Taxes While Living in Japan

A recent post by Roy indirectly reminded me about something I learned about taxes in Japan. The tax situation in Japan is pretty complicated and I can't claim to understand it very well beyond personal experience but my students and former Japanese co-workers have taught me a few other things.

In terms of personal tax responsibility, Americans don't need to pay income taxes in the United States unless they make more than $75,000 a year. Needless to say, few of us are in any danger of losing our tax-exempt status. We have to file a tax form regardless of whether we owe money or not. This was a fact that my husband and I were unaware of for an extended period of time while living here and there was quite a bit of panic when we discovered we hadn't filed for well over a decade and it may result in some problems despite the fact that we owed nothing. Fortunately, we didn't get in trouble. In fact, the IRS seemed to take it all in stride and sent us 3 years of back tax forms which we filled out and sent in. Now, we're on a regular schedule but it was a bit of a worry for awhile.

We do have to pay Japanese income taxes though the rate is relatively low compared to what we'd pay in the U.S. unless we opt to pay for the same sort of benefits we get back home (unemployment insurance, social security, etc). I'm not even sure that foreign residents can collect social security if they pay into the system unless they stay for a minimum amount of time (last I heard was 10 years). I was told that we aren't required to fill out a Japanese income tax form unless we want to get a refund and, since foreign employees are usually not over-taxed, we hadn't had to do it up until last year when I started doing freelance work for my former company. For some reason, they have a set policy of over-taxing all freelance workers (10% is the set rate) so you have to file to get the excess back.

Most foreign employees don't end up paying anything beyond the bare minimum because they don't plan on staying long enough to collect social security nor do they really know their options in regards to unemployment benefits. No one explains it to you when you start your job because the companies view most foreign workers (especially teachers) as transitory. At my former company, even though it was an office job, the president used to use the excuse that my boss (an Aussie) and I weren't going to remain with the company for long so we weren't entitled to some of the perks the Japanese, who were supposedly more dedicated to the company, received. Ironically, my boss and I outlasted all but 3 of the original staff who were there when we started at the company including the president himself who sold us off to a bigger company 2 years before I quit. My former boss is still there.

The big bite that comes out of our salaries in terms of taxes is ward taxes (commonly called "ku taxes" by foreigners living in Japan). These vary from ward to ward but the more expensive ones (like ours) amount to 5% of our income. Paying only 6% or so in income tax seems a lot less impressive when you add in the ward taxes and then the cost of socialized health insurance. The insurance rate is based on income but mine was about 9% of my salary...and I didn't make that much relative to other foreigners and I made less than the average Japanese salaryman.

Most Japanese employees are cut a break on the health insurance which most foreigners don't get. A lot of companies will pay a portion of their health insurance (generally around 50%). This can be quite a healthy chunk of money. My former boss used to pay about 60,000 yen a month in health insurance and I believe he made a salary commensurate with being a Japanese manager of his age. He'd have been pretty happy to have half of that paid by someone else.

If you add all the little bits and pieces up, that's about 6% income tax + 9% health insurance +5% ward taxes for a total bite of 20% and that's without any benefits beyond the health insurance. Since most foreigners rarely use health benefits compared to their Japanese counterparts, this is a pretty sweet payday for the Japanese government, particularly since a lot of services that the tax money is used for that directly benefit the Japanese, such as community center activities (like cheap access to a swimming pool) and adult education, don't get utilitzed by foreigners either.

Anyway, one of the most peculiar things I've learned about avoiding taxes in Japan came from one of my students. I've heard from several Japanese people that inheritance taxes are incredibly high. The highest figure I'd heard was 75% of the value of the property but my student reckoned it may be closer to 60% (at least for property outside of Tokyo). That means the Japanese government gets a huge payday any time a property owner passes on. My student told me that her husband is supposed to inherit some property after his father passes away and the way that they can avoid the huge inheritance taxes is for her husband to become her father's brother. This is accomplished by having his grandfather adopt him. This allows the inheritance tax to skip a generation rather than apply to every generation. This is one of the strangest loopholes I've ever heard.