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Taxation rules to follow when moving to Japan from the U.S.

January 18 2022

If you're a U.S. expat living in Japan, you have to file your taxes annually no matter where you live. In fact, as a U.S. citizen, your taxes don't expire every year - you have to file for every year that you have lived outside the U.S. (or if you meet certain IRS thresholds). If you have failed to file taxes for the past 5 years (or longer), now would be a good time to talk with a U.S. tax lawyer and get your U.S. tax filing in order.

At the same time, it is crucial that you indulge in some research work at your own level also. You need to search taxes for US citizens working in Japan to get more insight.

Paying U.S. tax in Japan.
If you're a U.S. expat living in Japan, you have to file your taxes annually no matter where you live.

Tax Criteria to follow

According to the IRS, an expat is a tax resident of the United States if he or she meets either of these criteria:

  1. They spend at least 31 days within a 12-month period in the United States (a U.S. territory does not count); or
  2. Their "tax home" is in America and they spend at least 183 days within a 24-month period in the U.S.

Expats who meet these two conditions are U.S. tax residents and are required to file taxes with both countries - unless an exception applies to them.

There are a number of ways to file your U.S. taxes from Japan, and most expats are required to do so. It can be confusing for first-timers, but there's help at hand.

What you need to know about filing taxes as a U.S. expat

If you're living in Japan for the long haul, you need to file taxes every year. If you use the calendar year as your tax year, then the deadline is April 15 (or April 17 if you file an extension).

There are two ways you can file your U.S. taxes while living abroad:

  • The Foreign Earned Income Exclusion (FEIE, using IRS Form 2555) is available to expats who have not been in the country for more than 330 days during the tax year. This is a great way to save money on taxes and it's also easy to do. However, this method only works if the income is coming from a U.S. source. This means that if you're working in Japan and receiving a salary, it must be paid in U.S. dollars - not yen - by your employer who has already paid their tax bill on that income.
    *For non-U.S. citizens, the FEIE covers up to around $100,000 per year of foreign earned income.
  • The other way to reduce your U.S. tax bill is the Foreign Tax Credit, using IRS Form 1116. If your income was taxed by a foreign country, you can subtract that from your U.S. tax, usually greatly reducing your U.S. tax hit. However, you can't claim the foreign tax credit for foreign taxes on income excluded on Form 2555, meaning you can only claim it for foreign taxes on the same income that the U.S. is taxing. How much of your foreign tax that can be claimed depends on the ratio of non-excluded income to total income.

It's important to remember that you are still a U.S. citizen and that your worldwide income is subject to U.S. taxation.

This can be especially difficult if you are living outside the U.S. and are required to file a tax return. You may be tempted to ignore your obligations and hope that the IRS doesn't notice, but this is never a good idea. The IRS has very sophisticated systems in place to catch Americans who try to hide their income offshore.