Five Things Expats Living in Japan Should Know


Five Things Expats Living in Japan Should Know

 

Moving to another country is an immense decision, and Americans who live abroad often find themselves uncomfortably straddling two different tax systems. While learning the tax requirements and deadlines of their new, resident country, they are still obligated to file US Federal Tax Returns as well. Below is a list of the top five things expats living in Japan should know about their taxes.

 

  1. Japan Can Be an Expensive Place For Expats to Live – But Exclusions and Deductions Can Help Mitigate the Cost

The cost of living difference between Japan and America is vast. In general, the cost of living in Japan is greater than in America because Japan has a large population and a small amount of land in comparison. Since the economy emphasizes exports, this often leads to a favorable exchange rate for the dollar. But when in Japan, the purchasing power of the yen is diminished.

Fortunately, the IRS has deductions, exclusions, and credits to help minimize double taxation. Most expats can offset all of their foreign earned income with the following:

  • Foreign Tax Credit – this credit reduces the US tax liability dollar for dollar on expat income based on taxes paid to the Japanese government;
  • Foreign Earned Income Exclusion – expats can use this to exclude up to $104,100 of foreign earned income from US taxation via Form 2555 in 2018; and
  • Foreign Housing Exclusion – this exclusion allows expats to reduce their taxable income by claiming certain housing expenses incurred as part of moving abroad.

 

  1. The Income Tax Rates Are Varied, and the Deadlines Differ From the US

Japanese income tax rates range from 5%-45%, depending on income level. On top of that, US expats must pay an extra 10% flat-rate inhabitants tax. This tax varies according to the municipality in which the expat resides, and covers 4% prefectural tax and 6% municipal tax.

 

In Japan, the tax year follows the calendar year, just as it does in the US. However, in Japan, tax returns are due to the Ministry of Finance on March 15. Every year after the first year in Japan, expats are allowed to pre-pay their taxes by the end of July and November, if they choose. Any remaining unpaid amount would be due on March 15 as well.

 

  1. Residency Status Can Influence Taxes

Residency in Japan falls into three different categories: permanent resident, non-permanent resident, and non-residents. To be a permanent resident, an expat must have lived in Japan for five out of the past ten years. Non-permanent resident typically applies to expats who have lived in Japan for more than a year. The non-resident status refers to expats who do not meet the status requirements of either a permanent or non-permanent resident.

 

4) US-Japan Tax Treaty and Social Security

The US and Japan have a tax treaty in place, which helps avoid double taxation by specifying which country is allowed to levy tax on which types of income.

 

Expats who work for Japanese companies will often be required to pay into Japanese social security programs, which covers health insurance, welfare, pensions, and other social programs. Exceptions to this mandate are offered for self-employed or those who are only working in Japan temporarily.

 

5) Expats Who Are Behind Can Become Compliant, Penalty-Free!

Many Americans who move abroad are surprised by their continued requirement to file US tax returns in addition to foreign bank account reporting (FBAR), and can quickly fall behind. The IRS has created amnesty programs such as the Streamlined Filing Procedures for those who were unaware of their filing requirement and have fallen behind. To use these procedures, be prepared to file:

  • The most recent three years of Federal Tax Returns.
  • The most recent six years of FBAR forms (Foreign Bank Account Reporting). Note that expats would typically be required to file the FBAR form if the total balance of all non-US bank accounts combined was higher than US$10,000 at any point during the year. But, if an expat is filing via the Streamlined Filing Procedures, they are required to file FBARs regardless of whether the threshold was met.
  • A signed copy of “Certification by U.S. Person Residing Outside of the U.S” statement (Form 14653).

Want Help Filing Your US Expat Taxes?

Greenback Expat Tax Services has accountants who focus specifically on expat taxes – and can make the process stress-free. Contact Greenback today!

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10 May 2018


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