A Basic Primer on Federal Income Tax and Social Security for US Expats Residing in Japan
A year and a half ago, I arrived in Tokyo from the United States with my family in tow. This is my sixth sojourn in Japan, my first time to spend more than a year at a stretch in the country, and the first time to reside here with my family. One of the things that struck me upon my arrival as a mid-career professional and as someone with a family was that the information that I could find on the Internet about what taxes I owed in Japan and the US, not to mention what I needed to do about paying into my Social Security account in the US, was too scattered and piecemeal. What I could have really used was some sort of one-stop source of information that summarized what I needed to know and included links to more detailed information if I needed it. That’s what I hope to provide to you now. So, let’s begin:
What do you need to know about paying US taxes and Social Security if you’re living and working in Japan?
- You must continue to file your US tax return every year, even though you are residing in Japan and earning all of your income here. The IRS states, “If you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. Your worldwide income is subject to U.S. income tax, regardless of where you reside.”
- If you are a US citizen, the IRS allows you an automatic 2-month extension to file your return without requesting an extension. For a calendar year return, the automatic 2-month extension then means that you have until June 15 to pay your income tax. A word of caution: You must pay any tax due by April 15 or interest will be charged starting from April 15.
- What Social Security benefits you will receive upon retirement are calculated on how much income you earned during your working career. The Social Security Administration (SSA) tracks what you have earned during your lifetime and pays benefits based on the average amount that you earned, provided a minimum number of work credits have been accumulated. What does that mean?
- In order to receive Social Security retirement benefits, you must have accumulated at least 40 quarters of work in what the SSA called “covered employment”. What this means: A “quarter of covered employment” is generally a three-month calendar quarter during which time you must have earned at least an average of $1,260 per quarter on an annual basis.
- To avoid having to pay Social Security tax in the US and Japanese pension system tax, you must request a Certificate of Coverage from your local Japan Pension Service office in Japan. What this means: In October 2005, the United States and Japan signed Social Security agreements that allow you avoid double taxation while working abroad and also preserve your future SSA benefit rights. One of the most important reasons for this agreement is to help US citizens who have worked in both the United States and Japan, but who have not worked long enough in one country or the other to qualify for Social Security benefits. Thanks to this agreement, the SSA tallies your work credits in Japan if they will help you qualify for US benefits when you retire. However, if you are like me and you already have 40 quarters of covered employment under SSA guidelines to qualify for a retirement benefit, the SSA will not count your credits in Japan. If you are younger and you have not yet accumulated 40 quarters of covered employment, the SSA will then take into account your work credits earned in Japan and you will receive a partial US retirement benefit that is tied to how long you worked in the United States subject to Social Security taxes. Even though the SSA will take into consideration your work credits in Japan, your credits will not be transferred from Japan to the United States. Those work credits stay on your record in Japan and you will then qualify for partial benefit payments from both the United States and Japan.
What I have summarized here should be enough to make you aware of what your obligations are as a US citizen living in Japan with regard to income tax and Social Security. As always, more detailed information can be useful, so I have provided several links below that I, myself, found useful – one source being the Teaching English as a Foreign Language website, the next source being the Japan External Trade Relations Organization (JETRO), and the last source being the Internal Revenue Service (IRS):
Finally, I am not a tax adviser or retirement planner, so please use an abundance of caution and seek out professional advice if you require it.
Andrew Neuman joined Management Solutions in California in March 2014 as a project manager and relocated to Tokyo in November 2015. Previously, Mr. Neuman was President of the Japan Society of Northern California, project manager at NEC Corporation of America, and project manager at Yahoo, Inc. Mr. Neuman also has several years of experience as a management consultant at PricewaterhouseCoopers. While completing his Bachelor’s Degree at UC Davis, Mr. Neuman studied at International Christian University in Tokyo, Japan, and later went on to earn his MBA with Japanese Concentration at Cornell University. Mr. Neuman is a currently certified Project Management Professional (PMP) and is fluent in reading, writing, and speaking Japanese. He can be contacted through LinkedIn.