Foreign Pension Tax Ramifications

[adamu]

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?

I was finally able to get this straightened out after some one on one consultations with a Japanese tax attorney

I don’t want this to be an advertisement so I rather not give contact info. A quick Google search in English, however, will provide you with several options.

I think it would be courteous to give some idea of the solution to the problem. You posted for help on the forum, and solved your problem, but didn't report how to solve the problem for the benefit of others besides "get a tax attorney" or "google it". I think one of the benefits of the forum is people learning from each other. Maybe the answer is that tax is too complex to handle without the help of a specialist?

[Gulliver]

tax is too complex to handle without the help of a specialist?

Bingo!

[Tkydon]

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?

I was finally able to get this straightened out after some one on one consultations with a Japanese tax attorney

I don’t want this to be an advertisement so I rather not give contact info. A quick Google search in English, however, will provide you with several options.

I think it would be courteous to give some idea of the solution to the problem. You posted for help on the forum, and solved your problem, but didn't report how to solve the problem for the benefit of others besides "get a tax attorney" or "google it". I think one of the benefits of the forum is people learning from each other. Maybe the answer is that tax is too complex to handle without the help of a specialist?

If the Pension is a Regular Payment (like an Annuity), And you are a Permanent Resident of Japan For Tax Purposes, then according to Article 17 of US-Japan Tax Treaty, the US has no call on your US Pension Income, and Japan has 100% call.

https://www.mof.go.jp/tax_policy/summar ... 1107a2.pdf

ARTICLE 17
1. Subject to the provisions of paragraph 2 of Article 18, pensions and other similar remuneration, including social security payments, beneficially owned by a resident of a Contracting State shall be taxable only in that Contracting State.

2. Annuities derived and beneficially owned by an individual who is a resident of a Contracting State shall be taxable only in that Contracting State. The term “annuities” as used in this paragraph means a stated sum paid periodically at stated times during the life of the individual, or during a specified or ascertainable period of time, under an obligation to make the payments in return for adequate and full consideration (other than services rendered).

3. Periodic payments, made pursuant to a written separation agreement or a decree of divorce, separate maintenance, or compulsory support, including payments for the support of a child, paid by a resident of a Contracting State to a resident of the other Contracting State shall be
taxable only in the first-mentioned Contracting State.
However, such payments shall not be taxable in either Contracting State if the individual making such payments is not entitled to a deduction for such payments in computing taxable income in the first-mentioned Contracting State.

Correction.
On further reading the US Japan Tax Treaty, unfortunately US Citizens will be taxed in the US.

ARTICLE 1
4. (a) Except to the extent provided in paragraph 5, this Convention shall not affect the taxation by a Contracting State of its residents (as determined under Article 4) and, in the case of the United States, its citizens.

ARTICLE 23
1. Subject to the provisions of the laws of Japan regarding the allowance as a credit against the Japanese tax of tax payable in any country other than Japan:
(a) Where a resident of Japan derives income from the United States which may be taxed in the United States in accordance with the provisions of this Convention, the amount of the United States tax payable in respect of that income shall be allowed as a credit against the Japanese tax imposed on that resident. The amount of credit, however, shall not exceed that part of the Japanese tax which is appropriate to that income.


So, a US Citizen would have to pay taxes on the Pension income in the US, and then claim a Foreign Tax Credit in Japan against the Taxes paid in the US.

[picklerick]

I don’t want this to be an advertisement so I rather not give contact info. A quick Google search in English, however, will provide you with several options.

I reckon an important criteria would be past work experience: Having worked as a tax accountant/attorney for a US company in Japan, for example.

I have been searching for over a month and unable to find any Japanese tax attorneys with the right expertise. Could you send me the name by private message? Or at least share the search terms you used to find "several options".

It's a common theme in this and other forums that it is difficult to track down tax attorneys and tax accountants with the right expertise.

[Tkydon]

https://www.nta.go.jp/english/taxes/ind ... 020/01.pdf

See Pages 22-23

The disclaimer at the bottom of page 23 it’s very interesting/as clear as mud. It states:

“Non requirement of filing tax returns concerning pension recipients
You are not required to file a return for income tax etc. if (a) your amount of earnings from public pensions is 4,000,000 yen or less,
(b) all the pensions you received are subject to the Japanese withholding (excluding ones that are covered by the provision in Article 203-7 of the Income Tax Act (public pensions, etc. not subject to the Japanese withholding), and
(c) your amount of income (excluding miscellaneous income from public pensions, etc.) is 200,000 yen or less.
* Even if you are not required to file a return for income tax etc., you are required to file a return for income tax etc. in order to receive refunds of income tax etc.
* For the inhabitant tax, see page 65.”

