Japan Tax Office wants me to file Japanese tax return first before filing U.S. tax return

[captainspoke]

Okay, thanks--I guess I'll start looking beginning with as much of the links that come thru.

[Tkydon]

Okay, thanks--I guess I'll start looking beginning with as much of the links that come thru.

All the Links now work.

If I type in the whole URL, if it is too long, it displays as Https://www.????????????...???????????.pdf, but the URL behind the link is complete.

If I then copy and paste Https://www.????????????...???????????.pdf, the URL gets Truncated to Https://www.???????????? and the ...???????????.pdf is not included in the URL, so the URL breaks, and will not work...

This message will of course not come through properly, as the URLs will be garbage...

[captainspoke]

[Nattokin]

Tkydon wrote:

1. US Social Security - only taxable in Japan
3. Bank interest - only taxable in Japan

Uh, I'm sorry, but I think you're mistaken.

US tax treaties often have a so-called "saving clause" at the outset that basically says, 'Despite everything that follows, most of the benefits of this treaty do not apply to you if you are an American expat.'

The US-Japan tax treaty (convention) is a case in point. Here's what it says:
Article 1, Paragraph 4. (a) "... 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."

So despite the language in Article 17, which you cited, Article 1 makes that language null and void for Americans.

But please don't take my word for it. Read up on the saving clause. For instance, here's a blogpost by an American CPA and IRS Enrolled Agent living in Japan who specializes in such matters:
https://kyototax.com/articles/the-u-s-japan-tax-treaty/

Now, getting back to the tax treaty, I cannot find anything else in the treaty that overrides Article 1. Can you? If not, your claim that US Social Security and bank interested are "only taxable in Japan" is probably incorrect. I wish it weren't, but I'm just going by what I see in the treaty.

In short, it seems that we US expats in Japan must report our worldwide income to BOTH countries and then figure out which country must allow us to claim a tax credit. If I'm mistaken, please show me where. I would like to know.

[Tkydon]

Yes, the Article 1 US Citizen trap... on the US Side.

However, that does not apply to the Japanese Taxes, which are covered by the Tax Treaty as detailed above.

From the Japanese Tax standpoint:

Social Security IS taxable in Japan - after deduction of all Allowances and Deductions and with the big Public Pension Deduction
Article 17.

Government Service Pension is NOT taxable in Japan, and therefore taxes paid on this income in the US cannot be deducted from Japanese taxes on other income that is taxable in Japan.
Article 18.

Bank Interest is taxable in Japan - but with no Foreign Tax Credit as it would not be taxable in the US to a Japan Resident Non-US Citizen
Article 11-1 and Article 23-3(a)

[Nattokin]

Tkydon wrote:

Yes, the Article 1 US Citizen trap... on the US Side.

Exactly! That's my point. There is also a US side to taxation here, and OP (booyeh) is a US citizen who falls into that "trap," as you've referred to it. You're presenting things from "the Japanese tax standpoint" alone, and in your earlier reply you also used the word "only":

"1. US Social Security - only taxable in Japan"

I'm curious: Why do you say "only" in Japan? I'm not seeing anything that says there is an exception to the saving clause when it comes to Social Security. If there's an exception, I sincerely would like to know because I too will be in the same boat when I get Social Security in the future. Please show me. I'll sleep better tonight knowing.

Unless there's an exception to the Article 1 saving clause, it would seem that the income must be reported in BOTH countries as taxable income. Then it becomes a matter of a tax credit in one, and the question would become “Which country must provide the tax credit?”

And thanks for dialoging about this. It's important that we figure this out.

[Tkydon]

Unless there's an exception to the Article 1 saving clause, it would seem that the income must be reported in BOTH countries as taxable income. Then it becomes a matter of a tax credit in one, and the question would become “Which country must provide the tax credit?”

In the case of Social Security, Japan will not provide a Foreign Tax Credit (23-3(a) below, but will provide a big Public Pension Deduction.

Article 23 refers.

