Gift Tax question

[StockBeard]

My parents are planning to send me a significant sum of money as a gift later this year. The amount is over the 1.1 Million JPY Threshold.

Details (I can add more if more specifics are required):
- My parents are over 60
- They live abroad and we are not Japanese
- For all intents and purposes Japan is my tax land, I've been here long enough that the "wait but if you've been here less than 10 years then..." shenanigans don't apply to me

It is my understanding that I have two options to declare this gift to the Tax office:
A) Declare it as a regular gift, and get taxed at 20% on anything above 1.1 Million JPY
or
B) Select "taxation at the time of inheritance", where I declare the amount I receive, but will only pay the taxes at the time of my parent's death. (the gift is under the 25 million cumulative limit so I'm not concerned about edge cases at this point)

Here are my questions:
1) is my understanding above accurate, about my two choices A and B?
2) Assuming it is, where and how do I file the necessary paperwork for either A or B? My local tax office?
3) What kind of documents are required?
3.1) E.G. documents to prove the source of the money, and the actual transfer? None of the documents will be in English, let alone Japanese, do I need to get them translated?
4) Do I need to prove that my parents are my parents? We (obviously) don't have a Japanese Koseki, so how would I prove that? Translate official documents from my planet?
5) Is there any "foreign tax credit" involved, assuming I end up having to also pay taxes in the motherland for that gift?

Thanks in advance

[Tkydon]

https://www.nta.go.jp/english/taxes/others/02/index.htm

https://www.nta.go.jp/english/taxes/others/02/15002.htm

https://www.nta.go.jp/english/taxes/others/02/15003.htm

[ClearAsMud]

A)
Gift tax over 1.1 million is incremental, from 10% to 55% with standard deductions involved. There are different increments and deductions depending on family relationship (e.g., gifts from parents to adult children are taxed less than gifts from unrelated people or to minor children). See the charts on this NTA page. For a gift of 10 million yen, the parent-adult child tax rate is 30% with a deduction of 0.9 million yen (tax works out to 1.77 million yen).

[Edit: Originally looked at the wrong chart . Recalculating based on the correct chart for parent to adult child AND assuming that you have no gifts from anyone else, making it possible to apply the 1.1 million exemption first: 10 million - 1.1 million = 8.9 million x 30% - 0.9 million = 1.77 million.]

B)
For early inheritance, a regular gift tax return is submitted to the local tax office along with a formal declaration that you are making the selection. If the gift is in cash, the return itself isn't terribly hard to complete.

Questions
1) I'd say yes, if you're not planning to use the money to buy a house or land for one.
2) The local tax office for both. They both use the same forms, and gift tax returns can be filed a little earlier than income-tax returns (from Feb. 1 to March 15).
3) A description in Japanese of the necessary forms and documentation will be found here (see Q28). Translations of supporting documents would of course be necessary if you are asked to provide them.
4) Some kind of proof of the stipulated relationship will surely be necessary for early inheritance, but it's not clear what proof non-nationals are supposed to provide. A notarized affidavit from the gifting parent testifying to the relationship under oath, in Japanese or with a Japanese translation attached, might work. Or you may need an official copy of your own birth certificate with the gifting parent's name on it. Or maybe even multiple certificates. But this is something you need to confirm directly with the tax office, preferably before initiating the gift, or maybe go through a competent tax accountant. No one else will be able to provide an authoritative answer. A preliminary visit or phone call to the tax office wouldn't hurt.
5) If you're subject to gift tax by both countries as a recipient (wouldn't this be rare?), you'll have to check the tax laws of your home country and any tax treaties in effect between your home country and Japan that may be designed to prevent double taxation. Professional help would be advisable, and timing could add complications. This NTA page does specifically state that a tax deduction can be taken by a Japan-based recipient for any gift taxes the donor has had to pay in the donor's country.

Remember that gifts in Japan are handled on an individual basis, so if both parents are giving you money, technically that means two reportable gifts (thus, both parents can actually do early inheritance separately, each for up to 25 million yen of individually owned assets). Also note that making the early-inheritance selection has implications for future gifts, so be sure you are aware of those, especially the one that says all future gifts from the same donor must be reported under early-inheritance rules. No more 1.1 million exclusion for gifts from that donor; all gifts (excluding common-sense stuff) get added to the early-inheritance pot.

[Darren in Japan]

Thanks for your insights on gift taxes, gentlemen.

I have another side question on this topic if that is OK.

I'm a long time resident of Japan with a Japanese wife and kids.

What if I gift my wife or child more than the 1.1 million JPY per year in Japan?

Is this subject to gift tax?

[Tkydon]

Thanks for your insights on gift taxes, gentlemen.

I have another side question on this topic if that is OK.

I'm a long time resident of Japan with a Japanese wife and kids.

What if I gift my wife or child more than the 1.1 million JPY per year in Japan?

Is this subject to gift tax?

For the Gift from your Parents, and to your kids...

