US Social Secuty Benefits and Japan Income Tax

[hugobozs]

I am retired US Expat living in Japan on a Spousal Visa which will expire after 5 years this fall. Every year I have been filing a US Tax return as required of US citizens living overseas.

During this 5 year period I was told that any overseas income was not reportable to the J-tax authorities. But I am now told that when I renew my Spousal Visa (or apply for Permanent Residence Visa) I will be treated as a "Resident Tax Payer" by the J-Tax Authorities because 5 years will have already passed. So my question is, will my Social Security Benefits which are deposited into my US bank, become taxable in Japan as income? Will I now have to file both US and Japan income tax returns, and pay income tax to Japan? I have no other reportable income so tax credits and such don't affect me.

I tried to see if anything in the US-JPN Tax Treaty clarifies this but all it says is that income tax is the jurisdiction of where the person resides, which in my case would be Japan. I even write to the IRS Intertnational Division Baltimore a year ago and they still have not answered.

 

[twhi]

@hugobozs I think the JapanFinance wiki will help you understand this better. But here is a quick summary for your situation.

SCOPE OF TAXABLE INCOME

For your first 5 years, you're a non-permanent resident (NPR) for income tax purposes. Note that this term is for income tax purposes only and is completely unrelated to your immigration residence status.

While you are NPR status, you are subject to income tax on foreign income sources (like your Social Security benefits, interest, capital gains, dividends, etc) only to the extent that you send money from the US to Japan during the same tax year as the income. So if you have been sending any money to Japan (or even using US credit cards in Japan), you will have some foreign income which is taxable in Japan. If you didn't report it, you will need to look into revising your filings for past years.

After 5 years you are no longer "non-permanent" resident, so you no longer get the break on foreign income if you don't send money to Japan. At that point, you all of your worldwide income will become taxable in Japan.

INCOME TAX TREATY

Per article 17 of the treaty, Social Security payments will be taxable in Japan. But you will be allowed to apply Foreign Tax Credits to your US income tax.

 

[confusedfl22]

@twhi Thank you very much. That corroborates exactly what I have been lead to believe. So after the 5th year, I presume I have to file both a US Tax Return as well as one for Japan. But since I pay no income tax on my SSA benefits to the US, I don't see how a "foreign tax credit" would apply or help me. Unless I am not grasping something here.

Sounds to me like I'm just going to be losing a significant portion of my Social Security Benefits.

 

[twhi]

@confusedfl22 I don't know if this will be useful, but you have the option is to apply foreign taxes as either a credit or a deduction. See the IRS webpage Foreign Tax Credit - Choosing To Take Credit or Deduction for further information.

 

[confusedfl22]

@twhi Thank you, but I don't see how the FTC either as Credit or Deduction helps a retired person with no taxable income. I think it's only useful if one has a taxable income against which to apply it.

 

[twhi]

@confusedfl22 If you have no other taxable income (US source or foreign source) and your Social Security benefit is below the taxable threshold ($25K if filing single or $32k if filing joint), then indeed it would not be applicable. But if this is the case, you would not be "losing a significant portion" of your SS benefits to Japan taxes. As @kristhuy mentioned, the tax rate for this income should be quite low.

 

[confusedfl22]

@twhi Yes I believe it will be quite low. Well at least for 2024. Next year will be a different picture with an entuire year's worth of SS benefits.

 

[twhi]

@confusedfl22 In that case then perhaps you will exceed the IRS threshold next year and will owe US income tax and you can apply FTC. But if you still don't exceed the IRS threshold, then your Japan income tax should be pretty low. It won't be zero though, and perhaps that's what you're getting at.

 

[confusedfl22]

@twhi Yes "IF" in 2025 I exceed the threshold and end up hving to pay US income tax, I believe I can apply the FTC.

Are Expats hiring accountants in Japan to file their J-tax returns? Or is it something one can do on their own> Right now (because of my low income) I file my US return myself,

 

[twhi]

@confusedfl22 Hopefully someone else can correct me if I'm wrong, but I would guess that it should be straightforward to do your own taxes for the situation you described.

