RetireJapan TV is a monthly show about personal finance in Japan with news, deep dives on specific topics, interviews with guests, and as much Q&A as you can handle.
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In today’s show we will talk to our guest Dean Yoshimoto about taxes and US citizens in Japan. What do you need to know about taxes as a Japan resident? How can you decide if you need an accountant? And what if you are a US citizen?
Daniel will be back in our next episode on July 24th along with our regular content. Stay tuned!…(read more)
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RetireJapan TV S01E08: Taxes in Japan, US Citizens in Japan
RetireJapan TV, an informational web series dedicated to helping retirees living in Japan, recently aired its eighth episode discussing the complexities of taxes in Japan, specifically for US citizens residing in the country. Hosted by retirement expert, John Miller, this episode shed light on essential tax considerations, updates, and guidance for US expatriates living and retiring in Japan.
Living abroad comes with its fair share of challenges, and taxation is no exception. US citizens, regardless of their place of residence, are obligated to report their global income to the Internal Revenue Service (IRS). This means that if you are a US citizen living in Japan, you are required to file taxes both in the US and Japan.
The episode emphasizes the importance of understanding the potential impact of these dual tax obligations. It explores several essential topics such as Foreign Earned Income Exclusion (FEIE), Foreign Housing Exclusion (FHE), and the Foreign Tax Credit (FTC). These provisions aim to prevent double taxation and mitigate the financial burden for Americans abroad.
One major rule that US citizens residing in Japan must be aware of is the Foreign Bank and Financial Accounts (FBAR) reporting requirement. Any US citizen who owns or has authority over an overseas financial account exceeding $10,000 must submit an FBAR annually. Failure to comply with this obligation can result in hefty fines and penalties.
Moreover, the episode delves into the importance of compliant tax reporting and the potential repercussions for those who fail to meet their obligations. It highlights the ongoing implementation of the Foreign Account Tax Compliance Act (FATCA), an initiative aimed at combating offshore tax evasion by US persons. With Japanese financial institutions cooperating with FATCA regulations, the likelihood of non-compliant US taxpayers escaping scrutiny is progressively diminishing.
RetireJapan TV S01E08 serves as a valuable resource for US citizens retiring or living in Japan. It provides practical tips and advice on navigating the complex tax landscape, helping viewers stay informed about their tax responsibilities while maximizing their savings and avoiding any potential legal complications.
In conclusion, RetireJapan TV S01E08 enlightens us about the intricacies of taxes for US citizens residing in Japan. By shedding light on critical issues such as dual taxation, FBAR reporting, and FATCA, the episode empowers viewers to make informed decisions and seek professional advice to ensure tax compliance while enjoying their retirement in Japan. Remember, it is always advisable to consult a qualified tax professional when dealing with international tax matters.
1:17:35 explaining filing as head of household as an alternative. No, that's not legally allowed. You cannot do this without getting divorce. IRS is very clear that head of household is for an individual whom is not married at the end of the tax year and have eligible dependents. If you're on a spousal Visa in Japan, that may work out too well. If Dean himself is doing this, IRS audit may not be very sympathetic as you're probably placed on higher standards as a US CPA whom is married to an IRS Enrolled Agent qualification.
1:03:00 Explaining "You might be able to apply accumulated foreign tax credit…." Passive income in both NISA and non-NISA. I think this is what he is trying to explain. If the tax in Japan is higher than in the U.S., the objective is to lower the overall tax rate to around the same level as U.S.
So by having a NISA and a non-NISA income in Japan, they both are passive category in 1116 thus the average rate can be mixed up and if the net tax rate in U.S.s is similar, you can offset the U.S. tax with the tax you owed in Japan better than otherwise possible.
This actually might not be legal because income from NISA is tax free in Japan thus that income is not eligible for foreign tax credit in the U.S. because no double taxation happened in respect to the NISA income.
58:54 Josh asks about how Roth IRA conversion is treated for Japanese Citizen and non-permanent resident and how VA disability is treated in Japan?