After the Gift Tax Deduction:

Gift Tax Rates From Lineal Relatives (Parents, Grand Parents, etc.)
Band Marginal Tax rate (％) - Max Tax in Band Yen
Under 1,999,000 - 10% Y200,000
2,000,000 to 4,000,000 - 15% Y300,000
4,000,000 to 6,000,000 - 20% Y400,000
6,000,000 to 10,000,000 - 30% Y1,200,000
10,000,000 to 15,000,000 - 40% Y2,000,000
15,000,000 to 30,000,000 - 45% Y6,750,000
30,000,000 to 45,000,000 - 50% Y7,500,000
Over 45,000,000 - 55% No Limit...


A recipient can receive in aggregate a total of Y1.1M in gifts tax free in any one tax year, over which Gift Tax becomes payable.

Transfer of funds between persons who have a legal responsibility to support each other do not constitute a gift, unless the Gift is for a purpose other than support or living expenses, etc..

[Darren in Japan]

many thanks Don!

So if I gift my wife 3.6 million per year for her NISA, none of that is taxable by the gift tax? All the best, D.

[beanhead]

So if I gift my wife 3.6 million per year for her NISA, none of that is taxable by the gift tax? All the best, D.

Don has explained that money to take care of everyday household costs is not considered a gift. I am pretty sure the NTA would not agree that investing in NISA can be included as living expenses.

It is up to you of course if you want to take the risk, but I suggest keeping it below the 1.1M and just taking longer for your wife to max out the new NISA.

[Darren in Japan]

thank you Beanhead, very helpful.

[ClearAsMud]

For the Gift from your Parents, and to your kids...

After the Gift Tax Deduction:

Gift Tax Rates From Lineal Relatives (Parents, Grand Parents, etc.)
Band Marginal Tax rate (％) - Max Tax in Band Yen
Under 1,999,000 - 10% Y200,000
2,000,000 to 3,999,000 - 15% Y300,000
4,000,000 to 5,999,000 - 20% Y400,000
6,000,000 to 9,999,000 - 30% Y1,200,000
10,000,000 to 14,999,000 - 40% Y2,000,000
15,000,000 to 29,999,000 - 45% Y6,750,000
30,000,000 to 44,999,000 - 50% Y7,500,000
Over 45,000,000 - 55% No Limit...

This table appears to need adjustment. How would a gift under 1,999,000, taxed at 10%, result in a maximum tax of 200,000 yen? How does a gift of 3,999,000, taxed at a rate of 15%, yield a maximum tax of 300,000 yen? Why do the bands all end with 999,000 when the NTA's tables specify an inclusive higher number for the maximum amount in each band (i.e., not 3,999,000 but 4,000,000 is the maximum taxable gift amount in the second band)?

Basics first: the actual amount gifted is rounded down to the nearest thousand before the standard 1.1 million yen deduction is applied; the resulting figure is then rounded down to the nearest hundred (=the taxable amount of the gift) before the tax rate is applied to calculate the actual tax. Because the tax is marginal, deductions are used as an easy-to-apply method to arrive at the actual tax for each band. Thus, you start with the (taxable) gifted amount, apply the relevant gift tax rate, then subtract the deduction for that band to reach the final tax due. The table, to be complete, should therefore have four columns rather than three.

The NTA avoids (or tries to avoid) the problem of relying on rounded figures in its tables by adding the terms "以下" (= up to and including) and "超" (= more than) to just a single figure for each band. If you rely on a span of numbers in English to identify each band without adding words like "up to" and "more than," you sort of have a problem because the rounding process would seem to require that the same number appear at both the end of one band and the start of the next (at least in theory -- I haven't worked out possible examples to to see whether overlap might actually be impossible).

Ignoring the rounding problem for the time being, here's a revised table of tax rates and maximum taxes for gifts from direct lineal relatives based on the theoretically possible rounded numbers that would be used to calculate the tax, after having first already applied the standard deduction and taking into account the relevant tax-band deduction. The same number appears at both the end of one band and the start of the next, but perhaps Tkydon could weigh in on whether, say, 2,000,100 or 2,001,000 might be a better figure to use to start the second band.

Taxable band / Marginal tax rate (％) / Deduction / Max tax

Up to 2,000,000 / 10% / 0 / 200,000
2,000,000 to 4,000,000 / 15% / 100,000 / 500,000 [edit: correction here]
4,000,000 to 6,000,000 / 20% / 300,000 / 900,000
6,000,000 to 10,000,000 / 30% / 900,000 / 2,100,000
10,000,000 to 15,000,000 / 40% / 1,900,000 / 4,100,000
15,000,000 to 30,000,000 / 45% / 2,650,000 / 10,850,000
30,000,000 to 45,000,000 / 50% / 4,150,000 / 18,350,000
45,000,000 - / 55% / 6,400,000 / No Limit...

I recommend this Casio site for quickly calculating gift tax in a way that includes the standard deduction rather than excluding it (the maximum amounts will thus be lower than the amounts in the above table). The results will show both the regular gift tax and the "special" lower gift tax that applies only to gifts to direct lineal descendants.

[Yossarian]

1) I'd say yes, if you're not planning to use the money to buy a house or land for one.

How does cash for buying a house or land affect gift tax? Is it untaxable? Different rate?