Rare case inheritance question

[japantous]

Hi all, and thanks for your pertinent advice on all manner of topics in the past.

I will try to describe my situation so that it doesn't turn into a wall of text:

- US citizen
- Lived in Japan from 2012-2020
- Moved back to US in 2021
- Getting ready to move back to Japan now for the long term, and currently have an application pending for a CoE (to get spouse visa)
- Following said application, a US relative passed away and I'm looking at inheriting the equivalent of 45 million yen (and the total estate amount exceeds the Japan inheritance tax exemption in this case, which is two legal heirs)

Now on to the question: I do not have a 'jusho' in Japan as of the date of death of the decedent. Is that all that matters for determining whether or not I'm subject to Japanese inheritance tax? Settling an estate can take months, so it's likely I WILL have a jusho when I eventually receive said funds.

I realize this is a very niche question and I will consult a lawyer if necessary, but just wanted to ask here first to see if anyone has insights or a similar experience.

[Tkydon]

Hi all, and thanks for your pertinent advice on all manner of topics in the past.

I will try to describe my situation so that it doesn't turn into a wall of text:

- US citizen
- Lived in Japan from 2012-2020
- Moved back to US in 2021
- Getting ready to move back to Japan now for the long term, and currently have an application pending for a CoE (to get spouse visa)
- Following said application, a US relative passed away and I'm looking at inheriting the equivalent of 45 million yen (and the total estate amount exceeds the Japan inheritance tax exemption in this case, which is two legal heirs)

Now on to the question: I do not have a 'jusho' in Japan as of the date of death of the decedent. Is that all that matters for determining whether or not I'm subject to Japanese inheritance tax? Settling an estate can take months, so it's likely I WILL have a jusho when I eventually receive said funds.

I realize this is a very niche question and I will consult a lawyer if necessary, but just wanted to ask here first to see if anyone has insights or a similar experience.

Consult an Inheritance Tax Professional.

As long as:
You were not Domiciled in Japan at the time of the decedent's death, and
You are non-Japanese, and
The estate is not located in Japan, and
The deceased was not Japanese, and
The deceased did not live in Japan within the 10 years prior to their death

then, your inheritance is not liable for Japanese Inheritance Tax, regardless of when you actually receive the inheritance.

[japantous]

Thanks for your reply Tkydon. That is what I have been thinking although your reply is much more thorough than what I’ve been able to research on my own so far.

[japantous]

A follow-up question to my original post: does anyone have experience with IRA disbursements while domiciled in Japan?

Most of the funds are in a traditional IRA, which can be paid out in a lump-sum, or over 10 years.
Such disbursements are subject to US income tax (as well as Japanese taxes once I have residency).

According to most of what I have read or heard so far, it makes more sense to stretch out the disbursements, reducing the US tax burden, during which time the assets in the account can continue growing. My only qualm with this is the JPY-USD exchange rate. Say it falls to 100 over the next 10 years (just a random hypothetical). Moving money over to Japan then would be much more painful. Regardless, I would most likely still be doing a good portion of investing on the US side to take advantage of higher returns, especially taking into account the relative lack of investment opportunities in Japan as a US citizen.

Any thoughts would be much appreciated. I will discuss with the US financial planner in charge of this IRA, who say they have experience with such international matters (we'll see about that )

[captainspoke]

Look a the second post here: https://www.reddit.com/r/JapanFinance/c ... ng_us_ira/ by the user 'starkimpossibility', along with the two links they provided.

[japantous]

Look a the second post here: https://www.reddit.com/r/JapanFinance/c ... ng_us_ira/ by the user 'starkimpossibility', along with the two links they provided.

Thanks very much, I hadn’t seen that thread yet!

[Tkydon]

A follow-up question to my original post: does anyone have experience with IRA disbursements while domiciled in Japan?

Most of the funds are in a traditional IRA, which can be paid out in a lump-sum, or over 10 years.
Such disbursements are subject to US income tax (as well as Japanese taxes once I have residency).

When you are resident in Japan, they will be subject to Capital Gains Tax in Japan, and you will be able to claim the Foreign Tax Credit in Japan for tax paid on the disbursements in the US.
You will have to file Gross Capital Gain in Japan in March, then Gross Capital Gain in the US in April, and then revisit the Japan Filing after that to add the Foreign Tax Credit and then get the refund in Japan.

According to most of what I have read or heard so far, it makes more sense to stretch out the disbursements, reducing the US tax burden, during which time the assets in the account can continue growing. My only qualm with this is the JPY-USD exchange rate. Say it falls to 100 over the next 10 years (just a random hypothetical). Moving money over to Japan then would be much more painful. Regardless, I would most likely still be doing a good portion of investing on the US side to take advantage of higher returns, especially taking into account the relative lack of investment opportunities in Japan as a US citizen.

It depends if you are planning to use the funds in Yen in Japan, and the time-frame in which you think you will need the funds.

