Expat Tax In Japan – What You Need To Know As A US Expat

Expat Living In Japan

The string of islands that are collectively called Japan, the Land of the Rising Sun, lies off the eastern coast of the Asian continent between the Sea of Okhotsk in the north, the East China Sea in the south, and the Pacific Ocean. Most of the population is found on the four largest land masses; Honshu, Hokkaido, Kyushu, and Shikoku. Tokyo, located on Honshu, is the capital of Japan and home to approximately 80% of the population or over 30 million people. Ancient traces of humans dating back over 30,000 years BC on these volcanic islands give this country a deep sense of history and identity. The long lineage of feudal states, shoguns, and emperors surviving through to the early 20th century is the foundation for one of the most densely populated countries and leading economic powers in the modern world. US Expats encounter this sense of history in Japanese society; a strong sense of national identity, cultural traditions, and pride.

The string of over 6,000 individual islands, with mountainous terrain and what can be called a temperate climate, are divided into 47 (administrative) prefectures. The uninhabitable, rocky land and 108 active volcanoes support neither agriculture nor residential land development and have thus forced most of the population to coastal areas. Average temperatures range from a wintry 5 °C (41 °F) to a comfortable 25 °C (77 °F). Heavy rain, often in the form of typhoons, appear from June through late August.

Below is our top 10 list of cities in Japan for expats (in no particular order):

• Tokyo
• Yokohama
• Osaka
• Nagoya
• Sapporo
• Kobe
• Kyoto
• Fukuoka
• Kawasaki
• Saitama

Expats fortunate enough to live in Japan will find more celebrated chefs and restaurants in this country than anywhere else in the world. Japan is a constitutional monarchy where the Emperor has limited, mostly ceremonial, responsibilities. The bicameral National Diet is a parliamentary body lead by a Prime Minister who is designated by the parliament but appointed by the Emperor. The current Japanese legal system is heavily influenced by European civil laws. Japan is a member of several world-wide groups including the Group of 7 (G7, formerly G8 before Russia was suspended), Asia-Pacific Economic Cooperation (APEC), and Association of Southeast Asian Nations (ASEAN).

Guide To US Expat Tax In Japan

The Tax Samaritan country guide to US expat tax in Japan is intended to provide a general review of expat tax in Japan and how that will impact your U.S. expatriate tax return as a U.S. Expat In Japan.

As a U.S. taxpayer, all worldwide income is subject to taxation and reporting and for most expatriates you are required to file a U.S. tax return on an annual basis due on April 15 each year (June 15 if you are residing overseas on the April 15 deadline). The tax treatment for different classes of income can vary greatly from Japan and the U.S. For example, certain benefits may be tax free or excluded from taxable income in the Japan, but in the U.S. these benefits are likely to be non-qualified benefits that are subject to being included as taxable income in U.S. As such, there are a number of considerations related to US expat tax in Japan and this brief article will address a few of those considerations.

Japan Expat Income Taxes

Who Is Liable For Income Taxes In Japan

An individual’s tax liability in Japan is based on one of three residency categories: permanent residence, non-permanent residence and non-residence. Any Japanese national or foreign national who resides in the country for at least 5 of the last 10 years is considered a permanent resident. Foreign nationals who have not maintained a Japanese residence for 5 or more years in the last decade are classified as a non-permanent resident. Non-residents are individuals who do not meet either of the above two categories. Foreign nationals who establish residence in the country are considered permanent residents unless there is evidence their residence will last less than 365 days.

A permanent resident is taxed, regardless of income source, on worldwide income. Individuals classified as non-permanent residents are taxed on Japanese-source income and any non-Japanese income received while resident in Japan. Non-residents are taxed only on Japanese-source income. Married individuals are taxed on all forms of income as individuals and file separately.

Tax Year In Japan And Tax Filing And Payment Rules

Tax returns are filed and paid between February 16 and March 15 for income received during the previous calendar year. Taxable income from employment includes wages, Directors’ fees, and any other form of compensation. Benefits of any kind including, for example, use of an employer-provided automobile, education-related benefits, health payments, and pension contributions are considered part of taxable income. Some benefits like moving expenses and employer-provided housing receive special tax treatment. Individuals who are self-employed or engage in professional activities are subject to separate tax rates.

