Save Yourself Trouble and Money with the Foreigner’s Guide to Taxes, Health Insurance, and Pensions

Social programs in Japan are funded through such things as taxes (income, resident, etc.), health insurance premiums, and pension contributions. Everyone, from citizens to foreign residents, is obligated to pay into them. It may all seem a little complicated, but in order to live peacefully in Japan, you need to know all about these fees. That’s why, in this article, we’ll explain how the system works while also saving you money by making sure you’re not paying more than your fair share.

What Fees Do You Have to Pay While Living in Japan?

While calculating your monthly expenses like food, rent, heating, and lighting, you cannot forget about taxes. Most people know about the consumption tax that you usually pay while buying things at the store, but people above a specific income threshold must also pay the resident and income tax. Besides that, there are also health insurance premiums, pension contributions, and other fees that everyone living in Japan, even foreigners, must pay.

We will now summarize all of those types of payments. The exact amounts you have to pay and ways of paying them will differ from person to person, and some people will even be exempt from them, so please read this guide carefully to make sure you’re not losing money by paying more than you have to.

Consumption Tax

supermarket cash register
PIXTA

The one type of tax that most people deal with on a regular basis is the consumption tax, which is paid while exchanging money for a product or a service. Everyone, no matter their income, has to pay the same amount.

In October 2019, the consumption tax rose from 8% to 10% but the old, lower rate remained when it came to purchases of daily necessities like food, beverages, newspapers etc. (However, luxury items like alcohol and cigarettes, as well as medication, are taxed under the new 10% rate.) Additionally, the lower tax rate does not cover eating out, but it does cover food delivery and takeout. One place where you really have to pay attention is the convenience store. Aside from luxury items, foods and beverages there are taxed at 8%, but if you eat something at their eat-in area, then the tax jumps up to 10%. A difference of 2% might not seem like a lot, but it all adds up. Keep this in mind while planning your expenses.

A Simple Guide to Japan’s Tax Hike From 8% to 10%: What Was Affected and What Are the Exceptions?

Resident Tax

If you have a permanent Japanese address as of January 1, and you’ve earned a certain amount of money in the previous year, then you will have to pay the resident tax to your local municipality. This is something that both foreigners and Japanese citizens have to do. The resident tax is calculated based on your income from the previous year, so foreigners don’t have to pay the resident tax during the year they’ve started working in Japan.

If you’re employed by a Japanese company, then your employer should take the resident tax out of your salary and pay it in your stead (called the special collection). If you’re paying the tax yourself (ordinary collection), then you should receive a request for payment from your local municipality every June. Simply follow the instructions detailed there and pay the resident tax at a financial institution of your choice.

Two scenarios to keep in mind regarding the resident tax:

Paying the Resident Tax After Quitting Your Company
If your company has been taking the resident tax out of your salary (special collection) and you’ve quit your job, then you will have to pay the outstanding amount yourself (ordinary collection). However, some companies give you the option of them taking the entire outstanding resident tax amount from your last salary or severance package and paying it to the local municipality (lump collection) so make sure to consult your company about this option.

Paying the Resident Tax After Leaving the Country
If you cannot pay off the resident tax before leaving the country, then you will have to choose an “administrator of tax payment” before your departure. This person, who lives in Japan, will then pay the resident tax to your local municipality in your stead.

However, depending on your income or family circumstances, you may be exempt from the resident tax. There are also countries that have an agreement with Japan to help their residents avoid double taxation. Please consult your local municipality about whether this applies to you.

If you do not pay your resident tax, your visa renewal application might get rejected, so make sure to handle it in a timely fashion.

Income Tax

The income tax is calculated based on a person’s income. In the case of foreigners, “income” might mean money earned by working for a Japanese company or money earned from abroad, so what is the exact scope of the income tax? It all ultimately depends on how long they’ve lived in the country and their personal circumstances. There are three classifications of people who have to pay the income tax:

Who Has to Pay the Income Tax

Let’s talk a little more about Non-Residents, which are people staying but not residing in Japan. In short, Japan is not where they live their life but they are staying in the country for a set amount of time before ultimately going back to their real home abroad. An example of a Non-Resident might be a worker who gets transferred to Japan from abroad and stays here for less than a year. However, if their stay extends to more than a year, then at that moment they cease to be a Non-Resident and become a Resident.

Here is the calculation for the different categories of foreigners.

