U.S. - Japan taxes

[jhr1054]

Looking for basic advise. I am American with Japanese PR who has been living here for over five years and my wife is Japanese. We have a home in Texas (which we have been renting) and will return there in February, while also keeping our apartment in Tokyo. We like Japan and are thinking of using both places in our new retirement years. Questions - which is best for a tax domicile? How long do I need to be in a certain place to prove my tax home? Will I be screwed tax wise from living in both places or is it better to chose just one and visit the other occasionally? Better to keep my PR or lose it and revert to tourist or other visas? How long and howe often do I have to be in Japan to keep my PR? Have about a $3 million nest egg along with social security for both of us. We like Tokyo better than Texas but want to be financially prudent.

[sutebayashi]

Japan inheritance taxes are pretty high, they would want a big chunk of 3 million dollars if they can get it. Different people feel differently about that type of tax, but it’s one I’d throw out there since it’d be pretty significant.

[captainspoke]

Versus the US side, where (for individual states) the period of residence is important, and also the 'physical presence test' for FEIE, for Japan I think tax residency (or not) has more to do with intent, as represented by some things you do. (I'm not sure of what that list of factors might be.)

A japanese transferred abroad for 2-5yrs might lose tax residency immediately, since it's clear that they're going to be gone. They or their company would have to attend to remaining obligations--the national income tax and whatever residence taxes due based on when they left. If you're not working there, you'll have to explore what other things would 'show' that you didn't have japanese tax residency.

OTOH, tho again I cannot quote the exact numbers, for inheritance it's something like "X out of the last Y years", e.g., 5 out of the last 10, or 10 out of the last 15. Something like that.

[captainspoke]

Japan inheritance taxes are pretty high, they would want a big chunk of 3 million dollars if they can get it. Different people feel differently about that type of tax, but it’s one I’d throw out there since it’d be pretty significant.

It makes a difference how many statutory heirs there are, and also where they live (outside of japan), what the japan resident's portion is, and then how the deduction(s) for all that might be applied.

[Tkydon]

Japan inheritance taxes are pretty high, they would want a big chunk of 3 million dollars if they can get it. Different people feel differently about that type of tax, but it’s one I’d throw out there since it’d be pretty significant.

The Japanese wife would be subject to Japanese Inheritance Taxes anyway.

[Tkydon]

Versus the US side, where (for individual states) the period of residence is important, and also the 'physical presence test' for FEIE, for Japan I think tax residency (or not) has more to do with intent, as represented by some things you do. (I'm not sure of what that list of factors might be.)

A japanese transferred abroad for 2-5yrs might lose tax residency immediately, since it's clear that they're going to be gone. They or their company would have to attend to remaining obligations--the national income tax and whatever residence taxes due based on when they left. If you're not working there, you'll have to explore what other things would 'show' that you didn't have japanese tax residency.

OTOH, tho again I cannot quote the exact numbers, for inheritance it's something like "X out of the last Y years", e.g., 5 out of the last 10, or 10 out of the last 15. Something like that.

Inheritance Tax Purposes - 10 out of the last 15 years.

Looking for basic advise. I am American with Japanese PR who has been living here for over five years and my wife is Japanese. We have a home in Texas (which we have been renting) and will return there in February, while also keeping our apartment in Tokyo. We like Japan and are thinking of using both places in our new retirement years. Questions - which is best for a tax domicile? How long do I need to be in a certain place to prove my tax home? Will I be screwed tax wise from living in both places or is it better to chose just one and visit the other occasionally? Better to keep my PR or lose it and revert to tourist or other visas? How long and howe often do I have to be in Japan to keep my PR? Have about a $3 million nest egg along with social security for both of us. We like Tokyo better than Texas but want to be financially prudent.

Japan does not have the concept of number of days in/out of country in deciding domicile.

If you maintain your property in Japan for your and your family's immediate occupation, they will consider you still resident in Japan, and subject to Japanese taxes. Under the Japan-US Tax Treaty you can claim Foreign Tax Credits for taxes paid in the other country to reduce or eliminate Double Taxation.

You can maintain your Immigration PR indefinitely so long as you have a (Multiple) Re-Entry Permit from Immigration which is valid for 5 years, and you keep coming back to renew it and your Zairyu Card before expiry. The Re-Entry Permit can be Extended (not renewed) overseas if there are extenuating circumstances that prevented you from coming to Japan to renew it. The 1 Year Special Reenty Permit (Tick Box on Disembarkation Card) cannot be extended or renewed overseas. This caught a lot of people out during the COVID Sakoku.

https://www.mofa.go.jp/j_info/visit/inc ... ermit.html

If you wish to terminate your PR, you would be liable for the Exit Tax as you have over Y100M; You would have to mark all assets to Market and pay Capital Gains Taxes as if you liquidated everything on the day you left. So probably not a good idea...

If you are resident in Japan, then your US Pension is taxable in Japan. Almost any other country (non-US with Tax Treaty with Japan), and it would only be taxable in the country of residence, but the US reserves the right to Tax it's citizens, where ever they are, and so you would be liable for tax in both places if resident in Japan, but would use the Foreign Tax Credits to reduce or eliminate Double Taxation.