For Roth IRA conversion for Japanese Citizen, I don't know why you would do that unless you have a plan to move to the U.S. or a country that recognized the U.S. Roth IRA as being tax free. One interesting opinion in the forum was that maybe there's no tax consequence in the Japan side arguing that if they don't treat the Roth IRA any different than the Traditional IRA, the conversion should not impact Japanese tax. Seems like a bit of a stretch. If you are a non-permanent resident, I suppose you can withdrawal the entire Roth IRA before your non-permanent resident ends if you'll be age 59 1/2 by then. Then make sure you don't transfer any money or anything of value from outside of Japan into Japan for the year of the withdrawal.
VA disability is tough one. For normal government pension other than Social Security, it is usually covered in Article 18 Paragraph 2 about government pension for services performed which are government in nature. So I wonder about this one and I wonder if the Veterans Affair will know anything about such situation. One way to look at it is that as a Veteran, the disability was caused by your military service which is a governmental service and as a compensation for that service, this disability pension is being paid much like a normal military pension. So maybe it is covered by it and if that is the case, it is only taxable in the U.S. at least at the national tax level. Because this treaty only covers national tax and not local tax, local Japanese tax still may apply.
54:10 Jackie Bencke asking about Japan coming after inheritance or other assets for up to 5 years if you left Japan. Does that actually happen and how do they enforce it.
Not sure if she wanted to ask about the Exit tax scheme of if you have more than 10 million yen of financial assets and you left Japan, you are supposed to pay the 15.315% tax to the Japanese government as if you sold the assets the day before you departed Japan or not. If you have financial assets exceeding 5 million yen outside of Japan as a Japanese resident (citizenship doesn't matter), you are required to filing disclosure of such assets. If you fail to do this, there's some fines and also potential 1 year prison as well as if you were to be audited, the penalty can be increased. If you do comply, there's a discount on penalty even if you were audited and under reporting something that was related to a disclosed asset. So that's one way they can enforce it. The other way is that the Tax Treaty allows the Japanese government to require information that the U.S. has if there's sufficient evidence that they were not in compliance of Japanese tax law. They can even get the U.S. to freeze U.S. assets to comply with Japanese tax obligation. 5 years is a normal limit for Japanese tax audit but it can be extended if you are deemed to have already known the requirements and willful neglected to meet your tax obligation. Be aware, Japanese tax authority is a lot stricter than the U.S. IRS. While audit rate looks lower, you more likely to be a target as a foreign citizen living in Japan. They are also efficient and sneaky that they know the Statute of Limitation so just because you were able to get away with not declaring U.S. income to Japan for a number of years does not mean they don't know about it. They wait until it is worth the time to audit you for the last 5 years then penalize you the interest on top of the tax and penalty.
Once you under report and get caught, it gets correct on the national tax, then the city and prefecture tax gets impacted so they'll impose their tax, penalty, and interest. Then it may impact the health insurance premium as well as there will be a penalty for that as well. So you'll get multiple bills from multiple places over time.
53:55 If a Japanese Citizen living in Japan had portfolio interest in the U.S. Bank account, the tax withholding rate is 0 by tax treaty. This means by filing a W-8BEN with the bank, the person will not pay any U.S. tax for that income and only be required to pay tax in Japan. If they fail to file the W-8BEN, they can still claim the treaty benefit by filing the 1040-NR and treaty disclosure and claim a refund for any tax that was withheld from that interest.
Conversely, if a US Citizen had US Bank account interest and lived in Japan, they have to pay tax in Japan, claim certain income re-sourced by treaty for the entire interest amount to claim Foreign Tax Credit on Form 1116.
The really tricky part is if you have capital gains as a U.S. Citizen living in Japan. It is normally considered Japan source even if it is a U.S. Stock in a U.S. brokerage. So you must claim this as as "Passive" category on Form 1116.
50:00 Tax treaty withholding rates.
