Guide to US expat taxes in Japan
Welcome to Japan! The string of more than 6,000 islands, with ancient traces of people dating back 30,000 years before Christ, and at the same time one of the leading economic powers of the modern world. It's on the bucket list for many American expats!
If you are moving to Japan and looking forward to settling into your new home, be sure to consider both your American and Japanese tax filing obligations. With nearly 60,000 Americans living in Japan, we thought it would be helpful to explain in more detail what the tax implications are of living as an American in Japan.
Do I need to file 2 income tax returns – both in the US and Japan?
As an American living and working in Japan, you must continue to file your U.S. expatriate tax return each year with the IRS. See this article for the exact filing thresholds.
The United States is one of the few countries in the world that taxes its citizens based on their citizenship. This basically means that when you are an American (or a green card holder), you will always have to file a US tax return no matter where in the world you live and work. So, you have to file a US tax return if you live and work in Japan!
Even though you need to file a US expat tax return, you are most likely also required to file a Japanese income tax return! Yes - in most cases, you will be required to file two tax returns. However, this does not mean that you will pay tax twice on the same income. We will explain this in more detail below.
How do US expat taxes work while you live and work in Japan?
For example, if you work for a Japanese employer and draw a salary. You should report this income on your US tax return, as you are required to report your worldwide income. The US has introduced several tax breaks for expats, which are explained below. These expat tax breaks are designed to prevent double taxation of the same income. No one wants to pay taxes on the same income twice!
|Most important tax breaks|
|Foreign Tax Credit||Every dollar of Japanese income tax paid can be used to offset your US tax bill (over Japanese income)|
|Foreign Earned Income Exclusion||This tax break excludes a max of $108,700 (tax year 2021) from your taxable income. In order to claim this tax break, you must meet either the bona fide residence test or the physical presence test.|
If these tax benefits are not enough to mitigate your double taxation, the United States-Japan tax treaty may also help resolve your double taxation entirely.
Also, be aware of other U.S. reporting requirements such as the FBAR. If your Japanese bank and financial account balances exceed $10,000 in total in a tax year, you should file Form 114 FinCen. For more details on the FBAR reporting requirement, check out our FBAR for expats article. Please be aware that this is purely a reporting obligation and is not part of your tax return.
If you have substantial foreign assets, you may also need to comply with FATCA reporting requirements (Form 8938) if your foreign assets exceed $200,000 ($400,000 for married couples).
What is the income tax rate in Japan compared to the US?
Japan levies income tax based on residency, not citizenship. As an expat living in Japan, you are generally considered a Japanese tax resident and must file a Japanese income tax return. Therefore, we thought it would be helpful to point out the Japanese tax rates and compare them to the US rates to already have an indication of which tax break is more beneficial for Americans in Japan.
|Taxable income (Yen)||Taxable income (USD)||Japanese rate||U.S. rate|
|1.95M - 3.3M Yen||$17,486 - $29,592||10%||12%|
|3.3M - 6.95M Yen||$29,592 - $62,322||20%||19%|
|6.95M - 9M Yen||$62,322 - $80,705||23%||22%|
|9M - 18M Yen||$80,705 - $161,411||33%||24%|
|18M - 40M Yen||$161,411 - $358,691||40%||34%|
You cannot rely on this comparison, but it serves as a guide as to which US tax break would be most beneficial to you. More details are provided below.
Should I claim the FTC over the FEIE if I live and work in Japan?
From the table above, you can see that Japan generally has a higher income tax rate than the US. This would simply mean that your Japanese taxes would always offset your US tax bill. If this is the case for you, it is more beneficial to claim the Foreign Tax Credit than the Foreign Earned Income Exclusion.
Let us illustrate with an example:
- Mike l in Japan and has a taxable income of $150,000 (Japanese wages).
- Japan taxes this income against 25%. Mike paid $37,500 Japanese taxes.
- The US would levy 20% US income tax. $30,000.
- By using the Foreign Tax Credit, Mike can now use $30,000 of the $37,500 Japanese income taxes paid to offset his US tax bill of $30,000.
- Mike does not owe any US tax.
- Mike can even carry the unutilized credits of $7,500 to future years (but might never need it).
A big advantage of the Foreign Tax Credit is that there is no maximum amount compared to the Foreign Earned Income Exclusion. It is really a dollar-for-dollar credit. If you pay more taxes in Japan than you would owe in the US, you can take an unlimited credit for the Japanese taxes paid and end up having no US tax bill at all.
Also, this provides more flexibility for later years and expats can claim the child tax credit (refundable credit of $1,400 per child!), which you simply cannot claim when you take the Foreign Earned Income Exclusion.
In summary, it is usually more favorable for US expats in Japan to claim the Foreign Tax Credit as you will always have enough Japanese taxes to use as a credit to fully offset your US tax bill! However, you need to be aware that the Foreign Tax Credit may not help you if you have a relatively low income. The Japanese tax rate starts at 5% and the US tax rate starts at 10%. Reference is made to the table above. If you need help choosing the right tax break, just let our software give you a recommendation. Just log in here and start your return.
Read more about when to take the Foreign Tax Credit and when to take the Foreign Earned Income Exclusion.
What is the due date for my Japanese income tax return?
In Japan, the tax year is the same as the calendar year (just like in the United States!). Tax returns in Japan must be filed before March 15 while you have till June 15 for your US return. Generally, extensions in Japan are not available.
Considering that you must file your Japanese tax return before your U.S. expatriate tax return, it makes sense to use your Japanese tax return as the basis for preparing your U.S. expatriate tax return.
Do I need to pay social security in Japan as a US expat?
Generally, if you work in Japan, you must pay social security contributions locally. Social security is imposed by the Japanese government to fund health insurance, unemployment insurance, pension plans, and more.
Good news for self-employed expats! Self-employed expats can take advantage of the Social Security Agreement between the United States and Japan. This agreement exempts you from self-employment tax in the United States. If you take advantage of the Social Security Agreement, you will only have to pay Social Security contributions to Japan. Read more about self-employment taxes.
Do I need to consider any other Japanese taxes?
As an expat living in Japan, you need to be aware that you are subject to an inhabitant’s tax which is a combination of the prefectural and municipal rates of around 10%. The exact percentages vary depending on where you live in Japan. This has not been included in the table above and needs to be accounted for.
Also, any compensation is taxable in Japan. This also includes non-cash compensation. 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 can I file a US tax return from Japan?
Before you start preparing your U.S. expatriate tax return, you should use your Japanese tax return or your annual employer statement. This annual statement is called 'Gensen-Choshu-Hyo' and is issued by your Japanese employer. This statement gives you an overview of your annual earnings and the amount of Japanese taxes paid during the tax year, which you eventually need for your US expat tax return.
Filing your US taxes does not have to be intimidating or considered difficult, because we have made it super easy with our DIY tax software designed specifically for expats. Here at Expatfile we make preparing your own US taxes for expats easy, secure and in just 10 minutes!
Are you ready to file your US tax return and be done for the year? Please follow the steps below and get your expat taxes ready:
- Log into our DIY tax software for expats and start your return.
- Finish our easy-to-understand questionnaire and see what you owe or receive as a refund. No tax expertise needed!
- Review your return directly.
- E-file your expat tax return yourself with our built-in connection with the IRS.
- Get an instant receipt acknowledgement from the IRS (through our software).
Give Expatfile a try and start for free today. You pay at the end and only when satisfied! Have any further questions, do not hesitate to reach out to our customer support team.