If you are a U.S. citizen living in Japan as a non-permanent resident (NPR), preparing your own Japanese tax return, or kakutei shinkoku (確定申告), can be much more complicated than many people expect.
Besides calculating your Japanese income, you may also need to determine remittance-based taxation, calculate the cost basis of your U.S. investments under Japanese tax rules, determine how your IRA or pension income is taxed in Japan, and claim a foreign tax credit.
This article explains the basic steps involved in preparing a Japanese tax return for U.S. non-permanent residents and some of the major differences between the U.S. and Japanese tax systems.
Hello, my name is Taisei Koshida, and I am a Certified Public Accountant and Tax Accountant in Japan. I provide international tax and accounting services in Japan with English support.
If you are a U.S. non-permanent resident preparing your own Japanese tax return, you will generally need to do the following:
Hello, my name is Taisei Koshida, and I am a Certified Public Accountant and Tax Accountant in Japan.
If you are a U.S. non-permanent resident preparing your own Japanese tax return, you will generally need to do the following:
1. Calculate your remittances to Japan
First, calculate your total remittances to Japan during the calendar year.
This includes payments made in Japan using U.S. credit cards. You also need to exclude remittances attributable to the proceeds from the sale of securities that you purchased before becoming a Japanese tax resident.
This calculation is important because the amount remitted to Japan can determine how much of your foreign-source income is taxable in Japan under the remittance-based taxation rules.
2. Identify your Japanese-source income
Capital gains from securities purchased after you became a Japanese tax resident are generally taxable in Japan regardless of whether you remit funds.
Typical examples include:
• ・Salary from employment in Japan
• ・Dividends and interest from Japanese financial institutions
• ・Rental income from property located in Japan
• ・Capital gains from securities acquired after becoming a Japanese tax resident
3. Calculate each category of U.S.-source income separately
You should identify each type of U.S.-source income separately, including employment income, Social Security benefits, pension income, IRA distributions, dividend income, interest income, and capital gains.
You will also need to deduct your cost basis when calculating taxable IRA distributions and capital gains.
One important difference between the U.S. and Japanese tax systems is how the cost basis of securities is calculated. Japan generally uses a method similar to the moving-average method to calculate the cost basis of securities, whereas the United States commonly uses the FIFO method.
As a result, the capital gain calculated for Japanese tax purposes may be different from the amount shown on your U.S. brokerage or tax documents.
Finally, if you take a conservative approach, you will also need to report the dividends and capital gains earned within your IRA accounts on your Japanese tax return.
4. Example: How to Calculate the Cost Basis of U.S. Securities in Japan
For example, suppose you purchase and sell the same U.S. stock several times:
• April 1: Purchase 10 shares at $100 per share
• May 31: Purchase 10 shares at $110 per share
• June 30: Sell 5 shares at $150 per share
• July 31: Purchase 10 shares at $120 per share
• September 30: Sell 5 shares at $130 per share
Before the first sale, the average cost per share is:
($1,000 + $1,100) ÷ 20 shares = $105 per share
Therefore, the cost basis of the 5 shares sold in June is $525, and the capital gain is:
$750 – $525 = $225
After the sale, 15 shares remain with a cost basis of $105 per share.
When another 10 shares are purchased at $120 in July, the new average cost becomes:
($1,575 + $1,200) ÷ 25 shares = $111 per share
Therefore, when 5 shares are sold at $130 in September, the cost basis is $555 and the capital gain is $95.
This example uses U.S. dollars only to make the moving-average calculation easier to understand.
In an actual Japanese tax return, however, each purchase and sale must generally be converted into Japanese yen using the appropriate exchange rate for the date of each transaction. Therefore, you cannot simply calculate the capital gain in U.S. dollars first and convert the final gain into yen.
This is particularly important when exchange rates fluctuate significantly between the purchase and sale dates. Even if the investment has only a small gain in U.S. dollar terms, the capital gain calculated for Japanese tax purposes may be significantly different because the acquisition cost and sale proceeds are calculated in Japanese yen.
5. Determine Your Taxable Income Under the Remittance Basis
For each calendar year, you should compare your total remittances to Japan with your foreign-source income that is subject to remittance-based taxation.
In simple terms, the taxable amount is generally the smaller of these two amounts.
For example, if your foreign-source income is USD 100,000 and your remittances to Japan are USD 30,000, the amount subject to remittance-based taxation is generally limited to USD 30,000.
If your remittances are lower than your foreign-source income, you will need to allocate the remittance amount among each category of foreign-source income.
6. Calculate Japanese Income Tax
Income subject to remittance-based taxation is generally added to your Japanese-source income and taxed according to the applicable rules under the Japanese tax system.
Many types of income are subject to Japan’s progressive income tax rates of up to 45%, plus local inhabitant tax.
In contrast, capital gains from listed securities are generally taxed separately at approximately 20%, including local inhabitant tax.
Therefore, correctly classifying each type of income is an important part of preparing your Japanese tax return.
7. Claim a Foreign Tax Credit
If remittance-based taxation applies, part of your U.S.-source income may become taxable in Japan. If the same income is also taxed in the United States, double taxation may occur.
In that case, you may be able to claim a foreign tax credit in Japan for U.S. taxes paid.
The foreign tax credit calculation for a non-permanent resident can be quite complex because it is closely related to the remittance calculation explained above.
8. Frequently Asked Questions
Is a U.S. Pension U.S.-Source or Japanese-Source Income for Japanese Tax Purposes?
A U.S. pension payment is considered U.S.-source income. Therefore, if you are a non-permanent resident for Japanese tax purposes, it is subject to Japan’s remittance-based taxation.
If you would like to learn more about how the foreign tax credit works in Japan, please read our article, ” Foreign Tax Credit for Non-Permanent Residents in Japan.”
Preparing a Japanese tax return, or kakutei shinkoku (確定申告), as a U.S. non-permanent resident requires much more than simply reporting your income.
Understanding remittance-based taxation, foreign tax credits, IRA and pension income, and Japanese cost basis rules is essential for filing an accurate Japanese tax return.
The difficulty is that U.S. tax documents are prepared under U.S. tax rules, while your Japanese tax return must be prepared under the Japanese tax system. The taxable income and cost basis shown on your U.S. documents may therefore be different from the amounts that need to be reported in Japan.
If you are unsure how these rules apply to your situation, professional tax advice may help you avoid costly mistakes and identify available tax reduction opportunities in Japan.
Our accounting firm in Japan provides international tax and accounting services with English support, including Japanese tax return preparation for foreign residents and U.S. citizens living in Japan.
Because every taxpayer’s situation is different, the correct calculation depends on your income sources, remittances, investment history, and period of residence in Japan.