Questions:

1. So for section (a) if you make, for example, only ¥2 million foreign pension you do not have to file a tax return?

2. Section (b): Which pensions are they talking about that are and aren’t subject to Japanese tax withholding? Isn’t everything “subject”?

3. Section (c): So if you make ¥2 million public pension and ¥100,000 add a side gig, you don’t have to file a tax return?

4 then it says “* Even if you are not required to file a return for income tax etc., you are required to file a return for income tax etc.” are they totally contradicting themselves or is that just a bad translation? What in the world does that mean?

Thanks again for your help.

In answer to Gulliver's questions, inline.

Questions:

1. So for section (a) if you make, for example, only ¥2 million foreign pension you do not have to file a tax return?

No, if you receive a Foreign pension you DO have to file a tax return, as this is Excluded by (b)
Foreign Pensions have not be subjected to Japanese Withholding Tax. Therefore, they do not satisfy Section (b), so you must file.

2. Section (b): Which pensions are they talking about that are and aren’t subject to Japanese tax withholding? Isn’t everything “subject”?

Everything is liable for Japanese taxes. 'Subject to Withholding" means that the payments have already had the required Japanese Taxes withheld by the payer at source. (PAYE or PAYG) This is a legal requirement of Japanese Pension Payers.

Any pensions paid IN Japan have had the Japan taxes withheld at source, by the payer, and therefore, you can receive up to ¥2 million of post-tax Japanese Sourced Pensions without having to file. If the amount goes over ¥2 million, then you must file.
This is clearly not the case for Pensions paid overseas. Any pensions paid outside Japan have NOT had the Japanese taxes withheld at source, by the payer, and therefore, you must file.
The payments may have been subject to taxes of the remote country, but these don't count... This is not Japanese Withholding, and so you must file.

Also, check article 17 of any Tax Treaty between the country where the pension is being paid and Japan. If you are a Permanent Resident of Japan for Tax Purposes, then under most of the Treaties I have read, Only Japan is entitled to tax the Pension Income (including the US, UK, Aus Treaties).
See your Country's Tax Treaty here.
https://www.mof.go.jp/english/policy/ta ... st_en.html

3. Section (c): So if you make ¥2 million public pension and ¥100,000 add a side gig, you don’t have to file a tax return?

Yes, if you receive a Japanese Pension Net of Withholding Tax, then you can make up to ¥2 million Taxed Pension, and a side income of upto 200,000 yen without having to file and pay taxes on that 200,000 yen.

No, if you receive a Foreign Pension it will not have had Japanese Taxes withheld, and you must file.

4 then it says “* Even if you are not required to file a return for income tax etc., you are required to file a return for income tax etc.” are they totally contradicting themselves or is that just a bad translation? What in the world does that mean?

You only quoted half of the sentence. The whole sentence says,
"* Even if you are not required to file a return for income tax etc., you are required to file a return for income tax etc. in order to receive refunds of income tax etc."
" in order to receive refunds of income tax etc." is the important bit...
This means, If you want to claim tax deductions for medical bills, insurance premiums, home loan insurance, Furusato Nozei, etc., so that those are paid with pre-tax Yen, and claim back the credit against the tax withheld on the Pension Income by the payer, or you wish to claim Foreign Tax Credits, then you have to file.
When you are employed, deductions for the medical bills, insurance premiums, home loan insurance (2nd year onwards), Furusato Nozei, etc. would be handled by your employer in the Nenmatsu Chosei.
There is no such thing as a Nenmatsu Chosei for the Pension income.
Therefore, the Only way to get the overpaid tax back is to file a Kakutei Shinkoku.
Even if the amount qualifies under (a) (less than Y2M Japanese Pension), (b) (has had Taxes withheld at source), and (c) (side income is less than Y200,000), if you want any kind of tax refund or want to claim any type of Foreign Tax Credit, then you must file.

[dcon]

Re-reading the section on 'Public Pension Deduction'. You may be able to claim this deduction.

'Public Pensions' means: public servant pensions, approved fund pensions, national pensions, or other pensions paid under social insurance schemes.

If your pension falls into one of these categories, then you should be able to claim the Public Pension Deduction.

The amount is calculated based on the total gross receipts of the public pension
off-set against the total amount of all other sources of income in the year.