Dividends can be subject to a flat tax rate as high as 15%. Interest including from non-Japanese sources are subject to a progressive tax rate. Capital gains, depending, for example, whether derived from real property assets or intangibles like securities, are classified as short- or long-term (greater than 5 years). Capital gains derived from the disposition of real property are taxed separately from other income. In comparison, capital gains from the sale of securities are generally taxed at a flat of 20%. Short-term capital gains are subject to a 30% tax rate plus an inhabitant tax that adds an additional 9%. Japan has both an inheritance and gift tax on Japanese-source transactions.

Expat Tax Withholding In Japan

Japan has social security programs that finance a full-range of social services including health, nursing care, pension insurance, welfare, unemployment coverage, and accident compensation protection. Premiums for these insurance plans are withheld from wages by employers. Non-residents are subject to 10% withholding for any proceeds derived from the disposition of non-residential real property.

Even though the Japanese tax reporting system is based on self-reporting, a non-resident does not need to file a tax return if income withholding satisfies the current year tax liability.

The United States has a tax treaty with the Japan. Consequently, tax returns of US expats, especially in Japan, require analysis by an international tax specialist like Tax Samaritan.

What You Need To Know About US Expat Tax In Japan

When dealing with US expat tax in Japan, there are a number of preferential expat tax treatments that may benefit your U.S. expatriate tax return. In fact, for many U.S. expats, the Foreign Earned Income Exclusion (IRS Form 2555) and other deductions will reduce your U.S. taxes to zero.

Some of these preferential tax treatments or benefits for US expat tax in Japan include:

• If you are a U.S. citizen or a resident alien of the United States and you live in Japan, your US expat tax in Japan is based on your worldwide income and as such you must file a U.S. return for all the years that you are residing in Japan. However, as a U.S. expat you may qualify to reduce your U.S. taxable income up to an amount of your foreign earnings that is adjusted annually for inflation ($99,200 for 2014). In addition, you can exclude or deduct certain foreign housing amounts. This is known as the Foreign Earned Income Exclusion and foreign housing exclusion .
• When it comes to your US expat tax in Japan, most US expatriates worry about “double taxation” – paying taxes to two different countries – the U.S. and Japan. A U.S. taxpayer working overseas in Japan may be able to reduce U.S. taxable income and “double taxation” by claiming the Foreign Tax Credit on Form 1116. Should any foreign income not be fully offset by the foreign earned income exclusion, housing exclusion or housing deduction, the foreign tax credit paid or accrued may be used as a deduction or credit on the U.S. tax return. Taxpayers can elect to either deduct the taxes as an itemized deduction on Schedule A or claim a credit against tax. In most cases, it is to your advantage to take foreign income taxes as a tax credit.

A common but dangerous mistake is the assumption that if there are zero taxes owed with these tax benefits that a return for US expat tax in Japan does not need to be filed. That is not true. If you are working overseas, it is likely that you meet the filing requirements to file a tax return and must do so. It is important to note that the preferential tax treatments, such as the foreign earned income exclusion and foreign tax credit are not applicable to the outcome of your tax liability until they are claimed on a filed tax return.

When faced with US expat tax in Japan there are many tax items to consider, but the above are by far the most common preferential tax benefits. With top-notch experienced and knowledgeable expat tax preparation from Tax Samaritan, you can be assured that you are paying the minimal amount of U.S. taxes that you are legally obligated for.

Japan Foreign Bank Account Reporting – The FBAR (FinCen Form 114)

Another important tax deadline that frequently applies to US expat tax in Japan is in regards to the disclosure of foreign assets on the FBAR (Foreign Bank Account Report – Form 114 – formerly known as TD F 90-22.1).

