US Expat Tax Guide for Americans Working in Japan

tax guide Americans Japan

Japan. The land of sushi, Pokémon, incredibly fast bullet trains, and high-tech toilets that can even play music during your bathroom sessions. While the year is 2022, it feels like the Japanese are living in 3022. 

Japan is also the country that tens of thousands of American expats call home. According to recent data, currently, 76,000 Americans live in Japan. 

While living in Japan might seem like a crazy, futuristic adventure of a lifetime, US expats can’t forget about taxes. In this blog post, we will discuss everything that US expats need to know about their tax obligations while living in the Land of the Rising Sun.

What are the requirements to be a resident of Japan? 

All residents of Japan who live and work in the country have to contribute taxes. The three different types of residency status in Japan include:

Residency StatusDescription
Permanent ResidentAny Japanese national or foreign expat who has maintained a home in Japan during at least five of the previous ten years. 
Non-Permanent ResidentForeign expats who have maintained a home in Japan for at least a year, but not for at least five of the last ten years. Japan will also automatically register any foreigner who organizes the necessary documents to begin their employment in Japan as a non-permanent resident.
Non-ResidentAny expat who doesn’t meet either one of the two categories mentioned above. 

What are Japan’s tax rates? 

As a resident of Japan, how much you’ll spend on taxes depends on your level of income. Here’s how much you can expect to pay in taxes based on how much money you make in Japanese yen:

Taxable IncomeTax Rate
Less than 1.95 million yen5% of taxable income
1.95 to 3.3 million yen10% of taxable income minus 97,500 yen
3.3 to 6.95 million yen20% of taxable income minus 427,500 yen
6.95 to 9 million yen 23% of taxable income minus 636,000 yen
9 to 18 million yen33% of taxable income minus 1,536,000 yen
18 to 40 million yen40% of taxable income minus 2,796,000 yen
More than 40 million yen45% of taxable income minus 4,796,000 yen

Residents also have to pay prefectural and municipal income taxes. These are:

  • Prefectural income tax rate: 4% of taxable income 
  • Municipal income tax rate: 6% of taxable income 
  • Prefectural enterprise tax rate (for self-employed residents): 3% – 5% depending on the type of business that the resident runs

What’s the deadline for Japanese taxes? 

Residents of Japan have until the 15th of March (or the middle of April if you’re paying via bank transfer) each year to file their tax returns to the Ministry of Finance. Unfortunately, once the deadline has passed, expats can’t do anything to extend it. 

There are two deadlines for tax prepayments in Japan. The Ministry of Finance processes these payments at the end of July and at the end of November of each tax year. If you haven’t paid your total amount of taxes by March 15th, then you will pay the remaining balance.

Do US citizens living in Japan still have to file a tax return to the IRS? 

Yes. The US is one of the few countries that applies a citizenship-based taxation system. That means that Americans, regardless of where they live (including Japan), must report their worldwide income to the IRS. 

Read more: What is Citizenship-Based Taxation?

Can US expats avoid double taxation while living in Japan? 

The idea of having to pay taxes both in Japan and the US might seem like a nightmare. But don’t worry. The IRS has multiple tax programs to help American expats avoid double taxation and save money while living abroad. These include:

Foreign Earned Income Exclusion (FEIE)

The Foreign Earned Income Exclusion (FEIE) makes it possible for US expats to exclude their income earned overseas from their IRS tax return. In 2022, the maximum amount of foreign income you can exclude is $112,000. (or around ¥12,299,504). 

While living in Japan, you must pass one of two tests to qualify for the FEIE. The first is the Bona Fide Residence Test, which consists of proving that you’re already a tax resident of Japan. The other is the Physical Presence Test, in which you have to certify that you’ve physically spent 330 days in Japan throughout any 365 period, which doesn’t necessarily have to be the whole US tax year, but which should overlap with it. 

Read more: IRS Foreign Earned Income Exclusion 2022 – Ultimate Guide

Foreign Tax Credit (FTC)

The Foreign Tax Credit (FTC) allows US expats to claim tax credits on a dollar-for-dollar basis, based on the foreign taxes they’re already paying to their new home country. Expats can then use those tax credits to deduct payments from their US tax return. 

This is a highly beneficial program for expats who live in a country with a higher tax rate than the US. 

Read more: Claim Foreign Tax Credit with Form 1116 — Bright!Tax Expat Tax Services

Foreign Housing Exclusion (FHE)

The Foreign Housing Exclusion (FHE) is a tax benefit that allows US expats to exclude a large portion of their foreign housing expenses from their gross income in their tax returns. Like the FEIE, you must also pass the Bona Fide Residence or Physical Presence Test to qualify for the FHE. 

You can exclude these expenses under the FHE:

  • – Rent
  • – Utilities
  • – Home repairs
  • – Property insurance
  • – Residential parking

Expenses that don’t qualify are any expenses that the IRS classifies as “extravagant,” such as domestic labor or home improvements.  

Read more: The Foreign Housing Exclusion: A Brief Guide for US Expats

What is the FBAR and do I need to file it while living in Japan? 

To fight international tax evasion, the Report of Foreign Bank and Financial Accounts (FBAR) is a report that ensures US expats declare all of their bank accounts overseas. Expats must file the FBAR with Form 114 if they hold more than $10,000 across one or multiple foreign financial accounts. 

If you hold more than $10,000 in Japanese bank accounts, you’ll need to file the FBAR on top of filing your tax return. 

Do I have to pay for Social Security while living in Japan? 

It depends on your work status. The good news is that thanks to the Totalization Agreement between the US and Japan, American expats can avoid double taxation for their Social Security payments. 

If you work for a Japanese employer, you’ll contribute to the Japanese Social Security system. If you’re working for a US employer that sent you to work in Japan for five years or less, on the other hand, then you’ll be paying US Social Security taxes instead. 

If you’re a self-employed professional who normally works in the US but works in Japan for five years or less, then you’ll also be making Social Security payments to the US. To learn more, check out the SSA’s agreement rules between the US and Japan.

Need help with your US tax obligations while in Japan? 

Navigating taxes as a US citizen overseas can feel like a challenge. If you still have questions about your US tax obligations while you’re setting up your new life in Japan, Bright!Tax is here to help. Contact us today, and one of our CPAs will answer any questions you may have about your tax situation.  

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