Junior NISA and the IRS

[StockBeard]

That 10% can be offset against Japanese taxes in a taxable account (but not in a tax-free one like NISA or iDeCo).

My current understanding is that you actually have to chase those taxes from the US IRS, by filing a special tax form to get foreign tax credit. If you meet a certain threshold, you'll probably get that money back from the IRS. But it's yet unclear to me what the threshold is, and if going through that process is worth it. In any case, my tax guy has told me that reclaiming that 10% needs to be done with the US, not with JP. For those of us who have never filed taxes with the US, that can be quite a task, and here again my tax guy told me most people don't bother doing it because it represents a small amount of money for them.

[RetireJapan]

Maybe for US taxpayers, but I'm pretty sure everyone else can do that with their Japanese tax return (as long as they are paying the 20% to Japan).

I've never bothered though, as most of my dividend payers are in a NISA account

[ctdummy9]

Quite old thread, but the scenario discussed here is similar to mine and I'm thoroughly confused

Me: US citizen living in Japan less than 5 years (not yet tax permanent resident) with working Visa (no PR)
Wife: Japan citizen with US green card (we have extended once, need to decide whether or not to try to extend again later this year)
Two children: ages 11 and 13, both have dual passports (US and Japan)

Does it make sense to open Junior NISAs for my two children? TokyoWart said earlier in this thread: "The dividends and capital gains from his Junior NISA (not taxable in Japan but taxable in the US) can be handled on your tax form until they reach very high amounts (which haven't been reached by any of my children who have had fully funded Junior NISA since they started). " Given that the Junior NISA gains are taxed in the US, if my yearly tax burden in the US is higher than in Japan, then there is no overall tax benefit in the Junior NISA, right? However, if my yearly tax burden in Japan is higher than in the US, then due to the Foreign Tax Credit, I should owe no taxes to the US and in this case, there IS a benefit in the Junior NISA. Do I have this right?

Then, there is the PFIC concern that restricts what can be held in the Junior NISA to effectively only individual Japan stocks, if I'm understanding that correctly.

Complicated stuff... if anyone can help clarify the situation, thanks in advance!

[TokyoWart]

Quite old thread, but the scenario discussed here is similar to mine and I'm thoroughly confused

Me: US citizen living in Japan less than 5 years (not yet tax permanent resident) with working Visa (no PR)
Wife: Japan citizen with US green card (we have extended once, need to decide whether or not to try to extend again later this year)
Two children: ages 11 and 13, both have dual passports (US and Japan)

Does it make sense to open Junior NISAs for my two children? TokyoWart said earlier in this thread: "The dividends and capital gains from his Junior NISA (not taxable in Japan but taxable in the US) can be handled on your tax form until they reach very high amounts (which haven't been reached by any of my children who have had fully funded Junior NISA since they started). " Given that the Junior NISA gains are taxed in the US, if my yearly tax burden in the US is higher than in Japan, then there is no overall tax benefit in the Junior NISA, right? However, if my yearly tax burden in Japan is higher than in the US, then due to the Foreign Tax Credit, I should owe no taxes to the US and in this case, there IS a benefit in the Junior NISA. Do I have this right?

Then, there is the PFIC concern that restricts what can be held in the Junior NISA to effectively only individual Japan stocks, if I'm understanding that correctly.

Complicated stuff... if anyone can help clarify the situation, thanks in advance!

In general I think most US expats in Japan do not wind up paying much in US taxes because of passive investment income unless that passive income is quite large (e.g. millions of yen a year) or their total income makes them subject to the net investment income tax (e.g. above $200,000 for a couple). Because of that you are likely to find that even reporting the Junior NISA account dividends on your US tax form don't actually increase your US taxes. Even better, you can file a tax return for your child and have them report the dividends and until their dividend income exceeds $2,200 it is taxed at their (zero) rate and not yours. For those reasons a Junior NISA for your kids is not getting taxed in Japan and almost certainly won't create taxes for you in the US.

We chose individual stocks for our kids' Junior NISA's. Each is currently worth around 4-5 million yen and as the oldest two are now in college it's nice to have the backstop for tuition expenses. My one regret is not using index funds instead (the accounts have gained in value but not as well as they would have if we'd just bought VOO or VTI).

[ctdummy9]

Quite old thread, but the scenario discussed here is similar to mine and I'm thoroughly confused

Me: US citizen living in Japan less than 5 years (not yet tax permanent resident) with working Visa (no PR)
Wife: Japan citizen with US green card (we have extended once, need to decide whether or not to try to extend again later this year)
Two children: ages 11 and 13, both have dual passports (US and Japan)

Does it make sense to open Junior NISAs for my two children? TokyoWart said earlier in this thread: "The dividends and capital gains from his Junior NISA (not taxable in Japan but taxable in the US) can be handled on your tax form until they reach very high amounts (which haven't been reached by any of my children who have had fully funded Junior NISA since they started). " Given that the Junior NISA gains are taxed in the US, if my yearly tax burden in the US is higher than in Japan, then there is no overall tax benefit in the Junior NISA, right? However, if my yearly tax burden in Japan is higher than in the US, then due to the Foreign Tax Credit, I should owe no taxes to the US and in this case, there IS a benefit in the Junior NISA. Do I have this right?

Then, there is the PFIC concern that restricts what can be held in the Junior NISA to effectively only individual Japan stocks, if I'm understanding that correctly.

Complicated stuff... if anyone can help clarify the situation, thanks in advance!

