US Expat Taxes for Americans Living in Japan– What You Need to Know
There are an estimated 50,000 Americans living in Japan.
Living in Japan is an incredible experience for a variety of reasons – the culture, history, landscapes, and the cuisine, to name but a few. As an American expatriate living in Japan though, what exactly do you need to know regarding filing US expat (and Japanese) taxes?
All US citizens and green card holders who earn a minimum of $10,000 (or just $400 for self-employed individuals) anywhere in the world are required to file a US federal tax return and pay taxes to the IRS, regardless of where in the world they live or their income is generated.
The good news is if you are paying income tax in Japan, there are various exclusions and exemptions available to prevent you paying tax on the same income to the IRS too.
US taxes – what you need to know
If you earn over US$10,000 (or $400 if you’re self-employed), you have to file IRS form 1040. While taxes are still due by April 15th, expats get an automatic filing extension until June 15th, which can be extended further on request until October 15th.
If you have foreign assets worth over US$200,000 per person, excluding your home if it is owned in your own name, you also have to file form 8938 and declare them.
If you had a total of at least US$10,000 in one or more foreign accounts at any time during the tax year, you also have to file FinCEN form 114, otherwise known as a Foreign Bank Account Report or FBAR.
“In Japan, permanent resident taxpayers are taxed on their worldwide income. Non-resident taxpayers are taxed only on their Japan-sourced income. Non-permanent resident taxpayers are taxed on their Japan-sourced income plus potentially part of their non-Japan-sourced income that is paid in or remitted to Japan.”
If you pay income tax in Japan, there are several exemptions that allow you to pay less or no income tax on the same income to the IRS. The two main ones are the Foreign Earned Income Exclusion, which lets you exclude the first around US$100,000 of foreign earned income from US tax if you can prove that you are a Japanese resident, and the Foreign Tax Credit, which gives you a $1 tax credit for every dollar of tax you’ve paid in Japan. The Foreign Tax Credit is normally a better option if you pay more tax in Japan than you would owe to the IRS, as you can carry the excess credits forward for future use. Remember though that even if you don’t owe any tax to the IRS, if your income is over US$10,000 (or $400 if you’re self-employed) you still have to file a federal return.
The US and Japanese governments share taxpayer info, and Japanese banks pass on US account holders’ account info to the IRS, so it’s not worth not filing or omitting anything on your return. The penalties for tax evasion for expats are steep to say the least.
If you’re a US citizen, green card holder, or US/Japanese dual citizen, and you have been living in Japan but you didn’t know you had to file a US tax return, don’t worry: there’s a program called the IRS Streamlined Procedure that allows you to catch up with your filing without paying any penalties. Don’t delay though, in case the IRS comes to you first.
Japanese taxes – what you need to know
If you are considered a permanent resident in Japan, defined as having had a permanent home in Japan for at least five of the last ten years, you are liable to pay Japanese income taxes on your worldwide income. Non-permanent residents meanwhile are foreigners who are employed in Japan or have lived in Japan for at least a year but less than five out of the last ten, and are taxed only on income arising or received in Japan. Non-residents are individuals who don’t qualify as either of the above but have income arising in Japan, and they are only taxed on their Japanese income.
The Japanese tax year is the same as the American, with tax returns due by March 15th.
The Japanese tax authority is called the National Tax Agency. Japanese income tax rates range from 5% to 45%.
As well as national income tax, Japan also has an inhabitant tax paid to local municipal authorities which is normally 10% of income.
We strongly recommend that if you have any doubts or questions about your tax situation as a US expat living in Japan that you contact a US expat tax specialist.