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 U.S. 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 U.S. taxes and how they can avoid double taxation.
- Double Taxation
- Filing Your American Tax Returns in Japan
- US-Japan Tax Agreements and Social Security
- What Happens If You Don’t File American Tax Returns?
- Tax Filing Services
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 U.S. 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
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12 Comments
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sakurasuki
Why? Simple in order not to be targeted by IRS.
https://en.wikipedia.org/wiki/IRS_targeting_controversy
Asiaman7
The current U.S. individual income tax system for expatriates dates back to the 1860s and the taxes that financed the Civil War. Every other major country taxes their residents but doesn't tax their citizens on income they earn outside the home country. The U.S., however, uses citizenship-based taxation, so Americans living elsewhere in the world—of whom there are more than four million—must file U.S. tax returns.
Put another way, a German citizen living in Los Angeles pays U.S. taxes on his U.S. income but owes nothing to Germany on that income. But a U.S. citizen living in Berlin would pay German taxes on his German income and then would have to file and possibly pay U.S. taxes on top of that.
The U.S. does offer an exclusion for the first $126,500 in earned income and for some housing costs, and there are foreign-tax credits to prevent double taxation. That means the tax burden of the current system falls on higher-income people, investors and retirees.
Today's system ensures Americans can't escape the U.S. tax net by moving outside the country without renouncing their citizenship. But it can impose a heavy compliance burden on Americans abroad by forcing them to file tax returns even when they don't owe money.
Desert Tortoise
My heart positively bleeds. I lived and worked abroad and did my own taxes. You are an American citizen. You use the services of the US State Department whether you realize that or not. If a war breaks out the US government might use the Navy or Air Force to evacuate you. If you get arrested abroad someone from the US Embassy will monitor your case and in some cases can assist you obtaining legal counsel along with keeping your family up to date on your whereabouts and the status of your case.
If you return to the US you would be eligible eventually for Medicare and Social Security. That costs money. As a citizen you have to pay your part.
Yrral
Only Social Security payed in the US system make eligible for Social Security
Desert Tortoise
If you are working overseas for an American company you may or may not have Social Security deducted from your pay. In my case it was.
falseflagsteve
Sod that for a game of soldiers. No wsy would I pay tax to ,y home nation when I’m not there, lol.
Americans get fleeced left right and centre.
CaptDingleheimer
I just went through a bunch of crap here in the US over a background check for a job because I didn't have my returns from doing JET 20 years ago.
wallace
falseflagsteve
If they live and work in Japan for more than one year they pay US taxes and Japanese taxes on earnings over $126,000 (¥18 million). They can also claim house expenses in the US if they own property there.
I doubt there are many Americans in Japan earning ¥18 million. The average is less than ¥8 million.
Trump has said he will abolish that additional tax.
Regardless all Americans must file a tax form every year.
fallaffel
Actually it's not a bad thing if you have kids. Usually you qualify for a $1400(?) per child tax credit. Makes me want to do my taxes.
Khuniri
I know Americans who simply don't file, not out of defiance but rather out of sheer inertia. They have lived here most of their lives and are not high-income earners. The IRS is quite incompetent, as well as corrupt, and that is both good news and bad news. The good news is that Big Brother usually has other fish to fry. The bad news is that if one is caught in its net, even quite mistakenly, it can be quite a nightmare.
Desert Tortoise
That has never been my experience dealing with them. They have found mistakes either I or my accountant made over the years, none serious, and have even sent checks when they determined we over paid. The one year our accountant screwed up and failed to hit the send button on our e-file they were considerate and didn't penalize us. All of my dealings with them have been professional, courteous and honest. My accountant deals with the IRS routinely and has a high regard for them as well. This is real life, not the stuff on Reddit or X.