If you are a U.S. citizen living in Japan as a non-permanent resident (NPR), preparing your own Japanese tax return 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 investments under Japanese tax rules, 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.
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
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.
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.
In addition, Japan generally uses the moving-average method to calculate the cost basis of securities, whereas the United States commonly uses the FIFO method.
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. 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.
The taxable amount is generally the smaller of these two amounts.
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.
5. Calculate Japanese Income Tax
Income subject to remittance-based taxation is generally added to your Japanese-source income and taxed using Japan’s progressive income tax rates (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.
6. Claim a Foreign Tax Credit
If remittance-based taxation applies, part of your U.S.-source income may become taxable in Japan. In that case, you may be able to claim a foreign tax credit for U.S. taxes paid. This calculation can be quite complex.
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 as a U.S. non-permanent resident requires much more than simply reporting your income.
Understanding remittance-based taxation, foreign tax credits, retirement accounts, and Japanese cost basis rules is essential for filing an accurate Japanese tax return.
If you are unsure how these rules apply to your situation, professional advice may help you avoid costly mistakes.
Because every taxpayer’s situation is different, the correct calculation depends on your income sources, remittances, and investment history.