In today’s world of ever-increasing tax rates, finding legitimate ways to reduce your income tax burden can be a financial lifesaver. Unfortunately, navigating the financial labyrinth of taxation can be challenging, especially when you’re in a country as challenging as Japan. So, how can you keep more of your hard-earned money in your pocket? Well, you may have already heard of “Furusato Nozei” as a tool for reducing residence tax – but if you’re not using it to reduce your income taxes as well, you’re missing out.
What Is Furusato Nozei?
“Furusato Nozei” is a unique tax program in Japan that offers individuals a chance to both support regional communities and benefit from tax deductions. The term itself is a combination of two Japanese words: “Furusato” (故郷), which means “hometown,” and “Nozei” (納税), which means “tax payment.” In essence, the Furusato Nozei program is all about making a tax payment to one’s preferred hometown in Japan.
The concept emerged as a solution to an economic challenge. As many Japanese citizens relocated to major metropolitan areas for better job opportunities and urban amenities, their original hometowns began experiencing economic decline. These regions not only lost their workforce but also a substantial amount of local consumption, leading to reduced revenue from taxes. The Furusato Nozei program aims to address this imbalance by allowing taxpayers to divert a portion of their taxes to their favored hometowns. In return, donors receive local goods or gifts as a token of appreciation, establishing a reciprocal relationship.
Tax Advantages of Furusato Nozei
The Furusato Nozei program in Japan is not just a unique way to support regional hometowns but also offers a strategic approach to income tax deductions. Here is a detailed breakdown of how the tax deductions work with this program:
- 1. Donation Basics: When you make a donation through the Furusato Nozei program, it becomes eligible for tax deductions. The core principle is straightforward: the more you donate, the more you can potentially save on your taxes.
- 2. Calculation of Deduction: Under the Furusato Nozei system, if you file a tax return, the amount you’ve donated minus a 2,000 yen base amount becomes eligible for tax deductions. For instance, if you donated 50,000 yen, the deductible amount would be 48,000 yen (50,000 yen – 2,000 yen).
- 3. Understanding the Refund: The refund or deduction you’re eligible for is calculated based on the deductible amount from the donation and your applicable income tax rate. The formula is described as (Deductible Amount) x (Income Tax Rate). However, the specific rate also takes into account a special income tax for reconstruction, increasing it by 1.021%.
As an example, if an individual with an annual income of 6 million yen donates, the estimated maximum deduction amount would come to 114,244 yen. After accounting for the 2,000 yen base amount, 112,244 yen is considered for deductions. The total refund would then be calculated based on the income tax rate.
- 4. Additional Benefits – Resident Tax: Besides the income tax deduction, the Furusato Nozei program also provides deductions on the resident tax. Following the above example, where 58,000 yen is the deductible amount, there would also be an approximate 52,000 yen deduction from the resident tax.
- 5. Claiming the Deductions: To benefit from these deductions, one must file a tax return by March 15 of the year following the donation. During this process, it’s crucial to present or attach copies of the “donation receipt certificate” provided by the town or region you donated to. Also, ensure you have “personal number confirmation documents” and “identity confirmation documents” handy.
- 6. Refund Timeline: If you file your tax return by March 15th and are eligible for a refund, expect the amount to be transferred to your specified account approximately one to two months later. Details of the refund amount and payment date are typically mailed to the donor after the tax return is filed.
So, now that you know how it all works, what do you have to do to take advantage of the system? Fortunately, as the program has grown in popularity, it has also become easier to use – and this counts for foreign residents of Japan as well as natives.
How To Make Your Furusato Donation
Despite the name, the Furusato Nozei program doesn’t actually require your donation to be sent to your literal “hometown”. The concept of “furusato” is more about forming a connection with a place that resonates with you. So, while foreign residents’ “hometowns” are overseas, they too can partake in this tax-saving scheme. The key is to choose a town in Japan that aligns with your values and preferences and follow the appropriate steps:
- Step 1 – Choose Your “Hometown”: First, select a rural municipality or hometown that you wish to support through your contributions. This could be the place to which you have a personal connection. Many people, however, choose locations based on the “gifts” they are likely to receive. There are many websites available that allow you to sort through towns and gifts. You can also donate to multiple municipalities, depending on the amount you can donate.
- Step 2 – Determine Your Donation Amount: For most people, the amount you can donate will come to around 1/3 of your resident tax bill. However, an online calculator can help you determine the exact value of your potential donations. You can also work with your financial adviser to calculate your exact donation allowance.
- Step 3 – Make Your Donation: The deadline for submitting your donation application is December 31st. Thanks to the rising popularity of Furusato Nozei, many user-friendly websites have cropped up that can help facilitate the process. Once the donations have been made, non-company employees will have to track their donation receipts and necessary paperwork for tax filing the following year. (Company employees can use the “One Stop Exception System”, but this will require a few additional steps.)
- Step 4 – Enjoy Your Tax Benefits: Now comes the exciting part—reaping the tax benefits. Work with your financial adviser or accountant to complete your tax return and claim the full amount of available tax deductions.
Building A Comprehensive Tax Strategy In Japan
While the Furusato Nozei program is beneficial, it’s just one of the myriad strategies available for tax optimisation in Japan. Minimising tax liability is a complex endeavor, involving various facets like maximizing allowable deductions, documenting financial dependents, utilising real estate depreciation, and more. This is why consulting a financial adviser is critical.
A knowledgeable financial adviser can offer personalized advice tailored to each individual’s financial situation – even as that situation changes over time. They can help you navigate Japan’s intricate tax landscape, ensuring that you’ve utilized all available avenues for tax savings with a strategy that maintains legal compliance.