Nobody likes paying taxes, especially in Japan, where taxes are significantly high. As much as taxes are essential to keep economies running, it’s always a pain knowing that you “lose” part of your income to the taxman. Luckily, there are tax deductions you can use to save some money.
Whether you own a small business or are self-employed, you can find a way to reduce your tax bill in Japan. If you are a foreigner who lives live in Japan, which tax deductions can you claim? Let’s take a look at some of them.
Home Loan Tax Deduction
This is a pretty big one, and it applies to people that purchased their residence in Japan.
Currently, this deduction gives you 1% of the remaining home loan value (up to ¥40M) per year as a tax credit for up to 10 years. So, for example, if you have a home loan of ¥50M, you receive a pretty hefty ¥400,000 credit every year for ten years.
Certain restrictions apply; for example, your home must be larger than 50 square meters and cannot be a certain age. This only applies to your primary residence, so you don’t get this on a holiday home, or an investment property. Also, if your taxable income is more than ¥30M, you are not eligible. We recommend you check with your real estate broker or tax accountant to confirm whether you and your home qualify for this.
Employee Expenses
Resident taxpayers who earn an employment income are eligible for earned income deduction. This amount is deducted based on the amount of employment income you make. Therefore, you can claim this to reduce your tax bill.
A permanent or non-permanent resident employee can take an earned income deduction. The minimum standard deduction is ¥550,000 or gross employment income, whichever is lower. The deduction is currently capped at ¥1.95M.
Spousal Tax Deduction
Japan has a spousal tax deduction that reduces the annual taxable income of the household’s primary earner. This reduction ensures that the main earner pays less in taxes.
Under the spousal tax break laws in Japan, the dependent spouse is making ¥1.03M or less each year, the taxable annual income of the household’s primary earner is reduced by ¥380,000. If the income is above ¥1.03M , the taxpayer does not qualify for a deduction.
Medical Expenses
The medical expense tax deduction in Japan is a handy way to lower your taxable income by subtracting medical costs incurred throughout the year. It’s not just limited to the taxpayer but also covers expenses for your family members.
If your medical expenses exceed a certain threshold, you can file a final tax return with the tax office to claim the excess amount as a deduction. The calculation is based on your medical expenses paid minus ¥100,000 or 5% of your total income, whichever is lower, with the maximum deduction capped at ¥2M.
Eligible expenses include treatments, medications, consultations, and specific health programs.
Charitable Contributions
According to the Ministry of Finance in Japan, charitable contributions are eligible for tax deductions only if the charity organization is in Japan. The total deduction is restricted to 40% of the income less ¥2,000. For instance, if you give a ¥10,000 donation, you get a ¥3,200 tax reduction.
The Tax Reform Act Japan defines this capital surplus. Therefore, if you make donations, you can reduce your tax bill. However, you first need to confirm if the charitable organization you choose is qualified.
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Life Insurance Premiums
If you pay life insurance or private pension premiums to a Japanese agency in local currency, you are eligible for deductions based on national income. The maximum deductible amount is ¥40,000 and ¥28,000 for the national tax and the local inhabitant tax, respectively.
An additional ¥40,000 for the national tax and ¥28,000 for the local inhabitant tax deductions are included if the premiums are paid under an individual pension plan or nursing insurance. If you have a foreign, non- Japanese policy, these deductions are not applicable.
In addition, earthquake insurance is also deducted for up to ¥50,000 annually.
Real Estate Investments
Investment real estate in Japan can be a good way to generate income in a tax efficient way.
If you hold property investments in Japan, you can deduct some tax from your total taxable income. Since real estate assets depreciate, you can deduct depreciation costs. In addition, you can deduct management and maintenance expenses, insurances, and interest payments on a loan.
Entertainment Expenses
Companies in Japan can deduct entertainment expenses for eating and drinking as long as this expense does not exceed ¥5,000 per outing. This deduction comes in handy if the company entertains a lot of clients. According to the Tax Reform Act 2020, corporations can deduct 50% of the entertainment expenses for food and drinks if the capital amount is more than ¥10B.
Capital Losses
From 1st January 2016, capital losses from the sale of publicly traded shares and some bonds via a Japanese broker can be offset against dividends. Based on the current tax laws in Japan, these capital losses can be carried over for three years.
Bereavement and Disasters
Condolence payments, funeral contributions, and disaster compensation will not be taxable. Although this varies depending on the tax office, these contributions are eligible for tax deductions in Japan.
Start-up Expenses
If you establish a business in Japan, you can reduce your tax bill on the opening costs used to establish the business and organization costs. This is possible because these expenses are treated as deferred assets: therefore, they can be amortized.
Net Operating Losses
A tax loss can be carried forward to offset your future company income. According to the 2016 Tax Reform Act, the net operating loss deduction will be implemented over three years. After this period, the limitation will be reduced to 50%. SMEs are not subject to this loss deduction limitation.
Payment To Foreign Affiliates
To get this deduction for expenses incurred by a foreign affiliate and charged to a Japanese corporation, you need to demonstrate that the service agreement between the two entities meets the criteria of Japan’s transfer pricing regulations. These tax deductions are allowed if the following conditions are met.
- You have a written service agreement.
- A Japanese corporation requested these services.
- There’s documented evidence, such as regular invoices from the foreign affiliate.
- The service charges are reasonable.
Dependents
If you support anyone financially, you are eligible for a tax deduction. For instance, general dependents have a tax deduction of ¥380,000. However, this amount may vary. Therefore, you should confirm with your local tax office to get the actual figure.
A dependent is a relative or spouse who depends on the taxpayer. You don’t have to live in the same house. If your dependent is a person with special disabilities or is under the age of 23, the deduction applies as long as their annual income does not exceed ¥480,000.
Honorable Mention: Furusato Nozei
While not exactly a tax deduction, Furusato Nozei (or hometown tax) is a program created by the Japanese government to encourage taxpayers to prepay their annual income and residential taxes to municipalities, rather than to where they live.
The program was created to shift much-needed funds from wealthy cities like Tokyo and Osaka, to cash-strapped regions. To encourage people to send the money their way, these local regions offer a “gift” in return, which may have a monetary value of up to 30% of the amount of tax paid. Basically, you pre-pay your taxes and receive gifts in return.
To learn more about Furusato Nozei, please read our article on the topic here.
Summary
Japan has several tax deductions that allow you to save money on taxes. However, keep in mind that most tax deductions are reviewed frequently and may change over time. You can always check with your local tax office or visit the National Tax Agency website for up-to-date information.
Once you receive your tax refunds, the next step is to put your money to work! Feel free to contact us at Argentum Wealth for a free consultation on investment strategies for expats in Japan.
Argentum Wealth does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
Argentum Wealth Management is licensed through the Japanese Financial Services Authority to give financial advice. The FSA strongly recommends that you only receive financial advice and services from a locally licensed and regulated firm.
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