This blog will thoroughly explain the tax considerations and strategies for U.S. Permanent Residents living a bi-coastal lifestyle between Japan and the United States.
Before starting cross-border living, it is essential to understand the basics of international taxation. For instance, U.S. permanent residents, like U.S. citizens, must report their worldwide income to the United States. This includes information about income earned outside the U.S. and financial assets held in foreign countries. To illustrate, you must report these amounts to the IRS if you have $ 100,000 in a Japanese bank account. In other words, living in Japan does not remove this obligation.
In addition, if your stay in Japan exceeds a specific period or meets certain requirements, the Japanese tax authorities may consider you a resident and be subject to Japanese taxes on your worldwide income. Therefore, it is necessary to understand the differences between the two countries' tax systems and file appropriate tax returns.
As U.S. taxpayers, U.S. permanent residents must report all of their U.S. and foreign income to the Internal Revenue Service (IRS). This includes wages, interest, dividends, rental income, and all other sources of income. It's crucial to understand that failure to report offshore financial accounts outside Japan or foreign countries can lead to significant penalties. This underscores the urgency of understanding and meeting your tax obligations.
The U.S. has provisions to avoid double taxation through mechanisms such as foreign tax credits and foreign-earned income exclusions. While these strategies can be complex, they are available to you. By following the correct procedures and engaging in proper tax planning, you can confidently navigate the tax landscape and minimize your tax burden.
Readers must understand that the US foreign tax credit does not necessarily eliminate double taxation entirely. The U.S. foreign tax credit is structured so that U.S. taxes available for the credit are determined by the division proportionally between worldwide and foreign income, which does not necessarily eliminate double taxation.
There is another critical U.S. rule: the Foreign Earned Income Exclusion. For the year 2024, this amount is $126,000. You do not have to include your foreign-earned income up to this amount in your US tax returns if you meet specific criteria.
Although it is not tax law, you can go abroad while maintaining your permanent residence for six months. If you exceed these six months, you will be considered to have abandoned your permanent residence status and may be detained by customs upon your return to the United States. 'Permanent residence status' refers to your legal status in the U.S. as a non-citizen who has been granted permission to live and work in the country permanently. In other words, you can only stay in Japan for up to six months to maintain your permanent resident status. There is an exception, of course, by obtaining a Re-Entry Permit. This is usually for a maximum of two years and can be obtained twice. That is four years in total. Please consult with an immigration attorney for more information. I heard of a case where one received the permit three times.
Your income in Japan is subject to both Japanese resident tax (10%) and national income tax. Depending on your residency status in Japan, you may be liable to pay these taxes on income earned in Japan.
If you are classified as a tax resident in Japan, you may be subject to Japanese taxes on your worldwide income. 'Tax residency' refers to the country where you are considered a resident for tax purposes. On the other hand, if you are classified as a non-resident, you will only be taxed on income 'sourced' in Japan. Therefore, proper management of your tax situation in Japan is the key to keeping your tax burden appropriate. Also, so you know, the type of income has different methods to decide that it is sourced in Japan.
Acquiring a residency certificate is one of the deciding elements for being recognized as a resident for Japanese tax purposes. However, holding a certificate of residence does not equal (=) being a resident for Japanese tax purposes. It is the author's understanding that many facts are judged comprehensively. In this case, the critical word is where your "main" living place is based on the facts and circumstances.
Now, if a Permanent Resident is considered a resident for Japanese tax purposes, income from Japan and the U.S. would be taxed on income from the two countries.
There is a bilateral tax treaty between the United States and Japan, the purpose of which is to avoid double taxation and to promote cooperation in tax matters. By utilizing this treaty, you can understand in which country your income should be taxed and the appropriate tax rate.
As mentioned above, however, double taxation can only be avoided partially. Another critical point to understand about the U.S. foreign tax credit is that where the labor was provided is the country to which the labor income belongs. This may be difficult to understand, but an example is that no matter how much you are paid from Japan, the period you were in the US is considered labor income earned from the US.
Accurate reporting and timely processing are required to receive the appropriate deductions and exemptions under the treaty's provisions. Therefore, it is prudent to seek the advice of a tax professional such as CHI Border to maximize the benefits provided by the treaty.
Tax planning is essential when living cross-border. One must understand the differences between the U.S. and Japanese tax systems and comply with each country's tax filing deadlines and requirements.
Many people around the author spend seven months of the year in the US and the remaining five months in Japan. In other words, these people report their worldwide income for U.S. tax reporting as residents and maintain their status as non-residents in Japan.
Tax-saving strategies include applying bilateral tax treaties, using foreign tax credits, appropriately using retirement accounts, and managing investment income. To effectively use these strategies, working with a tax professional such as CHI Border is recommended. They can help you navigate both countries' tax systems, identify potential tax savings, and ensure compliance with all tax laws and regulations.
The author's key points for living in two locations that should be remembered are the medical points. First of all, does your health insurance cover medical expenses in the event of an emergency? Some people may need to be transported to the U.S. in an emergency. Please ensure your insurance will cover the costs of such an eventuality. This is an essential consideration for those living a bi-coastal lifestyle, as they may need to travel between the two countries frequently and face different healthcare systems and costs in each country.
Next are measures against inheritance tax and gift tax. Inheritance and gift taxes in the U.S. are based on different U.S. income tax and permanent residence concepts. If the above situation occurs in Japan, i.e., the individual's death or a gift, it will be treated differently than when the individual resides in the US. This may be to your advantage, but it may also be to your disadvantage. Please keep this in mind. In addition, if you should die in Japan, you may be subject to Japanese inheritance tax. This is beyond the scope of the author's knowledge, but if you are subject to Japanese inheritance tax, it could extend to your assets in the United States. If you are concerned about your health, please keep this in mind if you plan to live in two locations.