Pension income deduction - Does US 401k qualify?

[Gulliver]

I would recommend hiring a Japanese tax attorney that is also well-versed in the US/Japan tax treaty.

I know this may seem very counterintuitive and onerous to an American (it was very painful for me to admit I needed help due to my complicated tax situation), but I was able to save thousands of dollars and months of frustrating research.

The Japanese tax code and US/Japan tax treaty is full of intricacies, inconsistencies and pitfalls. The professional I hired was able to look at my particular situation and find strategies that worked to my advantage. I would’ve never discovered these myself.

A quick Google search in English will provide you with several options. Again, make sure you vet them as to their knowledge of the tax treaty.
Edit:
That said, this forum is a great place to get basic Japanese tax advice (as I certainly have) as well as tons of other great info.

[Tkydon]

Correction

I had cause to check the Tax Treaties with various countries today, and it it Very Simple.

Article 17 of the US-Japan Tax Treaty clearly states:
Paragraph 1 - Pensions and other similar remuneration, including social security payments, beneficially owned by a resident of a Contracting State (Japan) shall be taxable only in that Contracting State (Japan).
Paragraph 2 - Annuities derived and beneficially owned by an individual who is a resident of a Contracting State (Japan) shall be taxable only in that Contracting State (Japan).
The term “annuities” as used in this paragraph means a stated sum paid periodically at stated times during the life of the individual, or during a specified or ascertainable period of time, under an obligation to make the payments in return for adequate and full consideration (other than services rendered).

However,

ARTICLE 1
4. (a) Except to the extent provided in paragraph 5, this Convention shall not affect the taxation by a Contracting State of its residents (as determined under Article 4) and, in the case of the United States, its citizens.

ARTICLE 23
1. Subject to the provisions of the laws of Japan regarding the allowance as a credit against the Japanese tax of tax payable in any country other than Japan:
(a) Where a resident of Japan derives income from the United States which may be taxed in the United States in accordance with the provisions of this Convention, the amount of the United States tax payable in respect of that income shall be allowed as a credit against the Japanese tax imposed on that resident. The amount of credit, however, shall not exceed that part of the Japanese tax which is appropriate to that income.


Therefore, for a US Citizen, any US derived pensions and 401k will be taxable in the US and Japan, and you would have to claim a Foreign Tax Credit in Japan for the Taxes paid in the US.

[emikami]

Therefore, for a US Citizen, any US derived pensions and 401k will be taxable in the US and Japan, and you would have to claim a Foreign Tax Credit in Japan for the Taxes paid in the US.

Very close to correct. Look at article 23 very closely. Japan only is obligated to give foreign tax credit to the same extent that foreign tax credit will apply to a non-U.S. Citizen living in Japan on the same U.S. Source Pension or annuity. If you're not a U.S. Citizen and receiving such pension or annuity, there's no U.S. Tax withholding therefore Japan will not be responsible for foreign tax credit in this case.

Look further into article 23, it'll explain U.S. will provide foreign tax credit which the double taxation was caused by article 1 paragraph 4, U.S. Saving clause that allows U.S. to tax worldwide income even if the tax treaty states otherwise unless it is specifically exempt by article 1 paragraph 5. The mechanism used is the "re-sourced by treaty" category in IRS Form 1116. Since no foreign tax credit will be given by Japan, the entire U.S. sourced pension or annuity can be re-sourced by treaty (meaning reassigned a U.S. sourced income as if it was sourced from a foreign country in order to make it eligible for U.S. Foreign Tax credit).

Not sure if "re-sourced by treaty" is exempt from Form 8833 used to disclose treaty position. If in doubt, disclose treaty position on Form 8833.

In summary, U.S. Citizen living in Japan with most U.S. pensions, U.S. annuities, and U.S. Social Security are taxed in both U.S. and Japan and foreign tax credit is claimed in the U.S. on Form 1116 as "re-sourced by treaty" and Form 8833 may be required for treaty disclosure. Exception: If the U.S. pension is from work in U.S. Federal or State government, those are covered in article 18 and if you're a U.S. Citizen living in Japan, it is taxable in U.S. only. Article 2 lists Japanese tax as "Income Tax and Corporate Tax" only. So my assumption is that you can only claim "re-sourced by treaty" against shotoku zei (National Income tax) and not jyumin zei (Local Inhabitant tax). As a result, the exemption against "Japanese tax" under article 18 isn't nearly as much of a tax savings as it sounds.