[captainspoke]

... you(r) wife would be taxed heavily as an Alien receiving inheritance from a US Citizen.
...

If you mean taxed heavily by the US, are you sure?

I used to think so, too, but from what I've read over on r/JapanFinance, this is generally not the case.

I've got something on this evening and can't search right now, but will try tomorrow.

[jhr1054]

Thank you for these replies. I'm leaning now towards making my residence in the U.S. and eventually giving up my PR and perhaps Japanese national health insurance here. Don't like these warnings I am hearing about estate taxes in Japan for foreigners. I am now wondering if I can continue to have an apartment here without being considered a resident.

[Tkydon]

Thank you for these replies. I'm leaning now towards making my residence in the U.S. and eventually giving up my PR and perhaps Japanese national health insurance here. Don't like these warnings I am hearing about estate taxes in Japan for foreigners. I am now wondering if I can continue to have an apartment here without being considered a resident.

PR for Immigration Purposes and PR for Tax Purposes are two different things. If you give up your Immigration PR you will be subject to the Exit Tax when you surrender your Zairyu Card, but you will still be treated as a PR for Tax Purposes if you have been in Japan for more than 5 years in the last 10 Years.

Japan does not have the concept of Communal Property.
Estate Taxes in Japan are the same for Foreigners as for Japanese. The total Deductions for Estate Taxes for a Spouse as a Sole Heir would be nearly Y200M...
Y30M Base + Y6M per Heir + Spouse Credit (with some caveats)
If you have children, then the children, and if not, then her parents or siblings may also be Statutory Heirs to your wife's Estate.

The Heirs would also get Foreign Tax Credit for Foreign Inheritance Taxes.

You would still be liable for any inheritance in Japan if you have been in Japan for 10 of the last 15 years, and you wife will be liable for Inheritance Taxes in Japan as a Japanese Citizen.

Japan does not recognize the use of trusts, and treats then as being completely transparent.

The bigger issue, as I understand it, and I don't so if anyone can enlighten us... As your wife is a Non-US Citizen, if she inherits from you, a US Citizen, the US Inheritance Taxes seem very high.

https://www2.deloitte.com/content/dam/D ... aliens.pdf

https://www.greenbacktaxservices.com/bl ... or-expats/

You should consult with a professional on US Estate Planning.

[ClearAsMud]

There's a lot that could be said on the topic, but to keep to the basics, the US doesn't have an inheritance tax but an estate tax, which taxes the estate of the decedent. Unless the estate of a US citizen or domiciliary (including all reported gifts up to the time of death) exceeds the current c.$12 million unified tax credit, there will be no federal tax on the estate no matter who inherits it.

Confusion seems to arise because the unified tax credit -- applicable to all US citizens and domiciliaries -- gets conflated with the unlimited marital deduction, which is available only to US-citizen spouses. My (totally unprofessional) understanding is that problems can arise when the value of the estate exceeds the basic c.$12 million and the spouse is a noncitizen (i.e., US citizens can leave unlimited assets to their US spouses, with any estate tax deferred until the death of the second spouse, whereas estate tax must be paid immediately on any bequests to noncitizen spouses that end up pushing the estate over the unified gift-and-estate tax credit of c.$12 million). So for us ordinary lot -- noncitizens included -- it's not really necessary to worry too much about US estate tax when the estate is passed on by a US citizen or domiciliary because the unlimited marital deduction is essentially irrelevant unless you happen to be very wealthy indeed (restrictions on gifts to noncitizen spouses and Japanese inheritance tax are different matters). And what happens when a nonresident, noncitizen spouse dies is basically that only in situ US assets are taxed, but the estate-tax exemption is very small, so estate taxes become more likely in that case.

A pretty good recent introduction to gift and estate taxes for noncitizen spouses will be found here. The implications of the unlimited marital deduction are explained clearly here. And a good explanation of how US tax residency is determined is given on this (rather old) page (the information resembles that found in the Deloitte PDF document linked to above.)

Japanese inheritance laws depend upon both nationality and residence, and they make it especially hard for Japanese nationals to escape tax-free. The table on this page shows the various permutations, which are most beneficial for noncitizens without a Japanese domicile.

By the way, according to the websites of Japanese embassies and consulates in various countries -- including this one in China, for example -- you can't actually obtain a new reentry permit overseas, but you can apply to a Japanese embassy/consulate for a one-year extension of your current permit if circumstances warrant. In theory, it's possible to spend up to six years overseas (seven years for special permanent residents) on a single multiple-reentry permit without losing PR as long as your residence card remains valid and you can provide a good reason for your extended absence if asked. Company postings, university study, and taking care of relatives would likely all be regarded as good reasons, but less persuasive reasons might eventually raise eyebrows, though it's hard to say. Regular temporary stays overseas, however, would hardly seem to present a problem for a PR who actually maintains tax residency in Japan.

In any case, the recommendation to get professional financial advice seems well worth heeding