Gross Annual Pension --- Other Income < Y10M --- Y10M to Y20M --- > Y20M

Under 65.
Less than 1,300k --- 600k --- 500k --- 400k
1,300k to 4,100k --- 25% + 275k --- 25% + 175k --- 25% + 75k
4,100k to 7,700k --- 15% + 685k --- 15% + 585k --- 15% + 485k
7,700k to 10M --- 5% + 1,455k --- 5% + 1,355k --- 5% + 1,255k
Greater than 10M --- 1,955kh --- 1,855k --- 1,755k


Over 65.
Less than 3,300k --- 1,100k --- 1,000k --- 900k
3,300k to 4,100k --- 25% + 275k --- 25% + 175k --- 25% + 75k
4,100k to 7,700k --- 15% + 685k --- 15% + 585k --- 15% + 485k
7,700k to 10M --- 5% + 1,455k --- 5% + 1,355k --- 5% + 1,255k
Greater than 10M --- 1,955k --- 1,855k --- 1,755k

You can go back an try to claim this on your Kakutei Shinkoku.


You can find this table reproduced here:

https://www.tax.metro.tokyo.lg.jp/book/ ... k2021e.pdf
Page 8

Where do you think an IRA distribution would fit? I have two small inherited Vanguard IRAs that I have been bundling together with my dividend and cap gains distributions. I did use the public pension bucket for my US company pension payments on last year's filing (I started receiving that pension in 2020). I'm now wondering if the IRAs better fit in the public pension bucket or miscellaneous income.


BTW: thanks for the link to that metro guidebook. It is quite well done.

[Tkydon]

I think it depends how you are taking the distributions.

[dcon]

I think it depends how you are taking the distributions.

The IRAs have an RMD (required minimum distribution) tied to the ages my parents would have been. I follow that minimum. Vanguard provides a 1099-R and all of the money is taxable on my US taxes. On the US taxes it ends up classified under pensions/annuities.

I noticed that the Miscellaneous bucket pulldown menu includes an "individual nenkin" option. That seems like a possible fit and I would expect that once I tap my 401K, it would also fall into that bucker.

[emikami]

Correction.
On further reading the US Japan Tax Treaty, unfortunately US Citizens will be taxed in the US.

ARTICLE 1
4. (a) Except to the extent provided in paragraph 5, this Convention shall not affect the taxation by a Contracting State of its residents (as determined under Article 4) and, in the case of the United States, its citizens.

ARTICLE 23
1. Subject to the provisions of the laws of Japan regarding the allowance as a credit against the Japanese tax of tax payable in any country other than Japan:
(a) Where a resident of Japan derives income from the United States which may be taxed in the United States in accordance with the provisions of this Convention, the amount of the United States tax payable in respect of that income shall be allowed as a credit against the Japanese tax imposed on that resident. The amount of credit, however, shall not exceed that part of the Japanese tax which is appropriate to that income.


So, a US Citizen would have to pay taxes on the Pension income in the US, and then claim a Foreign Tax Credit in Japan against the Taxes paid in the US.

No. You actually claim foreign credit on the U.S. side as re-sourced by treaty on IRS Form 1116. The reason is in paragraph 3 of Article 23 in U.S. Japan Tax Treaty:

3. For the purposes of applying the preceding paragraphs of this Article, where the United
States taxes, in accordance with paragraph 4 of Article 1, a citizen, or a former citizen or longterm resident, of the United States who is a resident of Japan:
(a) Japan shall take into account for the purposes of computing the credit to be

allowed under paragraph 1 only the amount of tax that the United States may impose on

income under the provisions of this Convention that is derived by a resident of Japan

who is neither a citizen, nor a former citizen nor long-term resident, of the United

States;

(b) for the purposes of computing the United States tax on income referred to in

subparagraph (a), the United States shall allow as a credit against the United States tax

the Japanese tax after the credit referred to in that subparagraph; the credit so allowed

shall not reduce the portion of the United States tax that is creditable against the

Japanese tax in accordance with that subparagraph; and

(c) for the exclusive purpose of allowing the credit by the United States provided

for under subparagraph (b), income referred to in subparagraph (a) shall be deemed to

arise in Japan to the extent necessary to allow the United States to grant the credit

provided for in subparagraph (b).

...

