A 2022 Handbook For American Expats Paying Taxes In Japan
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Nothing written here is tax advice.
Table of Contents
Introduction
Paying Taxes In Japan—Hello and welcome to Japan! The chain of almost 6,000 islands, with ancient human traces reaching back 30,000 years before Christ, and one of the world’s major economic powers at the same time. Many American expats have it on their bucke t list!
Paying Taxes In Japan
If you’re relocating to Japan and looking forward to settling in, keep in mind both your American and Japanese tax filing responsibilities. With approximately 60,000 Americans living in Japan, we felt it would be useful to go over the tax consequences of residing in Japan in further detail.
Is It Necessary For An American Expat To File Two Tax Returns One In The United States And One In Japan?
You must continue to file your US expatriate tax return with the IRS each year if you are an American living and working in Japan. The specific filing thresholds can be found in this article.
The United States is one of the few countries in the world where citizens are taxed depending on their citizenship. This essentially means that if you are an American (or a green card holder), you must file a US tax return regardless of where you reside or work. So, if you live and work in Japan, you must file a US tax return!
Even if you are needed to file an expat tax return in the United States, you are very certainly also obligated to file a Japanese income tax return! Yes, you will be needed to file two tax returns in most circumstances. This does not, however, imply that you will be taxed twice on the same income. We’ll go through this in greater depth later.
How Do You Deal With US Expat Taxes While Living And Working In Japan?
For example, suppose you are employed by a Japanese company and receive a salary. This revenue should be reported on your US tax return, as you are obligated to record all of your income. The United States has enacted a number of tax benefits for expats, which are detailed below. These tax incentives for expats are intended to avoid double taxation of the same income. No one wants to pay taxes twice on the same earnings!
Other US reporting obligations, such as the FBAR, should also be considered. You must file Form 114 FinCen if your total bank and financial account balances in Japan reach $10,000 in a tax year. Check out our FBAR for Expats post for additional information on the FBAR reporting obligation. Please keep in mind that this is only a reporting requirement and not a component of your tax return.
If you have significant foreign assets, you may be required to report them under FATCA (Form 8938) if your total foreign assets reach $200,000 ($400,000 for married couples).
In Comparison To The United States, What Is The Rate Of Income Tax In Japan?
In Japan, income tax is levied based on residency rather than citizenship. You must file a Japanese income tax return as an expat living in Japan. As a result, we felt it would be useful to highlight Japanese tax rates and compare them to US tax rates so that we could see which tax relief is more beneficial for Americans in Japan.
If I Live And Work In Japan, Should I Claim The FTC Instead Of The Fee?
As you can see from the table above, Japan has a higher income tax rate than the United States. This simply means that your Japanese taxes will always be lower than your US ones. If this is the case for you, the Foreign Tax Credit is a better option than the Foreign Earned Income Exclusion.
When opposed to the Foreign Earned Income Exclusion, the Foreign Tax Credit has a significant advantage in that there is no limit amount. It’s a true dollar-for-dollar refund. If you pay more taxes in Japan than you would due in the United States, you can take an infinite credit for the Japanese taxes you paid and wind up owing no taxes in the United States.
Also, expats can claim the child tax credit (refundable credit of $1,400 per child! ), which you can’t claim if you use the Foreign Earned Income Exclusion.
In summary, claiming the Foreign Tax Credit is usually more advantageous for US expats in Japan because you will always have enough Japanese taxes to apply as a credit to fully offset your US tax payment! However, if you have a low income, you should be aware that the Foreign Tax Credit may not be available to you. The tax rate in Japan begins at 5%, while the tax rate in the United States begins at 10%. The table above is used as a guide. Allow our programme to make a recommendation if you need assistance choosing the proper tax break. Simply log in and begin your return.
When Does My Japanese Income Tax Return Have To Be Submitted?
The tax year in Japan is the same as the calendar year (exactly like in the US!). In Japan, tax returns must be filed by March 15, however in the United States, you have until June 15 to file your return. In general, extensions are not accessible in Japan.
Given that you must file your Japanese tax return before filing your U.S. expatriate tax return, it makes sense to base your U.S. expatriate tax return on your Japanese tax return.
As A Us Expat, Do I Have To Pay Social Security In Japan?
If you work in Japan, you must generally pay local social security contributions. The Japanese government imposes social security to pay health insurance, unemployment insurance, pension programmes, and other benefits.
Good news for expats who work for themselves! The Social Security Agreement between the United States and Japan benefits self-employed foreigners. In the United States, this agreement exempts you from self-employment tax. You will only have to pay Social Security contributions to Japan if you take advantage of the Social Security Agreement.
Is There Anything More I Need To Think About In Terms Of Japanese Taxes?
As an expat residing in Japan, you should be aware that you are subject to an inhabitant’s tax of roughly 10%, which is made up of prefectural and municipal rates. The exact percentages differ depending on where in Japan you live. This was not included in the table above and must be taken into account.
In addition, any compensation received in Japan is taxable. Non-cash compensation is also included. A couple examples are meal and housing allowances, educational fees, etc.
Gift tax is also levied in Japan. The one receiving the gift is liable for gift taxes.
How Do I File A Tax Return In The United States From Japan?
You should use your Japanese tax return or your yearly employer statement before beginning to prepare your U.S. expatriate tax return. Your Japanese employer sends you an annual statement called ‘Gensen-Choshu-Hyo.’ This statement summarises your annual earnings as well as the amount of Japanese taxes you paid throughout the tax year, which you’ll need for your US expat tax return.
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