Taxes are painful to pay in any country, but Japan is particularly famous for its high tax rates and complex laws. For foreign residents, Japanese taxes become even more challenging to navigate, which means kissing goodbye a large sum of your hard-earned income. By utilizing deductions, however, you can optimize your tax savings and keep more of your income. Here are 5 types of deductions to claim on your taxes in Japan.
1. Work-Related Tax Deductions:
Both employees and business owners can utilize work-related tax deductions to reduce their taxable income and potentially lower their overall tax liability in Japan. Take stock of any work-related expenses you incur throughout the year, informing your tax adviser and providing receipts whenever possible. Some of these expenses could include:
- Commuting Expenses: These are transportation costs for commuting between home and workplace, such as train fares, bus fares, or parking fees.
- Professional Expenses: Professional expenses could cover everything from work-related training courses to business-related travel expenses and membership fees for professional organizations.
2. Housing Deductions In Japan:
Whether you’re renting a property or paying down a loan for a home you own in Japan, a portion of your home-related expenses may be tax deductible.
- Residential Rental Deductions: If you are renting a residential property in Japan, you may be able to deduct a portion of your rent, maintenance fees, and property insurance premiums.
- To deduct rent from your taxes, you’ll need to ensure that your rental agreement is a company contract rather than a personal one. This may require some effort, such as speaking with your boss or HR manager and preparing the necessary documentation for the company contract application.
- Once approved, your employer’s accountant or HR will calculate how much of the monthly rent is deductible and adjust your salary accordingly. While there may be some barriers due to company bureaucracy or policies, it’s worth inquiring with HR or your manager about the possibility of this arrangement. If successful, you should be able to deduct around half of your rent as a “company dormitory” expense.
- Real Estate Deductions: In Japan, you can use purchased real estate for tax deductions in two ways: through your home loan, or through investment properties.
- If you have a home loan for your primary residence, you may qualify for a tax credit of 1% of the remaining loan value. This 1% deduction is limited to 400,000 JPY per year over ten years for a 4 million JPY maximum deduction overall.
- You can also deduct various expenses from rental income, including depreciation, maintenance costs, management fees, insurance, and loan interest. These deductions can help reduce your taxable income and potentially increase your net income.
Your tax adviser can help you estimate what percentage of your housing expenses are tax deductible. You may need to provide specific information, such as how much of your home is used for business or work purposes.
3. Japanese Insurance Deductions:
Contribution to the Japanese national health insurance system is obligatory. Fortunately, you can deduct some of your health insurance expenses from your income tax. If you have a Japanese life insurance policy, you may be able to claim deductions there, too.
- Health Insurance Premiums: Public and private health insurance premiums can be deducted from your taxable income. The contribution amounts are tax-deductible and vary depending on the insurance funds and prefectures.
- If the contributions are deducted directly from your salary, no further action is required. However, if you pay the contributions yourself, you need to file a deduction application. This applies to both national health insurance and pension schemes.
- Life Insurance Premiums: If you have a Japanese life insurance policy on which you are both the policyholder and the life assured, you can claim deductions on your income tax based on the premiums you have paid.
- (This means you must be both the individual paying the life insurance premiums as well as the individual whose death would trigger the death benefit payout. If the policy is held and paid for by another individual or covers another person’s death, you cannot claim the premiums as deductions.)
- The maximum deduction is 120,000 yen, with specific deductible amounts varying depending on whether the policy is new or old, and the calculations are based on a percentage of the premiums paid, with specific thresholds for different premium ranges.
- The deductions are separate for general life insurance and individual pension premiums. However, it’s important to note that deductions are only applicable if the policyholder is the same as the life assured and is responsible for paying the premiums.
You can calculate your deductions based on your specific insurance plans and payments. Make sure to consult with your financial adviser to confirm and maximize your deductible amounts.
4. Other Tax Deductions For Japanese Taxpayers:
Beyond the above categories, there are also plenty of miscellaneous expenses that you can claim as deductions on your income tax. A couple of examples include:
- Dependent Deductions: In Japan, you can claim tax deductions for dependents in two ways. For a non-dependent spouse, a special spouse exemption of up to JPY 380,000 (national income tax) and JPY 330,000 (local inhabitant’s tax) can be taken if the taxpayer’s income does not exceed JPY 10 million.
- Resident taxpayers are also eligible for a deduction for each dependent who is 16 years or older. Dependents are relatives (excluding spouses) who are supported by the taxpayer, with their income not exceeding JPY 480,000 per year.
- The dependent does not need to live with the taxpayer but must receive support as part of the taxpayer’s household. Deduction amounts increase for dependents who are 70 years or older or between 19 and 23 years old. Additionally, deductions are higher for dependents who are handicapped.
- Charitable Contributions: Monetary donations, donations of goods, or volunteer-related expenses are also tax deductible up to a certain amount, but only if the charity organization is based in Japan.
- The deduction is limited to 40% of your income minus JPY 2,000. (For example, you can receive a tax deduction of JPY 3,200 from a donation of JPY 10,000.) Make sure to confirm if the charitable organization you choose is qualified for tax deductions before making the donation and keep receipts and documentation of your donations so that you can maximize your tax savings.
Bonus Tip: Use Your Taxes To Go Shopping For Japanese Items
The Furusato Nozei system in Japan not only serves as a tax-transfer system but also provides effective tax reductions for residents. By participating in this system, you can receive gifts that help offset your tax payments, essentially allowing you to shop for regional Japanese goods with a portion of your taxes.
Not only this, you can customize your options by choosing municipalities known for specific products they would like to receive as gifts. Moreover, certain regions offer the opportunity to direct contributions towards specific purposes, such as supporting healthcare, preserving nature, or aiding in disaster relief efforts. This purpose-driven approach enables you to align your tax donations (and gift shopping) with causes that hold personal significance.
Seeking Professional Guidance in Japan
Japanese tax laws are complex and ever-changing, and this includes the rules regarding eligible deductions. Tax professionals possess in-depth knowledge of the system, allowing them to ensure that you receive all available deductions and credits. Financial advisers can help you avoid costly mistakes with their comprehensive knowledge and assist you in your long-term tax planning. Work with a professional financial planner and give yourself the peace of mind of knowing that your taxes are handled as part of your comprehensive financial plan.