The tax form and instructions are in Japanese, though. If you aren't able to read them, perhaps you can use Google translator and/or ask your wife to help you with it.

 

[twhi]

@confusedfl22 If you do decide to hire an accountant, be sure to line them up soon. The accountants with experience supporting expats are in high demand and lose availability far in advance.

 

[kristhuy]

@confusedfl22

is it something one can do on their own

Yes, many people do it on their own. The NTA has its own tax return preparation site that simplifies the process significantly. For more information, see this year's tax return questions thread. We maintain a questions thread from late January through mid-March every year.

If you are only declaring US social security benefits, the process should be extremely straightforward. It probably won't take you more than 15 minutes or so.

 

[kristhuy]

@hugobozs

During this 5 year period I was told that any overseas income was not reportable to the J-tax authorities.

Only to the extent you make no remittances of funds to Japan.

I will be treated as a "Resident Tax Payer" by the J-Tax Authorities because 5 years will have already passed.

Yes. "Non-permanent tax resident" status is determined daily. The day after you have been in Japan for five years, you no longer have non-permanent tax resident status.

will my Social Security Benefits which are deposited into my US bank, become taxable in Japan as income?

Yes. And they were taxable during the five-year period to the extent you made any remittances.

Will I now have to file both US and Japan income tax returns, and pay income tax to Japan?

Yes.

all it says is that income tax is the jurisdiction of where the person resides

Under the treaty, Japan has sole taxation rights with respect to US social security benefits received by residents of Japan.

US citizens can't use the treaty to avoid US tax completely due to the saving clause in Article 1(4), but the treaty does ensure that you will be able to claim a foreign tax credit on your US tax return with respect to any Japanese tax you pay on your social security benefits, alleviating double taxation.

 

[reflectionsbythewater]

@kristhuy

Yes. And they were taxable during the five-year period to the extent you made any remittances.

Why would they have not been taxable regardless of remittance?

 

[kristhuy]

@reflectionsbythewater US social security benefits are "foreign-source" under Japan's income tax law, so as long as they are paid into an overseas account, non-permanent tax residents can avoid paying Japanese tax on them by making no remittances.

 

[confusedfl22]

@kristhuy Thank you.

"US citizens can't use the treaty to avoid US tax completely due to the saving clause in Article 1(4),"

I am trying to avoid Japan taxes, not US taxes.

Any idea on how a retired person who files no taxable income (SSA Benefits only) on his US tax Return can take use this "Foreign Tax Credit" after paying income tax to the J-TaxAuthos on those very same SSA benefits?

 

[kristhuy]

@confusedfl22

I am trying to avoid Japan taxes, not US taxes.

Sure, but Japan has sole taxation rights under the treaty, so that's not going to happen. A key purpose of tax treaties is to tell you which country you can avoid paying tax to. In the case of US social security benefits, that country is the US. (Though if you're a US citizen, all you can do is claim a foreign tax credit.)

how a retired person who files no taxable income (SSA Benefits only) on his US tax Return can take use this "Foreign Tax Credit"

The relevant IRS form is 1116. If you don't have enough US tax liability to use the credit, you can carry forward the unused credit for up to 10 years. If you never have enough US tax liability to use up the credit, though, it won't be of any value to you.

 

[confusedfl22]

@kristhuy Thank you. As I thought the Foreign Tax Credit is of no value to me. I've used Credits for decades before retiring, but now they are useless.

 

[kristhuy]

@confusedfl22 In case it's useful, foreign public pension benefits (such as US social security) are taxed fairly lightly in Japan (because they are treated the same as Japanese pension benefits). See here. If you have no other income, your Japanese tax liability will be pretty low (around 2-5%, depending on deductions, etc.).

 

[confusedfl22]

@kristhuy Thank you. You are right that it's not all that high plus I do have deductions that would apply.

When doing J-Tax Return, is there a specific USD-JYEN exchange rate to use?