No. of Recommendations: 3
To all MF taxpayers--

Since I have done a lot of tax-related work for foreign and Japanese companies and have myself dealt with both the U.S. and Japanese tax systems as well as the cracks in between as an individual (I'm American, working for a New-York based firm in Tokyo), I figure I can clarify a few points that seem to be getting pretty hazy.

First, as for whether a non-Japanese resident of Japan is liable to pay Japanese tax on overseas income under the Japanese tax system, the basic rule is that for the first five years the answer is no, after that the answer is yes. So look on your foreign registration card and calculate five years from the date of your arrival in Japan. Note: U.S. military personnel are generally outside of the Japanese tax system by default and are not usually considered eligible to set up a tax home in Japan either. Obviously, yen-earnings offbase will be taxed (usually at a 20% rate of withholding).

Foreign residents of Japan who work several jobs and have taxes withheld at each are highly advised to look into filing a final tax return at the end of the year (in practice from about 15 Feb to 15 March each year). Check at the tax section of your local ward/city office. Although the forms are all in Japanese, there are instruction books in English available upon request, and if you take the time to fill everthing out, you should be able to get a refund as the withholding rates are higher at second and third jobs than at the place of primary employment. Those of you who work one job probably have everything done by the company where you work.

The purpose of the U.S.-Japan tax treaty is, as the official title suggests, an accord that is intended to prevent double taxation. Thus, if you are a citizen of one country and a resident of the other, there are various provisions to such effect, most notably the foreign tax credit. Non-Americans should inquire about the tax treaty involving their country as Japan has signed tax treaties with most of the major nations of the world. If you pay tax on income in one country, say Japan, and you must declare the same income on your 1040 for U.S. tax as all American citizens must do, you can credit income tax paid in Japan against income tax owed in the United States. The precise method is spelled out in the tax guide each year. For Americans who intend to reside in Japan for a while, it is worth looking into declaring Japan as your tax home and filing a form 2555 with your 1040 so as to exclude up to (about) the first $75,000 earned overseas from your taxable US income. There are various tests, but the failsafe one is physical presence in your tax home and absence from the U.S. for 330 days in a yearly period (not necessarily a calendar year). Please be aware, however, that if only half of your yearly period falls during the given tax year, then you would only be able to exclude a little over $35,000 of income from that tax year.

Even if you are American and have a tax home overseas, it is still possible to get hit with the Alternative Minimum Tax if the IRS thinks you made too many deductions from income that is taxable. They have a formula that flags returns which cross some line on the screen so to speak, and your return then goes to a unit, the precise name of which I cannot recall, that tracks you down until the issue is settled. You should not have Alternative Minimum Tax concerns if you are legitimately excluding income from US taxation because you have a foreign tax home or are attempting to take advantage of the foreign tax credit. Similarly, if you are non-American and are filing only with regard to your investment income, the Alternative Minimum Tax should not be a major consideration unless you are making a lot of deductions.

If you are American, and you find the Alternative Minimum Tax to be a raw deal, let your elected lawmakers know. They voted the thing in as part of an attempt to crack down on bigtime players taking advantages of loopholes, but in the end it has been members of the middle class who do not hire lawyers and accountants to structure their investments that have gotten hit with it full force. There is widespread awareness that it has not been implemented as intended. The downside to changing the tax law, of course, is that the new baby will not likely grow up to look or act as its parents intended either.

As for how to deal with income earned from investments such as capital gains on the stock market, as Fools you should know that the tax treatment of capital gains from something held for over a year will be taxed at 15% or 20% in a category of its own, whereas the quick 25% you picked up from the sale of SDL (or whatever) the other day after holding it for a whole two weeks will be taxed as ordinary income, which translates into a much higher cost of doing business if you have substantial income and are in a thirty-something tax bracket. You should also know, despite LTB&H ideals, that the well-timed selling that IPET stock you picked up last year on IPO day for a loss can cause that loser of a stock to redeem itself as a timely loss can both clean up the portfolio and reduce your tax burden. If you are a true believer (or you bought something that has a prayer of going back up again like CTXS) you can always wait thirty one days to invest in it again, effectively cleaning the slate. For the details on U.S. tax treatment of investment income, I suggest getting it from the horse's mouth.

I have not said much about the U.S.-Japan tax treaty because, frankly, it is pretty vague about a few key items like 401(k) accounts and IRAs. As suggested elsewhere, it does not specify rates. It offers guiding principles. You will notice, however that both 401(k) accounts and IRAS are inventions that graced this world after the signing of the 1971 treaty. If you are in Japan working for a U.S. firm that has a 401(k) plan, you should consult very carefully with the personnel in charge of that plan. Ultimately each person is responsible for his own 401(k) or other financial account, but the Japanese tax authorities have gone after some of this income as there are a lot of shades of gray in the Japanese statutes and accompanying regulations on how they should be treated. Some companies have invested considerable time and resources to structure their plans so as to minimize exposure to tax risk, but this issue is very much in play and very little is guaranteed. As I understand it, the worst case is that your 401(k)contributions would be taxed as ordinary income in Japan if you were a resident of Japan earning the income in question from working in Japan. I won't comment on stock options, because no matter how much these boards may enlighten and entertain, if you have a bunch of them you really should get tax advice specific to your situation. It may seem expensive, but from what I have seen, trying to save money on tax advice usually turns out to be a false economy.

For those of you who get as excited over the tax treaty as the bureaucrats and the lawyers on both sides, the basic place of reference is the ACCJ. There is some talk on both sides of concluding a new one appropriate for the twenty-first century, but that will likely occur long after whatever tax questions promted this thread have been resolved. The following is a link to the ACCJ tax treaty committee, but its position papers have expired and are being redrafted. They should be reposted sometime this fall. That should give you an indication of the pace of change.

There are countless other questions, I'm sure, but this has gone on long enough to merit a "long post" warning. I hope it is of use to those of you who made it this far.

(full disclosure: long on CTXS)

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