What Goes into Calculating the Income Tax

Permanent Resident: All income, Japanese and foreign
Non-Permanent Resident: Japanese income, foreign income received in Japan, remittances sent to Japan from abroad
Non-Resident: Japanese income only

However, there are many things that foreigners can deduct from their taxes. Let’s look at some of them.

Tax Deductions for Japanese Citizens and Foreigners

There are a number of tax deductions that can be claimed by both Japanese citizens and foreigners residing in Japan, although they are broadly divided into two categories: income deductions (an amount of money that can be deducted from your taxable income) and tax exemptions (an amount of money that can be deducted from your income tax). We will explain both of them below. Please note, though, that Non-Residents can only claim three tax deductions (outlined below): casualty loss deduction, contribution deduction, and the basic deduction.

Most foreigners in Japan claim the Foreign Tax Credit and the Dependent Deduction. Let’s look at them more carefully.

Income Tax Deductions Most Often Claimed by Foreigners

1) Foreign Tax Credit

The Foreign Tax Credit, which was set up to avoid double taxation for people earning an income in Japan and abroad, is a system where the amount of taxes paid abroad (to a point) can be deducted from a person’s Japanese taxes. Resident foreigners in Japan have to pay income tax on all or part of their foreign income, and if they also paid taxes on it in their home countries, then that would lead to double taxation. To avoid that, Japan has entered into agreements with certain countries whereas the taxes paid in said countries by an individual can be deducted while they’re in Japan. However, there are limitations to the Foreign Tax Credit depending on the foreign country, which also influences just how much a person can deduct from their Japanese taxes, so it pays to be well-informed about the tax system in your home country as well. Finally, the Foreign Tax Credit cannot be claimed by foreigners from countries without an FTC agreement with Japan, and those people will unfortunately be double-taxed.

To claim a Foreign Tax Credit, you’ll have to fill out the appropriate space on your tax return and attach to it documents proving that you’ve paid all your taxes abroad. There are many kinds of deduction forms, and calculating the right amounts can be complicated, so if you feel like you can’t do it on your own, you should probably pay a certified public accountant to help you with all of that.

National Tax Agency’s “Foreign Tax Credit for Residents”

2) Dependent Deduction

The Dependent Deduction is a set amount that can be deducted from income tax by Japanese citizens and foreigners, even if their dependents are residing abroad. Make sure to include all the necessary documentation. The Dependent Deduction can only be claimed by Resident foreigners (not applicable to Non-Residents).

Definition of a Dependent:

  • Non-spousal family members (related by blood within six degrees or related by marriage within three degrees), foster children, i.e. those entrusted by the prefectural government, and the elderly in need of care entrusted by mayors of municipalities. (Spouses are covered by the Spousal Deduction.)
  • Person cohabiting with a taxpayer.
  • Those making less than 380,000 yen a year (1,030,000 yen in case of a salary).
  • A blue tax return-filing full-time businessman who did not receive a salary throughout the year, as well as a white tax return-filing non-full-time businessman. (The blue tax return receives preferential treatment in the Japanese tax system. To file a blue tax return, you will need to have real-estate income, business income, or forestry income, as well as permission from the director of a tax office. Anyone not eligible for the blue tax return files the white tax return.)

Definition of Dependent Relative:
A relative who as of December 31 of that year will be 16 or older.

Dependent Deduction Amounts

*1: A Dependent Relative is a relative who as of December 31 of that year will be 16 or older.
*2: A Specific Dependent Relative is a Dependent Relative who as of December 31 of that year will be 19 or older but younger than 23.
*3: An Elderly Dependent Relative is a Dependent Relative who as of December 31 of that year will be 70 or older.
*4: An Elderly Dependent Relative who’s “Living Together” with a taxpayer or their spouse must also be their direct relative (parent or grandparent.)
*5: If, in the course of “Living Together” an Elderly Dependent Relative is hospitalized for a prolonged period of time, even if that time is longer than a year, it will not change their “Living Together” status. However, if they are transferred to an elderly care facility which then becomes their residence, then the Elderly Dependent Relative cannot be said to be “Living Together” with a taxpayer or their spouse.

National Tax Agency’s “Dependent Deduction” (Japanese only)

To claim a Dependent Deduction, you’ll have to file a Dependent Deduction Application at your place of employment during the year-end adjustment period. This usually applies to salaried company employees and public servants, but part-time workers can also file the application. Your place of employment will issue you forms for this year and the following year, so make sure you fill out and file them both. If you encounter any problems, please consult your company.

The information in this article is accurate at the time of publication.

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