You have a number of options:

1. Liquidate before you come back to Japan (before the end of this year), pay the US taxes and put the money in the bank until next year.
If you do this, and the money is sitting in your bank account on 31 Dec, then if you transfer the money next year, it will be from savings, with no taxable event. You can then feed the money into NISA, Y2.4M per year into the Growth Portion and Y1.2M into the Tsumitate Portion, and the rest into a Tokutei Taxable Account waiting to be filtered into NISA.
It will then be forever Tax Free in Japan, though you will probably have to pay US Taxes when you withdraw the funds...
You will get the current Exchange Rate, so good rate into Yen. It will then depend on what you invest the funds in in Japan. If you buy overseas assets, it will be at the current exchange rate.

or

2. Once you have returned to Japan, then switch enough every year to fully populate the NISA in the year, over the amount you want to use, and pay the taxes in US and Japan.
In this case, you would expect the prices of Overseas Assets to move with the Exchange Rate;
If the Yen Gets weaker (the Exchange Rate goes higher, you will receive more profit in Yen from the US sale, so the Japanese Tax will go up, and when you buy overseas assets they will be more expensive due to the exchange rate.
If the Yen Gets stronger (the Exchange Rate goes lower, you will receive less profit in Yen from the US sale, so the Japanese Tax will go down, but when you buy overseas assets they will be cheaper due to the exchange rate.

Any thoughts would be much appreciated. I will discuss with the US financial planner in charge of this IRA, who say they have experience with such international matters (we'll see about that )

If you are buying and selling at the same time, the change in the exchange rate will be roughly the same on the sell and the buy, so the only issues will be the echange rate spread (about 3%) and the taxes (about 20% on the gain)

[japantous]

When you are resident in Japan, they will be subject to Capital Gains Tax in Japan, and you will be able to claim the Foreign Tax Credit in Japan for tax paid on the disbursements in the US.

I really appreciate your comprehensive reply! I did not know about the Foreign Tax Credit so I will definitely have to look into that more in depth.

In the event of spreading distributions out over 10 years, since I have US income for Dec.-Jan. 2023 but will have no US income (in salary form) from 2024 onward, I'm thinking it makes sense to skip any distribution this year and do the first in 2024 if possible in order to take advantage of lower tax rates (10-12% rather than 22%).

I have contacted my Japanese accountant to see if they can assist with the Japan-side reporting process.

[Tkydon]

When you are resident in Japan, they will be subject to Capital Gains Tax in Japan, and you will be able to claim the Foreign Tax Credit in Japan for tax paid on the disbursements in the US.

I really appreciate your comprehensive reply! I did not know about the Foreign Tax Credit so I will definitely have to look into that more in depth.

In the event of spreading distributions out over 10 years, since I have US income for Dec.-Jan. 2023 but will have no US income (in salary form) from 2024 onward, I'm thinking it makes sense to skip any distribution this year and do the first in 2024 if possible in order to take advantage of lower tax rates (10-12% rather than 22%).

I have contacted my Japanese accountant to see if they can assist with the Japan-side reporting process.

It depends on the type of disbursement.

If you sell units/shares and take the funds, then this (over Y500,000 Capital Gain Allowance per year) is subject to Capital Gains Tax - Flat Rate 20.315% (15% National, 0.315% Reconstruction, and 5% Residents' Taxes), regardless of the amount or the amount of any other income. (Probably the case for IRAs)

If the disbursement is through an annuity or pension type income, then it would be subject to Marginal Rate Income Tax. (Pensions, Annuities, Social Security, etc.).


As for the Foreign Tax Credit, after you have calculated the total aggregate taxable income in the year, you then use a 'Foreign Tax Credit Calculator' to calculate the amount of Income Reduction at your Marginal Income Tax Rate would produce exactly the same amount of Tax Saving as the foreign tax paid, and enter that number as a deduction into Items 46 & 47 on the Kakutei Shinkoku Tax Form, and they will use that calculated deduction to reduce the Taxable Income by the exact amount to give you that exact tax back, and issue you the refund.

[japantous]

Thank you Tkydon. I am getting a better grasp of how to handle this.

After talking with the US-side financial planners, I believe I will take a withdrawal of a certain % of the IRA in Jan 2024, before moving back to Japan. For the 2024 tax year I should be earning close to nothing in the US in terms of wages, so this makes sense from a tax bracket perspective.

They will look into doing an adjustment called a step-up in basis, in which the original cost of shares, etc. is adjusted to the price at the date of the decedent's death. This could help reduce capital gains tax in Japan.

One interesting point is the question of filing status for US taxes. My wife is Japanese, so for 2023 we will file as Married filing Jointly. Once we are back in Japan, it seems like it's the norm to file US taxes as Married filing Separately, which lowers the amount for the relatively advantageous 10% and 12% brackets (before it jumps to 22%). From what I've read, it's still an option to continue using Married filing Jointly, but the non-US citizen spouse is then subject to US taxes? Need to double check on that one in case we want to withdraw more in a certain year.