It’s tax time once again! This year, the filing deadline for national income taxes in Japan has shifted from mid-March to April 15. Be sure to thank your local coronavirus. Naturally, I waited until this weekend to amass my paperwork, and didn’t obtain the services of a professional account. So, I will head to my local National Tax Agency office (税務署) this week with a stack of documents and money in hand. By going through the tax-submission process manually, I was able to witness first-hand the significant differences between the American and Japanese income tax systems.
Keep in mind that I am not an accountant, and in fact I don’t really know what I am talking about when it comes to the legal requirements of paying your taxes. You should talk to a professional if you want any information beyond this interesting anecdote about my own taxpayer experience.
For convenience, I have converted some Japanese amounts into US dollars, using a $1 = ¥100 approximation.
Most People Don’t File Taxes
Of course, I don’t mean that most people don’t pay taxes in Japan. Yet because of the systems set up at most large companies, your typical salaryman doesn’t need to submit any paperwork to the NTA, since their company does it for them. There are a few key exceptions.
- You made more than $200,000 during the year
- Your spouse also worked, possibly resulting in duplicate taxes being paid
- You have your own side business or other secondary sources of income
- You overpaid and need a refund
Even when your circumstances require you to file, most Japanese get to use the simpler “Form 1,” which focuses on adjustments to the taxes already submitted by your employer.
This limited need to manually file taxes leads to a key tax-time difference between Japan and the US: there are no tax-submission software products. There are no Quicken or TurboTax counterparts here, at least for the consumer market. And there are no springtime TV commercials from H&R Block claiming that they can get you the biggest refund. More likely, there will not be a refund, because your company calculated the correct taxes the first time, rounded to the nearest yen.
Different Deductions Reveal Different Priorities
If you do file taxes by hand—especially through the more detailed “Form 2” long-form “final return,” you will find a variety of deductions that reduce your taxable income. Some of them have direct parallels to traditional Form 1040 and former Schedule A deductions in the US, including reductions for charitable giving and excessive medical expenses. But there are key differences that, I believe, say something about financial incentives and priorities in each country.
In Japan, there is no deduction for state or local taxes paid, a reduction still allowed under the revamped Form 1040. There is a credit related to taxes paid on the purchase or improvement of your primary home, but the nearly automatic deduction for interest and points paid for a home loan appears to be much more restricted.
There are a few discounts not found in the US return. Many of these are insurance related, such as a deduction for your life insurance premiums. Monies paid for earthquake insurance is also removed from your taxable income, as are the official premiums paid for Social Security and Medicare equivalents.
There is also a space to deduct donations you made to a political party. While such contributions were traditionally deductible under Schedule A as a component of charitable giving, it is interesting to see that such donations are singled out on the Japanese return. Working students also get special discounts, perhaps in a nod to the overall labor shortage in the country.
Things Escalate Real Fast
As in the US, the Japanese income tax system is progressive; the higher your income, the higher your tax rate. In America in 2020, the tax brackets start at 10% for individuals making just under $10,000 per year, going all the way up to 37% for those earning around $518,000 or higher. In Japan, the rate is just 5% for the first $20,000 or so of your taxable income. But by the time you reach around $400,000 in taxable income, the rate is a whopping 45%.
While I am sure there are ways for the rich to soften the financial blow, the lack of obvious standard deductions means that those in the middle and upper-middle classes will see a quick rise in their tax assessments. And that jump sometimes happens in a very tiny window of income.
For example, there is a deduction available for each of your dependents, initially around $4,800. This is true for individuals who earn up to $240,000. But by the time your income reaches $250,000—just a $10,000 jump—the deduction has dropped in three stages until it reaches zero. I am not sure why those who make $240,000 receive full benefits while those who earn $250,000 are fat cats who don’t need such government assistance. But this and similar sudden drop-offs are surprising in their abruptness.
Nobody Dreads the NTA
Despite the relatively high tax rate and the way tax brackets jump up quickly, you don’t hear a lot of grumbling from the general Japanese public about taxes. Keep in mind that this is not the only tax. Beyond this national income tax, local variations add ten percent to your tax burden. The consumption tax, a form of value-added tax, adds 8% to 10% to every retail transaction, including the purchase of real estate. Also, taxes for national health insurance and social security are in addition to the standard income tax. For those with the highest salaries, the tax burden easily exceeds 50% of all income.
And yet, I have yet to hear anyone moan about this burden, either for individual or corporate assessments. In part, this is a side effect of having your company do your taxes for you. As in the US, tax withholding is a great way to keep the taxpayers ignorant about what it really costs them. But even for those who understand they are paying a lot, you don’t hear the hew and cry that is common around April 15 in America.
If you cannot wait to get started on your Japanese taxes, you will be delighted to know that the National Tax Agency provides a full English translation of its instructions for both Form 1 and Form 2. There are a few grammar issues, including one cases where I think the opposite meaning came through. But in general, these guides should help you work through the otherwise kanji-laden tax forms. This page on the NTA web site provides links to the full English instructions or to specific sections of the 2020 booklet. Happy taxpaying!
[Image Credits: cheetah/photo-ac.com]