Unlock the Power of Japanese Tax Knowledge and Save Big!
In Japan, March marks the end of the fiscal year for most companies and is also the final deadline for both corporate and individual tax filings. While filing taxes may seem like a distant task for you if you are a white-collar employee working in company, many are unaware that you can employ tax-saving techniques to save money. With the right approach, you can take advantage of the Japanese government’s policies and save money! Today, we will explore tax filing knowledge and strategies for tax optimization in Japan.
To prevent tax evasion, companies are obligated to withhold a portion of income as taxes when paying salaries to employees. This is known as "Gensen Choshu" and is usually indicated as "income tax" on payslips. The company is then required to remit this amount to the tax authorities the following month.
Since the purpose of "Gensen Choshu" is to ensure taxes are paid without evasion, the withholding amount is often higher than necessary. As a result, at the end of the fiscal year, the tax authorities calculate the precise tax liability and refund any excess amount paid. This method of upfront deduction and subsequent refund incentivizes everyone to proactively file accurate tax returns.
For employees working in companies, the process of filing taxes and receiving refunds for excess tax deductions is known as "Nenmatsu Chosei" and typically takes place around December each year. The government provides various tax benefits and deductions, so if you meet certain criteria, you can report them during this adjustment period. Based on the reported items, the tax authorities will calculate the final tax liability, resulting in either a refund or an additional payment.
Generally, the documents typically required by companies for year-end tax adjustment are:
a. Dependent Declaration: Tax benefits can be availed for supporting parents, spouse, or children over 16.
b. Insurance Deductions: Besides the basic health insurance, deductions can be claimed for personally purchased life insurance, earthquake insurance, etc.
c. Mortgage Deductions: By submitting proof of mortgage balance, you may qualify for tax deductions.
In most cases, the tax authorities will refund a portion of the excess tax paid (known as "Hankofukin"). Hence, it is crucial to prioritize and pay attention to this procedure!
Kakutei Shinkoku, or the final tax return, is a process where both companies and individuals report their income to the tax authorities in the following year, typically in March or April.
For most employees in companies, their tax affairs are relatively straightforward and can be handled through the year-end adjustment conducted by the company. As a result, there is usually no need to make a separate visit to the tax authorities for the Kakutei Shinkoku.
However, if you meet any of the following conditions, it may be necessary for you to file a Kakutei Shinkoku at the tax office:
a. Income from a side work exceeds 200,000 yen.
b. Annual salary income exceeds 20 million yen.
c. Receiving salaries from two or more companies simultaneously.
d. Sold real estate during the year.
e. Engaged in stock trading with losses.
f. Medical expenses exceed 100,000 yen for the year.
Filing a Kakutei Shinkoku shouldn't cause much concern. Each year, tax offices in various locations set up venues specifically for the purpose of assisting with the final tax return. The staff members there will guide you step by step in filling out the required documents. Your task is to first check online for the necessary documents to bring (to avoid making multiple trips), bring your seal (hanko), and visit the local tax office directly.
*We are fully committed to supporting our clients throughout the entire tax filing process, and we encourage you to rely on us for any further assistance you may require. Don't hesitate to approach us anytime for comprehensive support and detailed information.
Three Key Tools for Tax Optimization: Dependents, Real Estate, and Hometown Tax Donation System
After you have some understanding about the basics of tax filing, let's now learn about as a salaried employee, what you can do to optimize your taxes.
Firstly, the concept of "taxes" primarily applies to income from profits. For companies and self-employment, the taxable income is derived by subtracting costs from the total annual income. Therefore, the concept of "costs" directly influences their amount of income tax.
However, salaried employees receive income in exchange for their labor, and there is no concept of "costs" applicable to them. Therefore, they can only utilize certain tax-saving policies stipulated by the government to reduce their tax.
One of the most common practices is providing "foster care" for family members and spouses. By financially supporting your family with a certain amount of money each year, you can qualify for tax benefits. The best aspect of this policy is that it also applies to foreigners and their family members residing abroad, making it very considerate. By annually remitting a designated amount of money to your parents through specified means and obtaining the necessary documentation, you can declare it during year-end tax adjustments.
It's important to note that, due to many individuals excessively exploiting this practice, including distant relatives who are not directly related, the scrutiny of foreigners for this policy becomes stricter every year. It may be canceled one day.
For the collective long-term benefit, we recommend listing only parents, spouses, and children over 16 as dependents and practicing moderate tax planning.
For employees working in large companies, especially those with higher incomes, Real Estate is a relatively cost-effective tax-saving method. Due to Japan's unique economic situation, bank loan interest rates are surprisingly low. Therefore, purchasing a house often results in lower monthly mortgage payments compared to renting. Furthermore, after taking out a loan, one can also enjoy tax-saving policies, which has encouraged many Chinese people to buy houses in Japan.
However, if you are not a permanent resident, Investing real estate requires a 30% down payment. Additionally, handling the procedures for buying a house incurs additional expenses such as lawyer fees, agent fees, etc., which need to be carefully calculated.
"Hometown tax donation payment" is a tax-saving policy introduced in recent years by Japan to revitalize local economies. However, it is a pure tax savings method, becuase it always you to "spend 2,000 yen and receive something worth far more than 2,000 yen."
This policy works as follows: You can first spend money to purchase corresponding items on major online platforms that support "Hometown Tax Donation System." The tax office will subtract 2,000 yen from the amount you spent and provide a reduction in the following year's inhabitant's tax.
For example, let's say Jone needs to pay 50,000 yen in inhabitant's tax annually. In 2020, Jone made a 10,000 yen purchase through the Hometown Tax Donation System. The following year, Jone inhabitant's tax would only be 42,000 yen. In this case, Jone effectively spent only an additional 2,000 yen to obtain an item worth 10,000 yen.
However, there is a "quota" for utilizing Hometown Tax Donation System based on the amount of residential tax each individual pays.
On various "Hometown Tax Donation System" websites, there are calculators where you can input your salary to calculate this quota. If the calculated reduction amount is 60,000 yen, for example, you should only purchase items worth 60,000 yen, and the following year's residential tax can be reduced by 58,000 yen. It is important to note that if your shopping exceeds this quota, the excess amount will not be eligible for reduction, and it will truly become a voluntary contribution.
Hometown Tax Donation System is still one of the rare tax policies in Japan where the more you earn, the more beneficial it becomes. Since there are almost no thresholds to use it and you can even purchase essential items like rice, we recommend that everyone working in Japan take full advantage of it.
When you have higher income or consider starting a side business or becoming self-employed, you may consider consulting with us to better plan your finances. However, before that, it is essential to understand the basic tax knowledge and tax-saving methods in Japan. They don't require too much effort on your part, but the returns they bring are substantial. We hope that everyone can enjoy life better with the money saved through reasonable tax planning.