US Expat Taxation Notes

US Expat Taxation Notes

The following is a summary of important information for US citizens living outside the US. Keep in mind that the numbers quoted in this document can change at any time and many of them change every year. You can find the most up-to-date information by searching for the names or abbreviations shown or by accessing the links included in the document.

Note that the following pages cover most, if not all, of the topics discussed below and in far greater detail:

Double Taxation and Tax Credits

  • At the moment, US citizens are taxed by the United States on worldwide income. In addition, anyone living in Japan is taxed by Japan on income resulting from work done in Japan or from investments located in Japan.
  • Anyone living in Japan for five out of the last ten years is considered to be a “permanent resident” for tax purposes (regardless of one’s status of residence) which means Japan taxes all worldwide income.
  • The United States and Japan have a tax treaty that attempts to avoid the possibility of double taxation. This is done by allowing credit on the tax return for one country for taxes paid in the other. The “United States” section of the following page contains a table of which country taxes what kind of income and which country provides a tax credit:
  • US citizens living outside of the United States may exclude a certain amount of their earned income (ie: salary but not investment income)) from taxation by the US. This is called the Foreign Earned Income Exclusion and must be claimed by filing Form 2555 with one’s tax return. Tax paid in Japan on ny income excluded under this provision may not be used for tax credit since there would be no US tax on that income, anyway. The amount of the exclusion changes every year to account for inflation but the 2024 exclusion amount is $126,500.

Passive Foreign Investment Companies (PFIC)

  • Some non-US investments (such as mutual funds, ETFs, REITs, etc) which are not registered with the US Securities and Exchange Commission (SEC) are considered by the IRS to be Passive Foreign Investment Companies. The reporting requirements and taxation of PFICs is very complex and possibly more expensive than regular investments. These are best avoided altogether.
  • Funds, ETFs, and REITs which are registered with the US SEC (mostly US-based funds, ETFs, and REITs) are likely not considered PFICs and should be OK to own. Direct investment in US companies (not via a fund) is almost certainly OK. Also, direct investment in foreign companies that are active businesses (such as McDonalds) should be OK.
  • There are exceptions. For example, certain types of foreign pensions may be exempt. Is in doubt, it might be a good idea to consult with a tax advisor.
  • It seems possible that the SPDR S&P 500 Index ETF (1557 on a Japanese brokerage) does not count as a PFIC investment so it might be a good option for long-term investing if you don’t have access to US stocks and ETFs (like if you’re investing via a NISA).

Retirement Savings

  • As a US citizen, you should be entitled to contribute a certain amount of your income to a US-based Individual Retirement Account (IRA). You may have trouble finding a company that will allow you to open an IRA account, thanks to US banking regulations. But if you spend any time working in the US, you may be able to open an account there and keep it after you return to Japan.
  • You can contribute to a Japanese self-directed retirement account, like a NISA, as long as the money is only used to buy US stocks, bonds, and ETFs. If you allow your NISA money to be used to purchase Japaese mutual funds, you will likely run into the PFIC complications described above. That means the Tsumitate part of a NISA account and the current version of iDeCo should not be used as long as you hold US citizenship without consulting a competent tax professions.
  • Note that, in most cases, income from dividends and capital gains in an iDeCo or NISA account might not be tax deferred on your US tax return. That means you will avoid paying tax on that income in Japan but you will end up paying tax in the US. Since taxes paid in Japan can be used to reduce or eliminate any tax paid on that same income in the US, there is probably no benefit at all to using a Japanese retirement savings account.
  • Money contributed to a company pension plan which you cannot access until retirement will most likely be treated as pension savings by the IRS so that might be a viable option. But it would still be advisable to check with a tax advisor who understands US tax law.

Life Insurance

  • Life insurance which only pays out on death or disability and does not include an investment component is probably OK for a US citizen to purchase. Life insurance which invests your money and pays a return at some fixed age should only be purchased from a US company. Purchasing an investment vehicle disguised as an insurance policy from a non-US company could subject you to the PFIC complications described above. If in doubt, check with a competant tax professional.
  • Term life insurance provided by your employer, assuming it is only insurance and not an investment, is probably OK.

Health Insurance

  • US citizens are normally required to purchase health insurance through the Affordable Care Act (Obamacare). As long as you are covered under a Japanese health care insurance policy (either company-provided or through Kukumin Kenko Hoken), you shoiuld be exempted from having to purchase health insurance in the US. You may need to show that you are a long-term resident of Japan.

Gift and Estate Taxes

  • Gift tax is a tax on money given by one person to another person while the person giving the gift is still alive. Estate tax is a tax on money which is distributed to heirs upon someone’s death. Both of these taxes are levied on the person (or estate) which is the source of the money.