In general I think most US expats in Japan do not wind up paying much in US taxes because of passive investment income unless that passive income is quite large (e.g. millions of yen a year) or their total income makes them subject to the net investment income tax (e.g. above $200,000 for a couple). Because of that you are likely to find that even reporting the Junior NISA account dividends on your US tax form don't actually increase your US taxes. Even better, you can file a tax return for your child and have them report the dividends and until their dividend income exceeds $2,200 it is taxed at their (zero) rate and not yours. For those reasons a Junior NISA for your kids is not getting taxed in Japan and almost certainly won't create taxes for you in the US.

We chose individual stocks for our kids' Junior NISA's. Each is currently worth around 4-5 million yen and as the oldest two are now in college it's nice to have the backstop for tuition expenses. My one regret is not using index funds instead (the accounts have gained in value but not as well as they would have if we'd just bought VOO or VTI).

Thank you TokyoWart! I am so far, still paying tax in the US, even after the exclusions/credits are applied. This is because I have been in Japan for less than 5 years and have various income in the US which I am not reporting in Japan, including cash flow positive rental income for my house there that I have owned for a long time. Once I cross 5 years, I agree, I likely will not be paying much if any US taxes as all worldwide income will need to flow through my Japan tax return. I am aware of the thread regarding what type of foreign income can be excluded during those first 5 years here: viewtopic.php?f=8&t=1213&start=20. From what I can tell from the NTA document, I believe (and hope!) that all Foreign "Sourced" Income is exempt, not just Foreign "Earned" Income, for non permanent tax residents. Given my situation (at least for the next ~2 years tax filings), your suggestion to file a tax return for my children is a good workaround, although somewhat of a hassle!

Nice job with your kids' Junior NISAs! If you had used index funds, would that not have triggered PFIC treatment? Also, how did you go about picking the individual stocks?

[TokyoWart]

Nice job with your kids' Junior NISAs! If you had used index funds, would that not have triggered PFIC treatment? Also, how did you go about picking the individual stocks?

The more I read about PFIC the less I understand it. I am sure it would not apply if I buy an index fund like VTI or VOO but those US index funds can be difficult to purchase from Japan. My Nomura accounts will let me buy them but there is a very high transaction fee and they apply a ridiculous exchange rate to the yen-dollar exchange. Discount brokers like SBI, Rakuten and Monex won't sell US securities directly to Americans. There has been a lot of discussion online that SPY equivalent ETF "1557" is not a PFIC because it trades on the NYSE. Rakuten and SBI will not sell it to Americans but Monex will. There are also a lot of iShares ETF's (1655, 1657, 1658, 1329, etc.) which appear on Japanese exchanges and can easily be purchased even by Americans on Rakuten/SBI/Monex. It is not clear to me whether these are not PFIC because of the "mirroring" exemption (which, again, I don't understand).

For my kids accounts I bought a variety of Japanese stocks which seemed relatively safe (telecoms like NTT 9432, Docomo (since bought back by NTT), KDDI 9433, Softbank 9984 and 9434), trading companies which always seem to trade at relatively low P/E and P/B ratios (Itochu 8001, Mitsui 8031, Mitsubishi 8031, Marubeni 8002), leading automotive companies (Toyota 7203, Honda 7267), and Japanese products or affiliates which seem to have unique market position or products which only they provide (Yakult 2267, Morinaga 2201, Kikkoman 2801, Shiseido 4911, Japan McDonalds 2702, Itoen 2593, Bic Camera 3048, Alsok 2331, USS 4732) and some companies where I personally knew and was impressed with senior management or board members (Komatsu 6301, Asahi 2502). The lesson to draw from that list is I would have been better off buying VOO or VTI even with the high transaction costs (although I would have missed out on some useful shareholders gifts).

[judomarshall]

This article seems to indicate that I made a huge mistake that I hope nobody else makes.
The de minimus exception doesn't really cover you once you decide to sell some of the stock.

Great article on it here:

https://hodgen.com/children-investment- ... fics-mess/

I am now debating the following options:

1) to take the money out of my son's account now and pay the 20% capital gains tax (to Japan) while the amount is still fairly small, and pay the PFIC taxes on it now.

2) Leave the money in the Junior NISA account until he is 20 years old, file the PFIC every year once the account exceeds 25,000USD and hope that by the time I start selling the fund he owns, things will have changed (he is 2yrs old now so a lot can happen in 18 years).

Any other suggestions?

[Kanto]

This article seems to indicate that I made a huge mistake that I hope nobody else makes.
The de minimus exception doesn't really cover you once you decide to sell some of the stock.

Great article on it here:

https://hodgen.com/children-investment- ... fics-mess/

I am now debating the following options:

1) to take the money out of my son's account now and pay the 20% capital gains tax (to Japan) while the amount is still fairly small, and pay the PFIC taxes on it now.

2) Leave the money in the Junior NISA account until he is 20 years old, file the PFIC every year once the account exceeds 25,000USD and hope that by the time I start selling the fund he owns, things will have changed (he is 2yrs old now so a lot can happen in 18 years).

Any other suggestions?

I do not think you can withdraw the funds from the J-Nisa until he is 18 at present.

It seems this provision will be shelved when the J-Nisa expires in 2023.

[judomarshall]

You can withdraw early, but you'd get taxed 20% and not be able to get any of the tax advantages associated with NISA.

[Kanto]

You can withdraw early, but you'd get taxed 20% and not be able to get any of the tax advantages associated with NISA.

Oh, I see, thank you for the clarification.

That is steep. You would need 4-5 years in the market to cover that cost of early withdrawal?

Have you found any documentation on the PFIC rate a minor with no income source would have to pay? Would it be more than 20%?

How much would you be "netting" with the tax-free investment after X years?

Seem like you need to map it out in Excel, lots of factors.