The FBAR filing deadline is June 30th (or the preceding business day if June 30th falls on a weekend). Unfortunately, requesting an extension on your individual return does not extend the FBAR due date – there is no extension available for the FBAR deadline. Any reports filed after this date are considered a delinquent FBAR. In addition, the FBAR is different than many other tax forms in that it must be received by the deadline date (and not postmarked by the deadline date).

The FBAR must be filed with the Treasury Department (it is not filed with your federal income tax return) whenever you meet the FBAR filing requirements, which in a nutshell is whenever a U.S. person has a financial interest in, or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust or other type of foreign financial account (including an insurance policy with a cash value such as a whole life insurance policy) maintained with a financial institution, with an aggregate value of over $10,000 at any time during the calendar year based on the highest value of each foreign account during the tax year.

If you have bank accounts at Dai-Ichi Kangyo Bank (DKB), Aichi Bank, Bank of Fukuoka, Bank of Japan (central), Bank of Kyoto, Chiba Bank, Bank of Yokohama (BOY), and 77 Bank, or at another bank in Japan or any other foreign country, you may meet the filing requirement to disclosure your foreign accounts on the FBAR. Please don’t hesitate to contact Tax Samaritan to learn more about your filing requirements.

U.S. – Japan Social Security Totalization Agreement

The United States has entered into agreements, called Totalization Agreements, with several nations for the purpose of avoiding double taxation of income with respect to social security taxes. These agreements must be taken into account when determining whether any alien is subject to the U.S. Social Security/Medicare tax, or whether any U.S. citizen or resident alien is subject to the social security taxes of a foreign country. As of this time, Japan has entered into a Totalization Agreement with the United States thus there is no opportunity to avoid double taxation of social security income for US expat tax in Japan.

U.S.- Japan Tax Treaty And Tax Relief For US Expat Tax In Japan

The United States has a tax treaty with Japan. The US Internal Revenue Code offers tax credits against any Japan income tax. See our Tax Samaritan Takeaways below for other valuable references.

Request A Tax Preparation Quote For Help With Your US Expat Tax In Japan

Our goal at Tax Samaritan is to provide the best counsel, advocacy and personal service for our US expat tax in Japan. We are not only tax preparation and representation experts, but strive to become valued business partners to American expatriates in Japan. Tax Samaritan is committed to understanding our client’s unique needs; every tax situation is different and requires a personal approach in providing realistic and effective solutions.

Click the button below to request a Tax Preparation Quote today to get started with the preparation of your return for US expat tax in Japan or to request a free 30-minute tax consultation.

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Tax Samaritan Expat Tax In Japan Takeaways

Please click on the hyperlinks below for additional takeaways for your expat tax in Japan:

Tax Samaritan Expat Tax Services

2014 IRS Publication 54, Tax Guide for US Citizens and Resident Aliens Abroad

US Embassy in Japan

Embassy of Japan, Washington, DC

Ministry of Foreign Affairs – Japan

Tax Samaritan is a team of Enrolled Agents with over 25 years of experience focusing on US expat tax in Japan and throughout the world. We maintain this tax blog where all articles are written by Enrolled Agents. Our main objective is to educate US taxpayers on their tax responsibilities and the selection of a tax professional. Our articles are also designed to help taxpayers looking to self prepare, providing specific tips and pitfalls to avoid.

When looking for a tax professional, choose carefully. We recommend that you hire a credentialed tax professional such as Tax Samaritan that is an Enrolled Agent (America’s Tax Experts) that is experienced and knowledgeable about US expat tax in Japan. If you are a US taxpayer overseas, we further recommend that you seek a professional who is experienced in expat tax preparation, like Tax Samaritan (most tax professionals have limited to no experience with the unique tax issues of expat taxpayers).

Randall Brody is an enrolled agent, licensed by the US Department of the Treasury to represent taxpayers before the IRS for audits, collections and appeals and experienced with US expat tax in Japan. To attain the enrolled agent designation, candidates must demonstrate expertise in taxation, fulfill continuing education credits and adhere to a stringent code of ethics.

Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional US expat tax in Japan advice based on your individual needs.