"ARTICLE 23
1. (a) 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, 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 the amount of the Japanese tax which is appropriate to that income.
For the purposes of the preceding provisions of this subparagraph, income beneficially owned by a resident of Japan which may be taxed in the United States in accordance with the Convention shall be deemed to arise from sources in the United States.
...
2. In accordance with the provisions and subject to the limitations of the laws of the United States (as it may be amended from time to time without changing the general principle hereof), the United States shall allow to a resident or citizen of the United States as a credit against the United States tax on income:
(a) the Japanese tax paid or accrued by or on behalf of such citizen or resident; and
...
For the purposes of this paragraph, the taxes referred to in subparagraph (a) of paragraph 1 and paragraph 2 of Article 2 shall be considered Japanese taxes imposed on the beneficial owner of the income.
...
3. For the purposes of applying the preceding paragraphs of this Article, where the United States taxes, in accordance with paragraph 4 of Article 1, a citizen, or a former citizen or long-term resident, of the United States who is a resident of Japan:
(a) Japan shall take into account for the purposes of computing the credit to be allowed under paragraph 1 only the amount of tax that the United States may impose on income under the provisions of this Convention that is derived by a resident of Japan who is neither a citizen, nor a former citizen nor long-term resident, of the United States;
(b) for the purposes of computing the United States tax on income referred to in subparagraph (a), the United States shall allow as a credit against the United States tax the Japanese tax after the credit referred to in that subparagraph; the credit so allowed shall not reduce the portion of the United States tax that is creditable against the Japanese tax in accordance with that subparagraph; and
(c) for the exclusive purpose of allowing the credit by the United States provided for under subparagraph (b), income referred to in subparagraph (a) shall be deemed to arise in Japan to the extent necessary to allow the United States to grant the credit provided for in subparagraph (b)."


As Article 17 says Zero US Tax on Social Security for Japan residents, there is no Foreign Tax Credit in Japan on Social Security, but a large Public Pension Deduction.


"ARTICLE 17
1. Subject to the provisions of paragraph 2 of Article 18, pensions and other similar remuneration, including social security payments, beneficially owned by a resident of a Contracting State shall be taxable only in that Contracting State."

i.e. not taxable in the US for residents of Japan, who are non-US Citizens or Green Card Holders"b


Therefore, under 23-3(a) there is no Japan Side Foreign Tax Credit.
Therefore, under 23-3(b) there is no Japan Side Foreign Tax Credit, so the Japan Tax will be 100% of the Japanese Tax Assessed on the Social Security Income, after all Allowances, Deductions and the Public Pension Deduction.
Therefore, under 23-3(c) The US would allow a US Foreign Tax Credit by

>>> reassigning US Social Security Income as Japan Sourced Income for that purpose for the Japanese Resident US Citizen, <<<

if you're taxed by the U.S. more than a non-U.S. citizen living in Japan (any tax vs Zero Tax), that excess is creditable by re-assigning the source of the Social Security Income from US to Japan by treaty category in IRS Form 1116.


On the US Side, there is also a large Exclusion for Social Security benefits
Threshold:
If your total income (including Social Security benefits) falls below a certain threshold, you may not owe any U.S. income tax on your Social Security benefits.
The exact threshold depends on your filing status (single, married filing jointly, etc.) and other factors.
The exclusion threshold for U.S. Social Security benefits varies based on individual circumstances:
Single Filers:
If you file as a single taxpayer, up to 50% of your Social Security benefits may be excluded from U.S. income tax if your combined income (including half of your Social Security benefits, other taxable income, and tax-exempt interest) is below $25,000.
If your combined income is between $25,000 and $34,000, up to 85% of your benefits may be subject to taxation.
If your combined income exceeds $34,000, up to 85% of your benefits are generally taxable.
Married Filing Jointly:
For married couples filing jointly, up to 50% of Social Security benefits may be excluded if the combined income is below $32,000.
If the combined income is between $32,000 and $44,000, up to 85% of benefits may be taxable.
Above $44,000, up to 85% of benefits are generally subject to taxation.
Additional Considerations:
The specific calculations involve a formula that considers various factors, including provisional income and base amounts.

Reporting Requirements:
Even if you don’t owe U.S. income tax, you still need to report your Social Security benefits on your U.S. tax return.

Consult a tax professional or refer to the IRS guidelines for specific details, and to calculate your US Side Tax Credit under 23-3(c).

[Nattokin]

OK. It seems like we're gradually getting to a more thorough understanding of the taxation of US Social Security for American expats living in Japan.

To sum up things thus far, a US Person (such as the OP, booyah) who is resident in Japan must report US Social Security income to BOTH Japan and the USA. He/she should first pay any tax due to Japan, and the amount paid Japan will be credited when it comes to calculating what is owed the USA using IRS Form 1116 (Foreign Tax Credit).

