Benjamin Franklin said that in life, nothing is more certain than “death and taxes.” For Americans living in Japan, this is twice as true. American citizens must file US taxes, even if they live and work in a different country. It’s the primary reason why retiring in Japan is difficult for Americans. Tax laws are convoluted, but understanding them will help you save more of your hard-earned yen. Here’s why Americans in Japan must file US taxes and how they can avoid double taxation.
Double Taxation
Unfortunately for Americans, the USA is one of the few countries that taxes its citizens no matter where they live and work. According to the IRS, all US citizens and residents are subject to tax on worldwide income from all sources. This means that even if you live in Japan and are earning a Japanese salary, you are still subject to US taxation and must file your tax returns and report your income in Japan every year. Since the Japanese government already imposes taxes on its residents, Americans living in Japan will be taxed twice on the same income and assets. That is, they will be taxed twice unless they claim the right exclusions by filing their tax returns.
How To Avoid Double Taxation
You need not accept double taxation as your fate as an American in Japan. Most Americans living abroad qualify for certain tax exclusions that are meant to help you avoid double taxation. You are eligible for these exclusions as long as you have lived and earned income in Japan for one year. Under the next administration, certain things may change, but here is how things currently stand.
The Foreign Earned Income Exclusion
If you have a Japanese residency card and earn your salary in Japan, you are eligible for the foreign earned income exclusion, or FEIE. This allows you to exclude yearly income that does not exceed $126,500 in 2024. The threshold rises every year as it is adjusted for inflation. This exclusion only applies to earned income, so interest, capital gains, pension payments and unemployment benefits cannot be excluded under FEIE.
Foreign Housing Deduction
Americans living in Japan who qualify for FEIE also automatically qualify for the foreign housing deduction. In addition to rent, other housing expenses such as utilities, property insurance and household repairs can be deducted. This deduction does not include phone and TV services or cleaning staff if you hire them. Typically, the maximum foreign housing deduction is 30% of your foreign-earned income.
Foreign Tax Credit
Another option is the foreign tax credit, which is a tax credit you can claim for taxes imposed on you by the Japanese government. The IRS will give you a tax credit that, in most cases, is equal to the amount you paid in taxes in Japan. Unlike the FEIE, the foreign tax credit can be used on both earned and unearned income.
Though American residents in Japan are eligible for all of these exclusions, you are not allowed to “double dip” and use both the FEIE and the foreign tax credit. If you exclude your foreign-earned income and foreign housing costs, you cannot receive the foreign tax credit. You must select one or the other.
Filing Your American Tax Returns in Japan
It is only possible to claim these benefits by filing your yearly tax returns. Fortunately, Americans living abroad also get an automatic two-month extension on their tax returns. This means your tax returns are not due until June 15th. If you need even more time, it is possible to extend your filing date until October 15th.
Tax Forms
- Form 1116, Foreign Tax Credit: Fill out this form to claim the foreign tax credit.
- Form 2555, Foreign Earned Income: Fill out this form to claim the foreign earned income exclusion and foreign housing deduction.
- Form 4868, Automatic Extension Application: Fill out this form to extend your filing date to October 15th.
US-Japan Tax Agreements and Social Security
The US and Japan signed a tax treaty that helps Americans in Japan avoid double taxation on the same income. The US and Japan also have a totalization agreement, which prevents Americans living in Japan from contributing to the social security systems of both countries. This agreement determines which social security system you are subject to contributing to.
This agreement ensures:
- If your employer in Japan is not a US company or organization, you pay into the Japanese system.
- If your employer is a US company or organization that assigns you to Japan, you pay into the US system for five years. If you remain in Japan for more than five years, you start paying into the Japanese system.
- If you’re self-employed, you pay into the system of the country where you live for most of the year.
What Happens If You Don’t File American Tax Returns?
It is crucial to file your tax returns every year because failing to do so while you owe taxes will result in severe penalties. Filing your taxes late can make you ineligible for FEIE, which means you will miss out on some important benefits. If you owe taxes and fail to file, you will incur late fees for your tax return and payments each month. In severe cases, the IRS has revoked the passports of US citizens and pressed criminal charges against those who fail to pay what they owe for a long time.
If you discover you have unpaid taxes after moving abroad and need to catch up, fortunately, there is another way. The IRS created an amnesty program that streamlined filing compliance procedures to help Americans abroad catch up on “delinquent” returns without facing penalties. To take advantage of the program, you must certify that your failure to file was an accident, not a willful decision, and of course, you’ll have to file your tax returns and pay your unpaid taxes on interest. This brings you into compliance with the IRS so you can avoid penalties.
Tax Filing Services
For 2024, there are 8 tax preparation providers participating in IRS Free File which are:
Here are a few trusteed tax preparation providers that require a fee:
Did we miss anything? What other important information do Americans living in Japan need to know about filing their tax returns? Let us know in the comments!
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U. S citizens and U. S permanent residents only!
While the article provides important information for U.S. citizens, it fails to mention something which is just as important and is usually unknown to Americans living abroad – the FBAR requirement. In order to prevent tax cheating and money laundering, the U.S. government requires Americans overseas to provide information about bank accounts and financial investments held outside the U.S. as institutions holding such accounts do not provide info on such holdings to the U.S. government.