US Expat Taxes Explained: Filing Taxes as an American Living in Japan
You are going to be required to file US expat taxes no matter which country you live in, but how will your taxes be affected if you live in Japan? As a long-standing economic hub of Asia, Japan is appealing for expatriates who are looking for unique cultures and business opportunities. Nevertheless, it is important to understand how your US expat taxes are going to change with your move to Japan, and what taxes you will be required to pay to your host country while residing there.
US Expat Taxes in Japan
If you are a citizen or permanent resident of the United States, then you are obligated to file US expat taxes with the federal government each year, regardless of the country in which you reside.
In addition to the regular income tax return, you could also be required to file an informational return on your assets held in foreign bank accounts with Foreign Bank and Other Account Reporting (FBAR) Form 114, in addition to Form 8938 Statement of Specified Foreign Financial Assets.
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 allows you to decrease your taxable income on US expat taxes by the first $108,700 for 2021 ($107,600 for 2020) earned as a result of your labors while a resident of a foreign country.
- A foreign tax credit which allows you to offset the taxes you piad in your host country with your US expat taxes dollar for dollar, and
- A foreign housing exclusion which allows an additional exclusion from income on US expat 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 expat 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 US expat taxes.
Tax Rates for Japan
|Under JPY 1,950,000||5%|
|JPY 1,950,001 – JPY 3,300,000||10%|
|JPY 3,300,001 – JPY 6,950,000||20%|
|JPY 6,950,001 – JPY 9,000,000||23%|
|JPY 9,000,001 – JPY 18,000,000||33%|
|Over JPY 18,000,000||40%|
Expats also pay Inhabitants Tax. This tax is combined by the municipality and prefecture where the person lives. The rate is dependent on the particular municipality, but is often 10%.
In Japan, you are taxed regardless of your residency status, but how you are taxed is different based on your residency status. There are three categories:
- 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 paper work to begin employment.
Is Foreign Income Taxed in Japan?
An expat may be required to pay taxes on foreign earned income, but it depends on their residence status. Permanent residents are required for national income tax and prefectural and municipal taxes on their global income. Non-permanent residents are only taxed on income that is Japan-sourced, unless their foreign earned income is then paid in or remitted to Japan. Non-residents are subject only to taxes on the income they earn inside of Japan, and are only required to pay inhabitants taxes if they own property or a Japanese company.
Japan Tax Due Date
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, and this date cannot be extended. This is a month earlier than the deadline for your US expat taxes.
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.
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 expat taxes.
US – Japan Tax Treaty
The US and Japan do have a 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.
Taxes in Japan
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.
As stated earlier, those living in Japan are going to be required to pay inhabitants taxes to prefectures and municipalities. This is usually 10% of your total income, but it does depend on the municipality.
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.
Saving on US Expat Taxes
With the many various forms of taxation that are applied to foreign nationals working and residing in Japan, it is important that you apply all of the exclusions, deductions and credits to your US expat taxes. Understanding your US expat taxes while living in Japan will make the entire experience a more enjoyable one.