Reducing taxable income

[N00bster]

I thought this could make an interesting topic, especially for those with higher income who are taxed 33% and more.

Recently, I have been able to convince my employer to pay for my rent and deduce the rent from my salary. This simple trick has the effect of reducing my income in the highest tax bracket. All of a sudden I am saving 1/3 of my rent!

Since then I am looking for other (legal) ways to reduce my taxable income. After reading "Rich dad, poor dad", I am especially curious about the benefits of having your own company. As the author explains, individuals get income, pay taxes, and then can spend or invest what remains. Companies on the other hand get income, spend or invest it, and pay taxes on the remainder.

It so happens that my spouse and I are seriously thinking about starting something together (where she would do the bulk of the work in replacement of her current employment), and I wonder if this could not be used to our benefit too. For instance, whether it is possible to invest pre-tax in your company, reducing your taxable income.

This topic should not be limited to the particular case of having a company though. Let's share all our tips to reduce taxable income and have more disposable money to invest!

[RetireJapan]

I thought this could make an interesting topic, especially for those with higher income who are taxed 33% and more.

Recently, I have been able to convince my employer to pay for my rent and deduce the rent from my salary. This simple trick has the effect of reducing my income in the highest tax bracket. All of a sudden I am saving 1/3 of my rent!

Since then I am looking for other (legal) ways to reduce my taxable income. After reading "Rich dad, poor dad", I am especially curious about the benefits of having your own company. As the author explains, individuals get income, pay taxes, and then can spend or invest what remains. Companies on the other hand get income, spend or invest it, and pay taxes on the remainder.

It so happens that my spouse and I are seriously thinking about starting something together (where she would do the bulk of the work in replacement of her current employment), and I wonder if this could not be used to our benefit too. For instance, whether it is possible to invest pre-tax in your company, reducing your taxable income.

This topic should not be limited to the particular case of having a company though. Let's share all our tips to reduce taxable income and have more disposable money to invest!

Great topic, and one that I would be very interested in.

[eyeswideshut]

For normally employed people, I don't think starting a business will allow much in the way of significant deductions in costs unless you can somehow flow your income stream through the company itself. However, whether there is any advantage between just doing it as a sole proprietor or actually incorporating I am not sure. I know that a lot of wealthy Japan residents make use of "business deductions" to reduce their taxes - declaring their Porsche as a company car etc. but I am just a salaryman and thus these options are not open to me.

For personal income deductions, I am aware of the following:

1) spouse and dependent deductions of 360000 per dependent. It used to be that people would send money overseas and then claim this but I gather the NTA is cracking down.
2) Donations - (Furusato Nouzei being the one where you can actually reclaim around 30% of the value by receiving gifts). Both my wife and I try to max out this allowance as it is a great deal.
3) J401K - my company does this so I don't know how it works for individuals
4) Mortgage deductions - I don't own my residence but my understanding is that this is not a particularly significant deduction.
5) Insurance deductions - I don't use this as I think the products that are eligible are not really worth the money.
6) Depreciation on rental properties. This can be significant. You can under current rules (which I gather are due to be revised next year) depreciate the value of a wood frame building (but not the land) over a 4 year period against personal income (not just rental income). As houses overseas tend not to depreciate (and may even appreciate) this can be a significant way to reduce taxable income for high income earners.

That is all that I am currently aware of.

[RetireJapan]

The mortgage deduction can be significant: I believe it is 1% of the loan amount per year for the first ten years. This means it can make sense to get the largest loan available even if you have the cash to reduce it, get the deduction for ten years, then pay the loan off once it is no longer helping you with your taxes

[eyeswideshut]

Interesting, I didn't realize it was a percentage of the total loan amount. Are you able to additionally deduct the interest payments or is that only for commercial properties?

[StockBeard]

Something we've used in the past but that obviously depends on your circumstances is that hospital bills can be deducted from your income if they reach a significant amount. I don't remember the details, but basically if you give birth on a specific year it's very likely you'll meet the threshold. not something you can do every year, but worth keeping in mind.

[vapid]

I can concur with StockBeard statement on medical expenses, specifically childbirth as being a potential windfall. Japan also allows you to claim the medical expenses of the household, so if you lived with elderly parents, their medical expenses could be a tax deduction. The main hassle is that you need to keep all the receipts and bills and provide them during your tax submission/adjustment.

[N00bster]

Very nice finding. It indeed seems that annual medical expenses that exceed 100,000Y can be deduced from taxable income up to 2,000,000Y:

http://www.shoken-kenpo.or.jp/eng/membe ... n/403.html