US Citizen with US C.D. and Japanese Tax

[tobehisalone]

If I have a Certificate of Deposit (CD) at a US bank and am a US citizen, but live in Japan (tax-resident), do I need to report the gained interest (likely a couple hundred USD) to the Japanese NTA when filing my taxes at the end of the year? The money would stay in the US bank when the CD matures (not be transferred to Japan).

If I need to report, how would I report this on my Kakutei Shinkoku (which I am required to do for my Japanese income)? Also, how would the value be calculated in JPY? Would I use the exchange rate when the CD is matured and funds withdrawn into a US savings account. Would I end up being taxed by the US and Japan on the interest gains?

 

[kristhuy]

@tobehisalone Interest on foreign bank deposits is classified as "interest income" and is taxed at marginal rates. See this discussion from this year's tax return questions thread for more details about how to declare it on your tax return.

how would the value be calculated in JPY?

The "interest income" is the JPY value of the USD when you received it (i.e., when you first had the chance to do whatever you want with it). If you converted it to JPY immediately, you can use the actual rate, but otherwise you need to use a reference rate for that day. Basically any reference is ok, as long as you use the same reference for all your foreign currency transactions.

If you subsequently sell any USD in exchange for JPY, you will need to know your average USD cost basis (in JPY) to calculate any foreign exchange gains.

Would I end up being taxed by the US and Japan on the interest gains?

Yes and no. Under the treaty, the US has primary taxation rights to the interest, capped at 10%. This means that if you pay 10% or less US tax on the interest, you can claim a foreign tax credit in Japan to offset your Japanese tax liability on that interest. (If the Japanese liability is more than the US liability, you will obviously pay the difference.)

If you pay more than 10% US tax on the interest, things get a little messy. You need to claim a foreign tax credit in Japan with respect to 10%, and then calculate how much Japanese tax was not offset by the credit. Then you claim a foreign tax credit in the US with respect to the Japanese tax that was not offset by the foreign tax credit you claimed.

 

[tobehisalone]

@kristhuy Thanks so much! This is super helpful along with you linked discussion explaining how to report it with the NTA's e-tax system.

As far as tax credits, that sounds a bit complex for sure. But, I'm guessing since the interest is less than the IRS's reporting threshold for "income" on my US taxes after I apply my foreign earned income credit (I make no other "US income"), I essentially will owe/pay no US taxes on it? That's what I'm hoping anyway, since just paying the tax to Japan and not having to deal with the tax credit system seems the most simple.

 

[ethzz]

@tobehisalone How long have you been here, and what is your status of residence (visa)? Will the money stay in the US, or will you be moving any of it to japan?

 

[tobehisalone]

@ethzz I've been here many years past the 5-year tax liability mark and will be here for the foreseeable future. I have no intent to move any of the money to Japan for the foreseeable future either unless I retire here. For the time being I will likely continue to reinvest it in the U.S.