US expat in Japan

[guvnrthe]

Hi,

I'm a US citizen living in Japan on a long-term visa. I just arrived a couple of months ago and as such, I believe I'm a resident but not a permanent resident.

As far as filing taxes, Is my understanding correct that:
a) I have to file US federal just like before
b) I have to file Japan-sourced income (my employment), but not brokerage capital gains (if I have any) on my US brokerage accounts

Once I do a and b, I will have to do some foreign tax credit business to reconcile overpayment?

[captainspoke]

Yes, you do continue to file US--I'm not sure how 'straddling' a tax year works with these for someone who recently arrived, but you can use either the FEIE or the FTC, or both if you make a lot. There are pros and cons to each. Frequently, if not for most people, filing US is a matter of paperwork, and no tax will be due. (unless maybe you have lots of gains, and/or dividends coming in).

For japan, I'm not sure of the category of the 'long-term' visa--maybe this is what people call long term resident (LTR). It may or may not affect things. Someone else will have to clarify that. (Some 'visas'/status of residence do make you liable for taxes here within the first five years, while others do not.)

[guvnrthe]

Yes, you do continue to file US--I'm not sure how 'straddling' a tax year works with these for someone who recently arrived, but you can use either the FEIE or the FTC, or both if you make a lot. There are pros and cons to each. Frequently, if not for most people, filing US is a matter of paperwork, and no tax will be due. (unless maybe you have lots of gains, and/or dividends coming in).

For japan, I'm not sure of the category of the 'long-term' visa--maybe this is what people call long term resident (LTR). It may or may not affect things. Someone else will have to clarify that. (Some 'visas'/status of residence do make you liable for taxes here within the first five years, while others do not.)

Thanks for your response.

Reading up on the FEIE, "A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year," I probably do not qualify for Tax Year 2023 given I arrived mid-year 2023. The FTC will be what I'd look for.

Could you clarify why no US tax will be due? I was under the impression that I'd be double taxed then reconcile the differences, but are you saying I don't have to pay US taxes until I pay Japan first and reconcile the differences?

As far as my visa, this is what I have: https://www.mofa.go.jp/j_info/visit/vis ... isa10.html. I will be taxed on my Japan-sourced income, but I'm not yet a permanent resident thus my US-sourced capital gains (if I have any) would not be taxed by the Japanese authority is my understanding.

[captainspoke]

I'm not a tax expert--US or here--but with the FEIE I think there is, or was, a way to claim partial years. You'd probably need a US-based CPA for this, one who knew something about it all, but then after that initial year you may be able to do it on your own.

The FEIE is now about US$120k, so if your earned income is under that level, it can all be excluded, so your taxable income will be zero. Two things in sequence from that: if your income is over that level, you can then use the FTC. Also, the amount of tax on your US investments will differ, since your income is zero, dividends and gains begin from there (are added to zero), and not as in the US where things get added onto an income (eg, onto $75-100k) and then taxed on that basis. With the FEIE, the level of qualified dividends that you can get before being taxed might surprise you.

Some people opt instead for the FTC, and since japan's taxes are generally higher than the US, the credit you get may mean no US taxes. (from reading, not experience, this is not the case at higher income levels) Also, with the FTC, you do have taxable income (tho no tax owed) and you can contribute to an IRA.

Again, I'm not a tax expert, just offering some ideas.

As for gains/dividends, if you leave it all in the US, and don't remit any of it here during the first five years, then yes, no tax here on it. But from what I've read, if you remit anything (based on a given tax year), you're not allowed to say "I remitted this, but not that", AFAIK, if you remit any of it, it all becomes taxable for that tax year. (I may not be expressing this very clearly.)

((also, I was under the impression that gains taken, since it is active choice, would be taxed even within five years; whereas dividends, very passive--you do nothing to get them--are not. But I guess that's not correct, which may show my worth as an advisor!))

[TokyoWart]

For claiming the FEIE I think you need something like 330 days to meet the physical presence test. Even if you arrived mid-year in Japan you can do that by getting a filing extension until the October 15th-ish filing date because you measure the physical presence up until the time you file your taxes. You still need to have paid any US taxes by the April 15th normal filing date because extensions don't extend the deadline for paying US taxes.

https://www.irs.gov/individuals/interna ... -exclusion