The explanation is getting side tracked into Japanese Citizen living in Japan and not U.S. Citizen living in Japan. That 10% withholding rate applies to Japanese Citizen and you file a W-8BEN to claim the treaty rate. You would not need to file a 1040-NR if that's your only income from the U.S. as a Japanese Citizen living in Japan. A Japanese Citizen will claim Foreign tax credit on their Japanese tax for this 10% withholding but because they have the national tax (shotoku zei), Prefecture tax (kenkin zei) and City tax (shimin zei) and each has separate limits, it is most often that you cannot reduce Japanese tax on U.S. tax withheld completely. 3 year carry forward is allowed in Japanese system but one difference that is beneficial is that not only can you carry forward foreign tax credit, you can also carry forward if the situation is that the home tax (Japan tax) is higher than the U.S. withholding.
If you are a U.S. Citizen living in Japan, you may be required to file W-9 to declare you are a U.S. Citizen and that no withholding is required and that you will file your normal 1040 to pay the tax if anything is due. But the tricky part with US dividends is that you are to take the foreign tax credit for the first 10% using the Japanese system just as you would as a Japanese Citizen except you must prove how much actual U.S. tax you paid because that can be different from 10% rate. If your U.S. tax is in excess of 10%, that excess can be claimed on Form 1116 as "Certain income re-sourced by treaty".
47:40 Talks about US Brokers rejecting US Citizens living abroad.
I did contact a few about a year about the question of U.S. Citizen moving to Japan permanently and if they will allow keeping the brokerage accounts including IRA's and HSA. Schwab said no but Fidelity, Vanguard, and Interactive Brokers were ok with it. I did follow up about it to make sure there wasn't any misunderstanding but their explaination was that Japan is not listed as a high risk country so it is ok for U.S. Citizens to keep their brokerage when they relocate to Japan and keep their U.S. Citizenship.
So at some point, it became super strict and later on, it appears they aren't nearly as strict at least for U.S. Citizens living in Japan. Of course, things can change so it might be wise to try to keep a few accounts just to minimize the risk of having your account liquidated completely. They typically give a limited time to transfer the account if you can find another broker to accept the transfer. If you already have another account, it might be easier to avoid force liquidation and forced taxation that results from it.
TD Ameritrade is now owned by Schwab, so most likely they'll follow the same policy whatever it may be now.
27:27 Joanna Hosoya
Worried about a friend whom hasn't paid American Income tax for a decade or more. The amount isn't huge. He feels he cannot go back to the U.S. because of potentially huge penalties. Is there a huge danger for him? I'm concurring with Dean's suggestion to try to file some U.S. tax returns. If you didn't owe any tax anyway because of foreign earned income tax exclusion and foreign tax credit, aside from going back however many years you are allowed to late file returns, it probably won't hurt the situation. I say this because lot of the penalties are based on how much you under paid. If after claiming your legitimate claims, the U.S. tax liability was zero anyway, then you have some percentage multiplier applied for penalty on tax due plus interest also on zero. Is that still not zero anyway?
21:19 Jackie Bencke's question. Been residing in Japan for 20 years. If you don't claim foreign earned income exclusion thus paying U.S. Income tax, will future social security payments be higher? – No. The only option as a U.S. Citizen to keep paying into U.S. Social Security on work in Japan is if you are either self-employed or if an employer sent you to Japan to work for a period of less than 5 years and you have health benefits in the U.S. and not in Japan. So because Jackie has been residing in Japan, these are not an option. Her 2nd question is will declining to claim foreign earned income exclusion lower Japanese tax? Possibly, but it is very unlikely that it'll reduce the Japanese tax to what she had in mind because that is related to raising the U.S. tax rate in order to claim higher foreign tax credit on income other than from Japan source income and taxable even if you were not a U.S. Citizen. You could claim U.S. foreign tax credit on Form 1116 and using general category for work income from Japan but this is useful to reduce U.S. income tax and not tax in Japan.
15:55 Chris Bauch question – first year in Japan. Was Texas resident so no state income tax. How do you claim foreign tax credit? – The video continues on explaining foreign earned income exclusion. But most people don't qualify in their first year in Japan. So most likely, he'll need to tax Foreign Tax Credit on Form 1116 for work income in Japan as general category.
Really appreciate this video, Ben. Do you plan to conduct further interviews with other CPAs, especially ones that are more UK-specific?