Dividend Retirement Question

[vapid]

Cross-posting my question from the JapanFinance reddit

This question is for US citizens retiring in Japan; so assume you have permanent residency.

For anyone retired and living solely off dividends, Japan's tax rate is the 20.315% flat rate.

Is that consistent whether you earn 1M in dividends or 40M in dividends? Or does Japan's dividend taxation also follow the tax code income thresholds?

If you are lucky enough to earn ONLY qualified dividends from your US investments, under the current rules those are taxed at 0% for the first $63k + $21.9k standard deduction for Head of Household. So for a US citizen abroad filing that way, you could earn $84900 at 0% US tax for qualified dividends.

And then be taxed at only the 20.315% Japan rate?
84.9k at 152.57 JPY XE (Oct 31, 2024) is 12,953,526 JPY
or 2,631,509 JPY in tax

For a quick comparison, the Japan Tax Calculator website estimates that 13M JPY is income would be reduced to 8.2M JPY

Are my comparison/estimates accurate?

Final question, if you were living off 10M in dividends per year, how would you estimate your residence tax for the subsequent year, health care or pension costs?

[TokyoWart]

The dividend and capital gain tax rate in Japan does not increase above that 20.315% rate.

If your only income is qualified dividends and you are filing married-filing-jointly you actually can be tax-free on the US side up to (for 2024):

$89,200 + $29,200 (2 standard deductions if under 65) = $118,400
(The standard deduction increases a bit when you're over 65.)

But you'll almost always have some taxable Social Security or foreign pension income that eats away at that tax free limit because of the stacking rule.

Japan assumes the US is taxing your dividends at 10% (even when it's actually much higher; mine is around 24% for the US) and you can get some relief from that when filing your 確定申告 and claim foreign tax credits but the calculation is complicated. I just checked my 2023 Japanese return and it looks like the calculation for the tax on my US dividends was right around 15% so I would estimate that the remaining 5% is going to be collected as residence tax by Minato-ku.

[Tkydon]

You can choose to use the Aggregate Taxation Method, using your Marginal Rate of Income Tax
This is more beneficial if your Total Taxable Income is less than about Y3M

or

You can choose to use the Separate Taxation Method at the Flat Dividend Tax Rate of 20.315% (15% National, 0.315% reconstruction, and 5% Residents' Taxes.
This is more beneficial if your Total Taxable Income is more than about Y3M

[vapid]

Stark provided some responses on the reddit thread, and I wanted to add that information here for other US citizens who were interested in this topic.

Is that consistent whether you earn 1M in dividends or 40M in dividends?

It depends how you choose to declare your dividends. If the dividends were paid via a Japanese brokerage, 20.315% tax (income tax plus residence tax) will have been withheld at the time of payment. That withholding gives you the ability to avoid declaring the dividends on a Japanese tax return.

If you don't declare the dividends, obviously you will pay 20.315%. But if you declare the dividends, you may pay less than 20.315%, for a variety of reasons, as discussed in https://www.reddit.com/r/JapanFinance/c ... nt_income/. Then again, once you take into account a broader range of factors (national health insurance premiums, etc.), you may find it is disadvantageous to declare the dividends, as discussed in https://www.reddit.com/r/JapanFinance/c ... _accounts/.

People whose sole source of income is dividends (via a Japanese brokerage) have a lot of options regarding taxation, so the question of the applicable tax rate is highly fact-dependent.

if you were living off 10M in dividends per year, how would you estimate your residence tax for the subsequent year, health care or pension costs?

It entirely depends on whether you are receiving the dividends via a Japanese brokerage, and—if so—whether you choose to declare them on your tax return. Most Japanese people who are living off 10 million yen per year worth of dividends (via a Japanese brokerage) would choose not to declare them (i.e., they would just accept the 20.315% withheld tax), in order to have zero income for the purposes of national health insurance, etc. But see the threads linked above for a more detailed discussion of the issues involved.

[vapid]

And Stark also answered the question about:

what happens if you brokerage is overseas?

In that case, things are a bit simpler, because you don't have a choice regarding whether to declare the dividends.

The only choice you need to make in that situation is whether to subject the dividends to flat-rate taxation (assuming they are dividends from listed securities) or combine them with your other income and let them be taxed at marginal rates.

Which of these options is best depends on the taxpayer's circumstances, particularly their income, but also whether they have any losses in other income categories that they would like to offset against their dividend income (e.g., business losses can only be offset against dividend income that is taxed at marginal rates, while capital losses from the sale of listed shares can only be offset against dividend income that is subject to flat-rate taxation).

Marginal-rate taxation also provides access to the dividend tax credit, but that credit is only available with respect to dividends paid by Japanese companies and funds that are significantly invested in Japanese companies.

In the absence of a dividend tax credit, flat-rate taxation will usually be the better choice for anyone whose total income is more than around 2.5 million yen, depending on deductions. But the usual advice is to just prepare your tax return both ways and see which way results in a lower tax bill (keeping in mind that the residence tax on dividends subjected to flat-rate taxation is 5% and the residence tax on dividends subjected to marginal-rate taxation is 10%).

[captainspoke]

And Stark also answered the question about:

what happens if you brokerage is overseas?

...
The only choice you need to make in that situation is whether to subject the dividends to flat-rate taxation (assuming they are dividends from listed securities) or combine them with your other income and let them be taxed at marginal rates.

... flat-rate taxation will usually be the better choice for anyone whose total income is more than around 2.5 million yen, depending on deductions. But the usual advice is to just prepare your tax return both ways and see which way results in a lower tax bill (keeping in mind that the residence tax on dividends subjected to flat-rate taxation is 5% and the residence tax on dividends subjected to marginal-rate taxation is 10%).

An excellent summary (at least afaik!), good to have on hand--thanks!