Taxes for Expats – The US – Japan Tax Treaty
The US-Japan tax treaty was one of the first international tax treaties that the US signed. The first version was signed in 1954, with later versions signed in 1972 and 2003. A further update protocol covering software companies added in 2013, and a final update was ratified in July 2019.
The purpose of the treaty is to prevent double taxation for Americans living in Japan and Japanese citizens living in the US, however the inclusion of a ‘Saving Clause’ in Article 1 (paragraph 4) of the treaty allows for the US to still tax its citizens living in Japan as if the rest of the treaty didn’t exist, so that the treaty doesn’t prevent US expats living in Japan from having to file US taxes.
US taxes for expats in Japan
The US taxes based on Citizenship, meaning that all US citizens and green card holders, including US expats living in Japan, with worldwide income of over $12,000 a year, or just $400 of self-employment income, are required to file a US tax return each year.
Japan on the other hand only requires Japanese residents to file Japanese taxes. An American typically qualifies as a Japanese tax resident if they have a residence in Japan, or if they’ve maintained a temporary residence in Japan for a year, or if they’ve been in Japan for 60 months in the last 120 months.
This leaves many US expats living in Japan having to file two tax returns, and also puts them at risk of double taxation.
Expats receive an automatic filing extension for their US taxes until June 15th, and they can request a further extension until October 15th if they need to, giving them plenty of time to file their Japanese taxes first (due by March 15th) .
US expats in Japan may also have to file a Foreign Bank Account Report (FBAR), if they have over $10,000 in total in non-US based bank and investment accounts at any time during the year (including any that they have signatory authority or control over, even if not in their name).
The United States – Japan Tax Treaty
“83% of Americans think the U.S.-Japan relationship should remain as close or closer than it is today” – USA Today
The United States – Japan Tax Treaty covers double taxation with regards to income tax and capital gains tax, however, as already mentioned, due to a Savings Clause, the benefits are limited for Americans expats living in Japan. The treaty does ensure though that no one will pay more tax than the higher of the two countries’ tax rates, and it also defines where taxes should be paid , which normally depends on where the income arises.
The only exceptions to the Savings Clause in the US-Japan Tax Treaty are for American researchers, teachers, students, diplomats, professional athletes competing, and for pension income.
The way for US expats to avoid double taxation on their income arising in Japan is to claim US tax credits to the same value as Japanese income taxes that they’ve already paid.
For income arising in the US, Americans in Japan can claim Japanese tax credits against income US taxes paid to the IRS.
To claim US tax credits against Japanese taxes paid, expats must file form 1116 when they file their federal tax return. By doing this, the vast majority of US expats in Japan won’t end up owing any US income tax.
Alternatively, expats can claim another exemption called the Foreign Earned Income Exclusion by filing form 2555, which simply allows them to exclude the first around $100,000 of their earned income from US taxation. Which exemption is most beneficial depends on each expat’s circumstances (e.g. their types of income, residency status, income levels, where their income originates, etc).
It is possible in some circumstances to claim both the Foreign Earned Income Exclusion and the Foreign Tax Credit, although they can’t both be applied to the same income.
The US-Japan Tax Treaty also contains a clause that allows the Japanese government to send US expats’ Japanese tax information directly to the IRS, as well as their Japanese bank and investment account balances.
To claim a provision in the United States – Japan Tax Treaty (besides claiming US tax credits), expats should use IRS form 8833.
The US-Japan Totalization Agreement
A separate agreement called a Totalization Agreement helps US expats in Japan not to pay social security taxes to both the US and Japanese governments. Their contributions made while in Japan can be credited to either system. Which country they pay to depends on how long they will be living in Japan for.
Expats in Japan who are behind with their US tax filing because they were unaware of the requirement to file from abroad can catch up without facing penalties under an IRS amnesty program called the Streamlined Procedure, so long as they do so before the IRS contacts them about it.