What this means is you first must look up the tax withholding rate for pensions as if you were a Japanese Citizen and live in Japan but had the same U.S. pension income. Look up "tax treaty table" in IRS.gov site to get to this .pdf:

https://www.irs.gov/pub/irs-utl/Tax_Tre ... 19_Feb.pdf

You'll notice the withholding rate is 0 for both Social Security and Pension. This means U.S. does not withhold any tax if you are a Japanese Citizen living in Japan for those types of income. As a result, under article 18, paragraph 3a, Japan will provide no foreign tax credit. Paragraph 3b states U.S. provides the tax credit in excess of anything that 3a allowed (which was 0) and paragraph 3c states you reassign income to the extent needed to claim the foreign tax credit on U.S. return under 3b. That is the "Certain income Re-sourced by treaty" category is for on form 1116. You can read the U.S. Treasury's technical explanation on U.S. Japan Tax Treaty 2003.

https://www.irs.gov/businesses/internat ... -documents

[emikami]

...
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.

When you say, you already paid tax on the pension in the U.S., what kind pension is it exactly? Roth IRA? Roth TSP, Roth 401(k), and Roth 403(b) come to mind but for the rest, you should not have paid tax on the pension yet.

My understanding is that if the pension was for U.S. Government, State Government, or County government work (either military or civilian) and you are a U.S. Citizen, Article 18 paragraph 2 in U.S. Japan Tax Treaty applies and for "income tax" purpose, it is taxable only in the U.S. The problem is that in Article 2 lists only "income tax" and "corporate tax" as covered by the tax treaty. In Japan, there's shotoku zei (national income tax) and also jyumin zei (local inhabitant tax). A big portion of jyumin zei is income proportional which is called shotoku wari. So there's the point of view that shotoku wari portion of jyumin zei should be covered in the tax treaty but city government may not take that position thus you may still owe jyumin zei on this income even if it came from Roth TSP, Roth 401(k), and Roth 403(b). I'd probably ask a U.S. Competent Authority in this case to clarify their view if that is an income tax or not. I'd like to know this answer if anyone already went through this in their situation. UK Japan tax treaty on the other hand does include Local Inhabitant tax in its article 2 which is why I am afraid jyumin zei is being imposed to pension on U.S. government pension income for U.S. government work and not just U.S. Social Security and U.S. 401(k).

For other retirement payout like 401(k), IRA, and even Roth IRA, article 17 applies and they are taxable in the country of resident but in the case of U.S. Citizen or U.S. green card holder, Article 1, paragraph 4 applies (U.S. Savings Clause) which allows the U.S. to tax it. If it is a Roth account, of course, the U.S. won't tax it, but Japan can still tax the earning after subtracting the cost basis in Japanese yen. The issue is whom actually has accurate records of every purchase in their retirement account to specific days so that they can lookup the currency exchange rate and figure out the actual cost basis in yen? As unfair as it seems, Japan makes no distinction between a traditional IRA and a Roth IRA. Since U.S. is not taxing the earnings on Roth accounts, there's no "double taxation" thus there's no foreign tax credit for it. If you had a traditional IRA, the foreign tax credit will be claimed on form 1116 as certain income re-sourced by treaty category because of article 23a stating only foreign tax credit given by Japan are for U.S. tax withholding that will happen if you were not a U.S. Citizen or U.S. Green card holder with the same income and living in Japan. Since Japanese citizen living in Japan will have 0 U.S. tax withholding on U.S. pension, there's no Japanese foreign tax credit however, under article 23b and 23c, U.S. provides foreign tax credit in excess of what was allowed in article 23a within limits of U.S. law. That's where Form 1116, re-sourced by treaty comes in.

I know at least one U.S. CPA dealing with U.S. Citizen living in Japan claiming jyumin zei can be claimed against U.S. Foreign tax credit. However, reading the publication, I'm not too sure because it only states if the tax is substantially similar to an income tax and in lieu of an income tax and not in addition to the income tax. If "re-sourced by treaty" is required, I further question if you're even allowed to claim U.S. foreign tax credit against jyumin zei in addition to shotoku zei because article 2 does not include inhabitant tax unlike the UK Japan treaty.

As for Japanese National health insurance - Kokumin Kenko hoken ryo or Kokumin Kenko hoken zei. Ryo seems like a premium while zei seems like a tax but in reality, the only differ by which government is imposing the law and minor rule difference like the Statue of Limitation for non-payment. Kokumin Kenko hoken ryo is the national law version and Kokumin Kenko hoken zei is the local government version. The issue as to why that would not be eligible for foreign tax credit is that while they are a tax against your income, it is not a general income tax where it is used for anything but rather it is more like a fee for specifically defined service--in this case, it is health insurance. Such tax is not eligible for foreign tax credit.