  • Inheritance tax is a tax on money received as the result of someone else’s death. There is no federal inheritance tax in the US. Some US states may levy a tax on inherited assets for residents of that state.
  • Large gifts and inheritances are taxed in the US (and possibly in Japan) but, for US tax purposes, there are limits below which gifts and bequests are exempt from taxation. Gift tax is usually paid by the person making the gift. Estate tax is usually paid from the estate of the deceased. There is a combined lifetime exclusion of $12,000,000 below which no tax will be imposed. Note that this limit may be reduced by 50% in 2025 if the increased exemptions put in place by the Tax Cuts and Jobs Act are not extended.
  • Whether or not gifts are taxed, and whether or not they need to be reported to the IRS by the person receiving the gift, depends on the amount of the gift, the relationship between the donor and the recipient, and whether the donor is or is not a citizen of the US. The following limits apply to US taxation of gifts as of the 2024 tax year:
Situation Exemption Reporing?  
Gifts from US person to their spouse Gifts less than $185,000/year are exempt from tax No  
Gifts from US person to non-spouse Gifts less than $18,000/year (per receipent) are exempt from tax No  
Gifts from US person to anyone (lifetime) Gifts from any one person are exempt from tax up to a LIFETIME total of $12,000,000 Yes  

  • Gifts made by a US person do not have to be reported if they fall under the exemptions for which the “Reporting?” column in the above table says “No”. Gifts over those limits must be reported (on Form 3520) but are not taxed until the total of all gifts given over the donor’s lifetime exceeds the lifetime total shown above. If any gifts over the exemptions in effect at the time of the gift are not reported, a fine of 35% of the value of the gift may be imposed.

  • The receipent of a gift does not have to report the gift if it was received from a US person or if the gift was less than $100,000 per year (from one donor or from a number of related donors such as members of a single family). However, if the total of all gifts received from any single donor (or collection of related donors) is over $100,000 in any given tax year and at least one of the donors was a non-US person (ie: not a citizen or resident of the US), then the receipient must report the gift on their tax return for that year… but no tax is actually levied.

  • There may be estate tax on real property located in the US, even if owned by a non-US person (ie: a non-resident non-citizen). It is possible that the lifetime gift tax exemption may not apply to non-US persons.

  • Note that capital assets (stock, real estate, etc) received as inheritance are considered to have been “purchased” at the value of the asset at the time of the inheritance. In other words, any gains or losses in the value of those assets during the lifetime of the deceased are not taxable to the receipient.

  • Many of these limits are indexed for inflation so they will change year-by-year.

Trusts

  • Trusts in the US are generally required to file their own US tax returns and are not included on the tax returns of either the trustees or the beneficiaries.

  • Any ownership in a foreign (ie: non-US) trust must be reported on Form 3520-A. A possible fine of $10,000 or 5% of the gross value may be levied for failure to file this form.

US Tax Returns

  • In theory, US citizens must pay US income tax on all worldwide income. There are exemptions and credits specified in various tax treaties that can reduce or eliminate any US taxes but you must file a tax return with the IRS to take advantage of those exemptions and/or credits. Since the US and Japan have a tax treaty in place and Japanese taxes are generally slightly higher than US taxes, you shouldn’t have to pay anything to the US until you earn over $200,000 per year and have significant investment income.
  • Tax rates in the US vary depending on whether one is single or married. If married, the tax rate depends on whether you both file together (jointly). If your spouse is not a US citizen and makes a reasonable income, it may be cheaper to file separately since her income would not be taxed by the US in that case… whereas, if you file jointly, you must include both incomes on the US tax return. If you have children, you can file separately but still use the cheaper married tax rate by filing as “Head of Household” and indicating the qualifying child or children on your tax return.
  • If you are single and make more than $12,500, married and make more than $25,100, or are self-employed and make more than $400 in any given year, you are required to file a tax return for that year with the US IRS by the 15th of June.
  • You can also file for an automatic extension until the 15th of October.
  • The first $112,000 of earned income (salary/bonus) can be deducted from your US tax return. This is known as the Foreign Earned Income Exclusion (FEIE). Earned income does not include investment income.
  • A credit can be claimed against US income taxes for Japanese taxes paid on one’s income (both earned and otherwise). This would include taxes paid on salary/bonus over $112,000 or any investment or self-employment income.
  • US citizens must pay an additional 3.8% Net Investment Income Tax (NIIT), which is part of the Affordable Care Act, if their income is over $200,000 as a single taxpayer or $250,000 when married and filing jointly. Since there is no equivalent Japanese tax, this tax cannot be eliminated using tax credits.

State Tax Returns

  • In theory, someone born and raised outside the US should not be considered a resident of any State. If you decide to live in the US for a while and then return to Japan, you could become subject to State income taxes even after returning. Be careful when using any US address or buying any property in the US — check whether the State in question is one of the “sticky” states that could end up taxing your income for a long time.

Foreign Bank Account Reporting (FBAR)

  • If the total balance of all your non-US bank accounts exceeds $10,000 at any time during the year, you must file a Foreign Bank Account Reporting (FBAR) form with the US Department of the Treasury (not the IRS). The maximum balance for each account would be listed on the form, even if those balances happened at different times of the year. This is VERY IMPORTANT because the penalties for failing to file can be severe.

Foreign Account Tax Compliance Act (FATCA)

Additional References

Some links to general information on taxation of US citizens living abroad:

Some links pertaining to foreign pensions and US taxation/reporting issues:

Some links pertaining to life insurance:

Some links pertaining to renunciation of US citizenship:

Tax preparation services:

Potential software for filing ex-pat US tax returns:

History

  • Page created on 28 April 2023
  • Retirement Savings and Life Insurance sections added on 27 Feb 2024.