Furusato Nozei Experience

[TokyoWart]

After seeing a discussion on furusato nozei (ふるさと納税) here late last year I finally took the plunge and made a number of donations last November and December. I was a little unsure if it would really work as advertised but just received my draft tax return from my accountants and wanted to share how I think this actually works out better than just the yen-for-yen replacement of next year's local inhabitant taxes (住民税). Because you get to deduct the contributions under 寄附金控除 you also get a reduction in income tax (所得税金額) at your marginal rate. I don't see that happening anywhere on my return for the 住民税 that I paid last year. That benefit is greater the higher your tax bracket but it also potentially helps address the final year of employment tax problem.

The final year of employment tax problem as I see it is that if you retire on the last day of 2020, for instance, you face inhabitant taxes during 2021 but don't have the employment income to help pay them. If you make furusato nozei contributions during 2020 you both reduce that upcoming inhabitant tax yen-for-yen but also get the tax deduction for income tax while you are in that higher employed income tax bracket of 2020. There are limits on how much you can donate in furusato nozei for the tax benefits so you wouldn't want to contribute more than is counted against the inhabitant tax, but I think it makes sense to really maximize use of this system especially during that final employment year.

Anyway, thanks to those who brought up the furusato nozei discussion last year. I had heard about the system outside RetireJapan but didn't get motivated to take the plunge until I saw those comments.

[adamu]

My experience is only with the one-stop system, which is 100% deducted from residence tax, so I'll find out in June if it worked!

The income tax deduction for those doing a tax return is definitely worth pointing out, I hadn't considered that. Maybe I should add that info to https://retirewiki.jp/wiki/Furusato_Nozei.

[RetireJapan]

The final year of employment tax problem as I see it is that if you retire on the last day of 2020, for instance, you face inhabitant taxes during 2021 but don't have the employment income to help pay them. If you make furusato nozei contributions during 2020 you both reduce that upcoming inhabitant tax yen-for-yen but also get the tax deduction for income tax while you are in that higher employed income tax bracket of 2020. There are limits on how much you can donate in furusato nozei for the tax benefits so you wouldn't want to contribute more than is counted against the inhabitant tax, but I think it makes sense to really maximize use of this system especially during that final employment year.

Wonderful. Thanks for bringing this to my attention

[TokyoWart]

Just got a detailed breakdown from my accountant on the deduction for income tax vs offset of inhabitant tax and it looks a little less good than my initial impression because some of the inhabitant tax offset is being cancelled by the deduction. Still looks worth continuing again this year.

[TBS]

Just got a detailed breakdown from my accountant on the deduction for income tax vs offset of inhabitant tax and it looks a little less good than my initial impression because some of the inhabitant tax offset is being cancelled by the deduction. Still looks worth continuing again this year.

Yep via the Kakutei Shinkoku route the donation money is offset by deductions from both income and inhabitant tax.



With the one stop system it is just one larger inhabitant tax deduction. The total tax cost/benefit is the same via either system - it's the 2000 yen participation fee and identical gifts either way.

That said, a recent thread on here discussed the opportunity cost of participating in Furusato Nozei as you are in effect paying tax upfront. On the same theme, I think there is a marginal benefit of declaring via the Kakutei Shinkoku route, as that way you have a lower income tax bill/higher refund in spring, followed by higher residents tax costs from June, as compared to one stop. I.e. an opportunity of more money in your pocket from spring until you have to start paying the residents tax bills.

Interestingly this is another way those with higher income can benefit more from Furusato Nozei, as proportionately more of the total tax deduction comes via the income tax portion than the inhabitant tax portion.

Anyway, it is a pretty marginal benefit and probably not worth exploring unless you are motivated to do a Kakutei Shinkoku.

One caveat is if you are in your second year or more of claiming a mortgage loan deduction, and otherwise do not need to do a Kakutei Shinkoku, it is better to go via one stop. More discussion on that here

[RetireJapan]

And for those of us leaving full time employment we'd rather have the tax benefit applied to our local inhabitant tax in the following year I presume?

[TBS]

And for those of us leaving full time employment we'd rather have the tax benefit applied to our local inhabitant tax in the following year I presume?

No, I think the answer is still the same. Either way total amount of tax you are paying is the same. The Kakutei Shinkoku route just means you are paying it later, so as an investor you can make that money work for you in the meantime.

The previous thread discussed how not making any Furusato Nozei contributions is actually the best way to maximize investment time, as you are kicking the tax payments furthest into the future that way. However, I personally make contributions as the gifts, points and fun of it outweigh the opportunity cost for me. Moreover, we are only talking about a few months here or there, which is not sufficient to guarantee investment gains as you know. You can only expect payoff by employing this strategy over many years, meticulously investing the spare cash when you have it. This is not practical or realistic for most people's busy lives.

[RetireJapan]

And for those of us leaving full time employment we'd rather have the tax benefit applied to our local inhabitant tax in the following year I presume?

No, I think the answer is still the same. Either way total amount of tax you are paying is the same. The Kakutei Shinkoku route just means you are paying it later, so as an investor you can make that money work for you in the meantime.

The previous thread discussed how not making any Furusato Nozei contributions is actually the best way to maximize investment time, as you are kicking the tax payments furthest into the future that way. However, I personally make contributions as the gifts, points and fun of it outweigh the opportunity cost for me. Moreover, we are only talking about a few months here or there, which is not sufficient to guarantee investment gains as you know. You can only expect payoff by employing this strategy over many years, meticulously investing the spare cash when you have it. This is not practical or realistic for most people's busy lives.

I'm only referring to the specific case of someone leaving full time employment which means they will owe local inhabitant's taxes based on their previous year's salary while not having a salary. I'm selfishly interested in how to ameliorate this (as well as health insurance payments, also based on previous year's salary).

[TBS]

I'm only referring to the specific case of someone leaving full time employment which means they will owe local inhabitant's taxes based on their previous year's salary while not having a salary. I'm selfishly interested in how to ameliorate this (as well as health insurance payments, also based on previous year's salary).

As TokyoWart says, maxing out Furusato Nozei while you are employed minimizes the tax bills that come in when you are not. One stop will minimize the inhabitant's tax bills most. I don't think you are saving on tax though, just bringing paying some of it forward.

To be honest I have not looked into this final year of employment issue in detail, especially with respect to health insurance etc. Maybe others know if there are preferable strategies?

Self-employed people will face the biggest strain. Their income taxes are not withheld at source so they have both their ordinary income and inhabitant's tax bills coming in the year after they finish work.

[adamu]

For final year's employment: Maybe the best thing to do would be to try and save the entire year's tax liability in advance and just not worry about it? For residence tax, you could probably arrange to pay it all in a lump sum and be done with it.