of your new home, it is important not to forget where you came from, particularly when tax time rolls around! Read on to find out more about your tax obligations as an American living in Japan.
US Tax obligation while living in Japan
As a citizen or permanent resident of the United States, you are obligated to file US taxes with the IRS each year regardless of the country in which you reside. In addition to US taxes, you could also be required to file an informational return on your assets held in foreign bank accounts (“FBAR”). While the US is one of the few governments that tax the international income of their citizens and permanent residents who reside overseas, it does have special provisions to help protect them from double taxation including:
- The Foreign Earned Income Exclusion, which allows you to exclude $102,100 from your foreign earned income on your 2017 US taxes and $103,900 on your 2018 US taxes
- The Foreign Tax Credit allows you to offset, dollar-for-dollar, the taxes you paid in your host country with your US taxes
- A Foreign Housing Exclusion which allows an additional exclusion from income on US taxes for certain amounts paid for household expenses that occur as a consequence of living abroad
With proper planning and a skilled tax preparer, you should be able to take advantage of these strategies to minimize or eliminate a liability from US taxes. Please do note that even if you do not believe that you owe any US income taxes you will, most likely, still be required to file a US tax return.
Will I need to pay tax in Japan?
In short, yes, you will be required to pay tax while living in Japan. How much tax, and what income will be subject to tax will be determined by looking at your residency status while in Japan. There are three different categories of resident:
- Permanent Resident — This category includes Japanese nationals and expatriates who have maintained a home and domicile in Japan for five or more years in the preceding ten years.
- Non-Permanent Resident — This category is for expatriates who have had domicile and a home in Japan for one year or more, but have not surpassed five years out of the preceding ten years.
- Non-resident — This category includes those who do not meet either of the requirements listed above. Note, however, that foreign national employees are usually considered Non-Permanent Residents once they have landed in Japan and have organized the necessary paperwork to begin employment.
How much tax will I need to pay?
Currently, the national income rates that apply to both permanent and non-permanent residents are as
An additional surtax of 2.1% of earnings is also included in addition to income tax rate you are required to pay (i.e. the above the amount in the table). In addition to income tax, both permanent and non-permanents residents are required to pay an “Inhabitants Tax”. This tax is a combination of the prefectural and municipal rates applicable to where you reside and generally works out to be a flat 10%.
Non-residents are taxed differently at a flat rate of 20.42% on Japanese sourced gross salary and allowances (no deductions allowable). This rate includes the 2.1% surtax described above.
Is my worldwide income taxed just like in the US?
This will depend on your residency status. For those considered permanent residents, then yes, you will be required to pay tax on income that you have received from both inside and outside of Japan. For those that fall into the non-permanent resident category, you will only need to pay Japanese tax on income received from outside of Japan if it is “remitted” (that is, brought into) Japan. For example, income is earned in the United States and is then transferred to a Japanese bank account for use in Japan. This income has been remitted to Japan.
Non-residents are only subject to income tax on Japanese sourced income.
When is my Japanese tax return due?
The Japan tax year is the same as the United States: January 1st through December 31st. As far as dates are concerned, this is where the similarities stop. Tax returns need to be filed with the Ministry of Finance before March 15th (mid-April if you pay by automatic bank transfer), and unfortunately, no extensions are available.
Japan has two due dates for the pre-payment of taxes. These pre-payments occur at the end of July and November for each year except for the first initial year of arrival. If the entire amount has not been paid by March 15th, the remaining balance will then be due.
Note: if prefectural and municipal income taxes are not withheld by your employer, you’ll need to pay them in quarterly installments during the following year. For example, the 2017 taxes are paid in four installments in June, August and October 2018 and January 2019.
Am I required to pay Social Security in Japan?
As a general rule of thumb, expatriates are going to be required to pay into Japanese Social Insurance once they have started employment with a Japanese employer. This is required in order to cover the costs of health insurance, welfare, pension plans, workers compensation, and unemployment insurance, as well as other social programs currently in place in Japan.
If you are on a temporary assignment in Japan, you will be required to pay Social Security to the US. If you are self-employed, you are to pay social security to the country in which you spend more time. This is an area where some expats find they see dual taxation on their US taxes. The good news is there is a Social Security Totalization Agreement between the United States and Japan that can help. The agreement means that you are only required to pay into one system, even in situations where you should technically be paying into both. Please don’t hesitate to contact one of our tax specialists if you would like further information on this.
US-Japan Tax Treaty
In addition to the Social Security Totalization Agreement, the US and Japan also have an income tax treaty. The US-Japan tax treaty is useful for defining the terms for situations when it is unclear to which country taxes should be paid. The country that receives the tax payment is usually determined by the taxpayer’s resident status in each country. It is in place to help relieve double taxation of dual citizens while also being available to explain any tax matters that may be unclear. It is an expat’s friend when it comes time to file both Japan and US expat taxes.
Are there any other taxes in Japan that I need to know about?
Yes, in addition to income tax on salaries paid, there are other forms of income that are taxed in Japan. They are not too different from what you are used with your US taxes, but it is good to be aware of them:
- Non-cash compensation is considered taxable. This includes housing stipends, relocation expenses, meal and clothing allowances, commuting costs, club memberships, education reimbursement or home leave payments. There are exceptions, but in general, expats can expect to pay taxes on non-cash compensation in Japan.
- Any capital gains are also going to be taxed, including the sale of art or antiques, machinery or equipment by an entrepreneur, the sale of patents, memberships, or bonds. These are filed under the separation tax method; although, new policies include that capital losses can be carried forward and can offset your other income.
- For estate taxes, foreign nationals can expect to pay taxes if they are considered a resident of Japan at the time the donor passed away, and the tax is applied to all properties inside or outside of Japan. If the beneficiary is not a resident of Japan, then taxes are only applied to properties in Japan.
- Gift taxes are quite similar to what is used in US taxation. The donee is responsible for paying the taxes applicable to the gift, and the donor does not have any tax responsibility. Non-residents are only required to pay gift taxes for property located in Japan.
Have more questions about your expat tax return?
If you have a situation that you find complicated, consult with a Greenback accountant! Our expat tax experts can help with your questions about living in Japan and how your US expatriate taxes are affected. Or contact us today.