Foreign Pension Tax Ramifications

[Gulliver]

I have been living in Japan with an employed Japanese spouse and, for tax purposes, was classified as a dependent because I didn’t meet the threshold for Japanese income. This has been nice because I was not required to pay Japanese health insurance, Social Security and residence tax.

This year I became a Japanese resident for tax purposes (here for five years ), so I had to declare my worldwide income- which is a US pension. That bumped me above and out of the dependent earnings category. Other than that I have no other income in Japan or the US. (I am under 65).

So now, as a non-dependent, I have to pay not only my own Japanese national health insurance and Social Security, but also residence tax on my US pension amount. About ¥450,000/year extra!

I already paid taxes on the pension in the US. So I was surprised that the amount was added to my total income on my Japanese tax return (which got sent to the ward office, which in turn sent me all the extra new bills.)

So my question is does anybody know a workaround for this problem? In the US we have the foreign earned income exclusion. So any foreign income that we have already paid taxes on would be excluded from the total income amount. This does not seem to be the case in Japan, however.

Thanks for your help.

[captainspoke]

...
I already paid taxes on the pension in the US. So I was surprised that the amount was added to my total income on my Japanese tax return (which got sent to the ward office, which in turn sent me all the extra new bills.)

So my question is does anybody know a workaround for this problem? In the US we have the foreign earned income exclusion. So any foreign income that we have already paid taxes on would be excluded from the total income amount. This does not seem to be the case in Japan, however.

Thanks for your help.

I think you should be able to deduct taxes paid in the US, something to check on. And if not getting credit here, for taxes paid there, then it may work in the other direction--you should be able to claim taxes paid here (not health premiums, but taxes) against your tax bill in the US.

Look up the foreign tax credit (FTC). This is sometimes looked at as the alternative the the FEIE (foreign earned income exclusion), but I think your case is slightly different, since you (apparently) do not have any earned income here that would be excludable.

[Gulliver]

...
I already paid taxes on the pension in the US. So I was surprised that the amount was added to my total income on my Japanese tax return (which got sent to the ward office, which in turn sent me all the extra new bills.)

So my question is does anybody know a workaround for this problem? In the US we have the foreign earned income exclusion. So any foreign income that we have already paid taxes on would be excluded from the total income amount. This does not seem to be the case in Japan, however.

Thanks for your help.

I think you should be able to deduct taxes paid in the US, something to check on. And if not getting credit here, for taxes paid there, then it may work in the other direction--you should be able to claim taxes paid here (not health premiums, but taxes) against your tax bill in the US.

Look up the foreign tax credit (FTC). This is sometimes looked at as the alternative the the FEIE (foreign earned income exclusion), but I think your case is slightly different, since you (apparently) do not have any earned income here that would be excludable.

Thank you for the reply.

Yeah, I think that’s the crux of the matter. I don’t know if there’s a way to exclude the income in Japan in order to be eligible for dependent status again.

I think you may be correct that I could be able to claim a credit for the residence tax on my US tax return because it is an income tax. But I think not for the JP health insurance and Social Security.

Has anyone here been able to exclude their foreign income or pension, that has been already taxed in their home country, on their Japanese tax return?

[TokyoWart]

I'm a little surprized that you are only being assessed residence tax and not Japanese income tax on that US pension income. You can claim Japanese taxes (both residence tax (住民税) and income tax (所得税) paid on your US tax return. The problem is likey to be that you don't get much back. For the US you can only get a refund of foreign taxes paid up to the limit of what you actually pay in the US so if you have paid less than the equivalent of 450,000 yen in taxes on that pension in the US then you won't realize the full credit. I find that the end result of claiming foreign tax credits is at best you wind up paying whichever tax is highest.

[Gulliver]

I'm a little surprized that you are only being assessed residence tax and not Japanese income tax on that US pension income. You can claim Japanese taxes (both residence tax (住民税) and income tax (所得税) paid on your US tax return. The problem is likey to be that you don't get much back. For the US you can only get a refund of foreign taxes paid up to the limit of what you actually pay in the US so if you have paid less than the equivalent of 450,000 yen in taxes on that pension in the US then you won't realize the full credit. I find that the end result of claiming foreign tax credits is at best you wind up paying whichever tax is highest.

Actually, I did get that assessed for the Japanese National income tax. And we got what looks like a tax credit from JP for that. (my Japanese spouse did my taxes and we are still both befuddled by the whole thing. This is all new for my spouse because the company usually does the taxes.) i’m amazed that there is no simple e-filing software like TurboTax here. One wonders who is behind that…

My question still remains. Is there a way to exclude already taxed foreign income from your JP tax return so your total income doesn’t look artificially high. This seems to violate the premise of no double taxation.

Thanks for your help.

[TokyoWart]

My question still remains. Is there a way to exclude already taxed foreign income from your JP tax return so your total income doesn’t look artificially high. This seems to violate the premise of no double taxation.

I see; you're hoping for some form of exclusion from Japan's point of view. I can't think of anything that would have that affect once you are counted as a tax resident of Japan.

[RetireJapan]

The tax benefits of pensions generally do not transfer between countries: the country that gave you the tax break did it for their own reasons that the other countries don't really care about.

So if you are living in Japan and receiving a pension from another country, that is just going to count as ordinary income. Japanese pensions have a tax-exemption allowance in Japan, but I wouldn't get any special treatment if I moved to the UK and received my Japanese pension there.

[captainspoke]

... i’m amazed that there is no simple e-filing software like TurboTax here. One wonders who is behind that…

Excuse me, but it's the US that is the problem, not Japan. Here, you can do your tax return on your cell phone--it's called eTax. And if you don't do it that way (or by logging in on your PC at home to do the same), you can go to the tax office and they literally spend their own time helping you do your return.

The US has only just gotten around to free file, and yes, while NOW some of the previously paid-for tax packages offer a free file version, if you have anything but the simplest of tax returns, you'll end up paying for one reason or another. And there's so much smoke and mirrors thrown up by those companies to get you to pay even tho you're trying for free file.

Nobody "wonders who is behind that"--those tax prep software companies have HUGE lobbying budgets--it is in their interest to keep tax filing difficult/opaque enough that people buy their software. And don't let those same companies even get a whiff or a hint that the IRS might put out its own software so that taxpayers could file on their own (without paying a private company to streamline the process for them).

[captainspoke]

... Is there a way to exclude already taxed foreign income from your JP tax return so your total income doesn’t look artificially high.
...

No. Try for a credit for foreign taxes paid.

And note that the US only allows foreign earned income to be excluded, not passive/unearned income--like a pension, dividends, investment gains, and so on. So even for the US, it's not a blanket thing.

That is, if you had a pension here in Japan, it would not be excludable, since it is not earned income.

[Gulliver]

Thanks for the help. This is helped clarify things to some extent.

Since it appears that pensions cannot technically be excluded income, I’d like to explore some other means of redress.

Has anyone here had experience getting health insurance and Social Security payments reduced due to being unemployed or having low income?

Also, has anyone found a way to shelter (not exclude) this is kind of income? This may be one I have to talk to an international tax attorney about due to the labyrinthian complexity of a dual nationality Japanese tax return. But maybe someone is in the same boat as me and I won’t have shell out $1000+ for the privilege.

Ironically, my national taxes ended up having zero tax liability, while the local/residence tax incurred full liability. How screwy is that?