Does that sound correct?

If so, I would add that the US taxpayer should also attach IRS Form 8833 (Treaty-Based Return Position Disclosure) to his/her US return since anyone claiming tax treaty benefits is required to attach a full disclosure of each treaty-based return position taken. Form 8833 requires not only an explanation, but also reference to the specific treaty article(s) relied on (see post, above). Failure to fully disclose a treaty-based return position can result in a penalty of $1,000.

OK?

[captainspoke]

OK. It seems like we're gradually getting to a more thorough understanding of the taxation of US Social Security for American expats living in Japan.

To sum up things thus far, a US Person (such as the OP, booyah) who is resident in Japan must report US Social Security income to BOTH Japan and the USA. He/she should first pay any tax due to Japan, and the amount paid Japan will be credited when it comes to calculating what is owed the USA using IRS Form 1116 (Foreign Tax Credit).

Does that sound correct?

Yes, this what I've done. (I should add that I have various dividends, occasional gains (losses!), and some minor interest, along with local pensions, to combine with SS payments on my US tax forms.)

If so, I would add that the US taxpayer should also attach IRS Form 8833 (Treaty-Based Return Position Disclosure) to his/her US return since anyone claiming tax treaty benefits is required to attach a full disclosure of each treaty-based return position taken. Form 8833 requires not only an explanation, but also reference to the specific treaty article(s) relied on (see post, above). Failure to fully disclose a treaty-based return position can result in a penalty of $1,000.

OK?

This part, together with some of the other details above, is new to me. And I've been following this thread closely to see what I might be missing, doing right/wrong, etc.

[Nattokin]

Hm-m-m-m... This still is not settled in my mind. Far from it.

Today I have been looking at the Technical Explanation of the US-Japan tax treaty,
https://www.irs.gov/pub/irs-trty/japante04.pdf.
It was recently brought to my attention, and the following sections have me wondering.

First, here's what it says regarding exceptions to the Article 1 saving clause:

Article 1, Paragraph 5

...Paragraph 5 sets forth certain exceptions to the saving clause that preserve these benefits for residents of the Contracting States and, in the case of the United States, citizens of the United States. Under paragraph 5, the following provisions of the Convention are applicable to all residents of the Contracting States and, in the case of the United States, citizens of the United States, despite the general saving clause rule of subparagraph 4(a):
...
(3) Paragraph 3 of Article 17 (Pensions, Social Security, Annuities, and Support Payments) provides exemptions from taxation by the Contracting State of source or the Contracting State of residence in certain circumstances for periodic payments made pursuant to a written separation agreement or a decree of divorce, separate maintenance, or compulsory support.

It says nothing whatsoever about Paragraph 1 of Article 17 being an exception to the saving clause. The way I read it, only Paragraph 3 of that article seems to be an exception. Right?

If so, then Tkydon's assertions, above, that

"As Article 17 says Zero US Tax on Social Security for Japan residents, there is no Foreign Tax Credit in Japan on Social Security... i.e. not taxable in the US for residents of Japan, who are non-US Citizens or Green Card Holders"

would seem to incorrect. The saving clause would seem to take precedence over Article 17, Paragraph 1. At least I think it does. Can anyone demonstrate otherwise? If so, please read through the technical explanation and show me where I'm mistaken. I'd like to know.

Continuing on, here's what the Technical Explanation says regarding Article 23:

Article 23 (Relief from Double Taxation)
This Article addresses the manner in which each Contracting State undertakes to relieve double taxation. The United States uses the foreign tax credit method under its internal law and by treaty.
Paragraph 1
Japan agrees, in paragraph 1, to allow to its residents a credit against Japanese tax for U.S. taxes. For this purpose, the U.S. taxes covered by subparagraph 1(b) and paragraph 2 of Article 2 (Taxes Covered) are U.S. taxes. Under subparagraph (a) of paragraph 1 of Article 23, where a resident of Japan derives income from the United States which may be taxed in the United States in accordance with this Convention, the amount of U.S. tax payable in respect of that income is 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.

This part seems key: Japan agrees to allow to its residents a credit against Japanese tax for U.S. taxes... (and) where a resident of Japan derives income from the United States which may be taxed in the United States in accordance with this Convention, the amount of U.S. tax payable in respect of that income is allowed as a credit against the Japanese tax imposed on that resident.

Responses, please. I want to figure this out.