Moving to Japan can be an amazing experience for Americans looking for adventure or plentiful work opportunities. Japan is known for its vibrant city life, excellent healthcare system and unique food and culture. However, one consideration expats must research before moving to Japan is the filing of international taxes. U.S. citizens will be required to file their individual tax return and foreign income filings with the IRS each year, as well as required forms to their country of residence. This can be a complicated process, especially for expats who have recently relocated overseas. The international tax experts at Evolution Tax and Legal are here to help you understand expat taxes for Americans living in Japan: tax rates, tax treaties, residency and how to file your U.S. taxes from Japan.
U.S. Expat Taxes in Japan
U.S citizens that live overseas are required to file yearly expatriate tax returns with the IRS, which reports income and other information no matter where they reside. Additionally, many Americans living abroad are required to file FinCEN Form 113, which provides information about assets held in foreign countries and in foreign banks. The U.S has provisions which help citizens avoid double taxation, as they pay international taxes to the U.S. These provisions include: the Foreign Earned Income Exclusion, which allows an individual to exclude USD $104,100 in earned income from foreign sources, a tax credit which allows tax on any remaining income to be excluded based on tax paid to foreign governments and an exclusion on foreign housing, which allows some income tax exclusions to be made based on the housing costs of living abroad.
Japanese Tax Rates
Tax rates in Japan follow an income-based structure, similar to many other countries. Expats in Japan must also pay an Inhabitants tax, which varies depending on the municipality in which an individual lives, but the rate is generally around 10%.
The income tax rates are as follows:
- For individuals with an annual income under JPY 1,950,000: 5%
- For individuals with an annual income above JPY 1,950,001 but under JPY 3,300,000: 10%
- For individuals with an annual income above JPY 3,330,001 but under JPY 6,950,000: 20%
- For individuals with an annual income above JPY 6,950,001 but under JPY 9,000,000: 23%
- For individuals with an annual income above JPY 9,000,001 but under JPY 18,000,000: 33%
- For individuals with an annual income above JPY 18,000,001 but under JPY 40,000,000: 40%
- For individuals with an annual income above JPY 40,000,001: 45%
Who Qualifies as a Resident of Japan?
Japan has three different categories of residency, all of which must pay taxes in the country. The taxes are imposed differently depending on the type of resident an individual qualifies as. An individual is considered a Permanent Resident if they have had a domicile and home in Japan for at least 5 of the 10 previous years. An individual is considered a Non-Permanent Resident if they have had a home and domicile in Japan for at least one year, but not exceeding 5 of the last 10 years. A Non-Resident is an individual living in Japan who does not fit either category above. Typically foreign employees who are non-residents are granted Non-Permanent resident status once they file paperwork to begin employment within the country.
U.S.-Japan Tax Treaty
The U.S and Japan have a tax treaty in place to help U.S expats who reside in Japan avoid double taxation and determine which country to pay taxes to and when the taxes will be due. The treaty determines which country taxes are to be paid to by using residency status, but the treaty can be complex and certain taxes and informational forms are required for both countries regardless of residency. As such, it is helpful to consult an international tax professional for guidance on your unique situation before filing taxes in Japan and the U.S.
When Are Japanese Taxes Due?
Japan follows the calendar year when determining their tax year, which is January 1 – December 31. Taxes must be filed with the Japanese Ministry of Finance by March 15 each year, and there are no extensions that can be put in place for this deadline. As an expat, you can begin to make tax prepayments in the year following your first year in Japan. These payments will be due July 31 and November 30. If there is any balance on the tax payments by the tax filing date, March 15, the remaining balance will need to be due that day as well.
Social Security in Japan
U.S expats living in Japan will typically begin paying into Japanese Social Security once they start a job in the country. Similar to the U.S system of Social Security, a percentage of each paycheck will be contributed to the social security fund, which helps fund things such as welfare, unemployment and pension plans in the country.
U.S citizens who are on a temporary assignment in Japan will have to continue paying social security to the United States, and self-employed individuals who work in both Japan and the U.S will have to pay social security to the country where they spend the majority of their time throughout the year. Social security is typically one of the areas where avoiding double taxation becomes difficult, for those who live and work in both the U.S and Japan.
Does Japan Tax Foreign Income?
Any tax a resident must pay on foreign income earned depends on the residency status of an individual. Permanent residents in Japan are required to pay income, municipal and prefectural taxes on all income earned globally. Non-permanent residents are only required to pay income taxes on any income sourced in Japan, although they can be required to pay taxes on any foreign income that is paid in Japan or sent to Japan. Non-residents living in Japan only pay income tax on money earned in Japan, and they are only required to pay the inhabitants tax if they own property within the country.
Other Taxes in Japan
Along with income tax and the inhabitants tax, both discussed above, there are other taxes in Japan that U.S expats should be aware of, whether they live in Japan or are considering a move. Any cash and non-cash compensation is taxable in Japan, including relocation expenses, club membership, meal allowances, education reimbursements and commuting costs. Expats should be prepared to pay taxes on any and all forms of compensation received while residing in Japan.
Residents in Japan are required to pay taxes on all capital gains, including gains from the sale of antiques, art, machinery, bonds and patents. While capital gains are filed separately from regular tax returns, any capital losses can be used to offset income taxes for the current tax year in which the losses occurred.
If a resident receives any cash or property from a donor after a donor’s death, they will have to pay estate taxes on any property whether it is inside or outside the country. If an estate’s beneficiary is not a Japanese resident, the tax must only be paid on property that is within Japan. The Japanese gift tax follows a similar structure to the U.S gift taxes: a donee must pay the applicable taxes on a gift, and the donor is not responsible for these gift taxes. Gift taxes are only paid by non-residents if the gift is located within the country.
File U.S. Taxes With Evolution Tax and Legal’s U.S. Expat Tax Services
Filing taxes within the U.S and within your country of residence as an expat can be a complicated process, but Evolution Tax and Legal is here to help. Contact our team of seasoned expat tax lawyers for help filing your U.S taxes as an expat, and ensure you avoid double taxation and maximize your benefits as an expat.