Rare case inheritance question

[TokyoWart]

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.

If I understand your situation correctly you have an inherited IRA. There is no step-up in cost basis for an inherited IRA in the US and Japan doesn't have a step-up in basis for inherited financial assets. Although there is some debate about how Japan taxes IRA accounts, I doubt that you can get a step-up in basis for an inherited IRA that would have meaning in either the US or Japanese tax systems.

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.

I think the most common practice for couples who have only one of the spouses in the US tax system is to file MFS. If you don't your foreign spouse is subject to the same tax reporting requirements and limitations regarding things like PFIC's that we US persons face. However, if your wife is the equivalent of a "green card" holder (long term US resident) she has to file form I-407 to give up her US tax status. She hasn't actually left the system and its reporting requirements just because she leaves the country or the green card expires. If she has not had a green card then she leaves the US system more easily but you may want to just confirm that this is not an issue for you.

https://www.goldinglawyers.com/form-i-4 ... ation-tax/
https://jp.usembassy.gov/ja/visas-ja/im ... r-i407-ja/

[Dugalator]

Japantous, a rare case inheritance question, but not so rare. I am experiencing almost exactly as you are (modifying some dates and monetary amounts and the fact that I am back in Japan already on a spousal visa). As Tykdon responded, this is basically my understanding after hours and hours of research. I was curious whether you came up with a resolution and are at peace now. I too wish to put this to bed and to quit fretting about the matter. Let me know, please. Thank you.

[Tkydon]

Japantous, a rare case inheritance question, but not so rare. I am experiencing almost exactly as you are (modifying some dates and monetary amounts and the fact that I am back in Japan already on a spousal visa). As Tykdon responded, this is basically my understanding after hours and hours of research. I was curious whether you came up with a resolution and are at peace now. I too wish to put this to bed and to quit fretting about the matter. Let me know, please. Thank you.

You have not provided any details.

However, if you were in Japan when the person died, you really need to consult a professional with International Inheritance experience as quickly as possible, such as:

https://chester-tax.com/plan/global-inheritance_en.html

You can also see some good info here:

https://retirewiki.jp/wiki/Inheritance_tax

[Dugalator]

Yes, I probably should have offered some details, which, as I mentioned, are/were very similar to those of the original poster.

My situation is as follows:

I lived in Japan on a working visa until July 2018, at which time I went back to the US (my nationality). I completely broke Japan residency at that time, with no legal connections and no jushou. I have been living in Japan again since May 2022 on a spousal visa. The decedent, my father, passed away in February 2022, while I was still legally resident in the US and with no jushou in Japan. Estate was in probate for some time and no distributions to this point.

I think, based on what you said earlier, I should be absolved from estate tax in Japan based on these factors.

Very grateful for your response(s) on this matter.

[japantous]

Japantous, a rare case inheritance question, but not so rare. I am experiencing almost exactly as you are (modifying some dates and monetary amounts and the fact that I am back in Japan already on a spousal visa). As Tykdon responded, this is basically my understanding after hours and hours of research. I was curious whether you came up with a resolution and are at peace now. I too wish to put this to bed and to quit fretting about the matter. Let me know, please. Thank you.

Apologies that it took so long to see this and reply. I believe that you are indeed correct and this is not such a rare case, but rather something that many lifer-expats will go through. The inheritance I received is in the form of an IRA, so your mileage may vary with how the below information applies to your case, and the resident experts can feel free to correct me on any points.

Initially I thought I was free and clear in terms of Japan-side taxes as I had no jusho in Japan when the decedent passed. However, due to the inheritance being in the form of an IRA, with distributions to be made that are then subject to income tax, my current plan is to follow what Tkydon said in a previous post (file Japan taxes, file US taxes, then revisit the Japanese tax return).

While users here and on r/JapanFinance are extremely helpful, it is difficult to find good professional advice on this topic; e.g., from any kind of professional advisor. I signed up with PlanVision as it is highly regarded on the Bogleheads forum. Over a brief chat they had some interesting insights, but as you might expect are not well versed in the Japan side of things. One piece of advice from them that I am considering is taking aggressive distributions in 2024-2025 because the current 24% tax bracket is set to increase to 26% in 2026.

One other thing that I learned from PlanVision is that income earned in Japan is stacked on top of any IRA distributions in the US for the purpose of calculating total income. For example, assuming one earned the equivalent of $60k in Japan and took a distribution of $40k from the Inh. IRA that year:

-Japan Income: 60k
-IRA distribution: 40k
-Total income: 100k
-Standard deduction: around 15k
-Leaving 85k taxable
-The 60k Japan income is subject to the FEIC
-Leaves 25k taxable
-BUT, this 25k is taxed in the 100k-192k bracket (currently 24%)

[TokyoWart]

One other thing that I learned from PlanVision is that income earned in Japan is stacked on top of any IRA distributions in the US for the purpose of calculating total income. For example, assuming one earned the equivalent of $60k in Japan and took a distribution of $40k from the Inh. IRA that year:
-Japan Income: 60k
-IRA distribution: 40k
-Total income: 100k
-Standard deduction: around 15k
-Leaving 85k taxable
-The 60k Japan income is subject to the FEIC
-Leaves 25k taxable
-BUT, this 25k is taxed in the 100k-192k bracket (currently 24%)

In the example you give the income would be taxed partly in the 22% and partly in the 24% bracket assuming filing as single with no other deductions or credits. You still fill the brackets as you go up but you start at the $60K line which is the 22% bracket. Only the amount above $95,376 is getting the 24% bracket.

[japantous]

@TokyoWart

Yes, my mistake. Thanks!

[Nancy]

This may be off-topic, and I may be missing something with your example, but it might be better to split the money up into smaller payouts if you can. I cashed some US savings bonds last year, that had accumulated quite a bit of interest over the 30 years that I had them. I had to first pay tax in Japan, and the amount of interest with the weak yen, made my income to be very large. So I also had huge health insurance payments, and local tax payments last year. I then paid the same amount in US taxes. I went back this year to claim the foreign tax credit in Japan. There is some kind of limit on the amount that will be reimbursed, but some will be reimbursed. After paying the huge amount for health insurance and local tax last year, I wonder if this will somehow be recalculated too, but I'm not sure. I had to cash the bonds all together, but it was not ideal.

[japantous]

@Nancy

That's another aspect I hadn't considered. At this point I'm wishing I had just liquidated the entire thing before coming to Japan--paid the huge tax bill and be done with it..

Whinging aside, big thanks to everyone on here who shares their knowledge on these relatively unknown topics.