Tax Guide for US Citizens Living in Japan

The US citizen burden 米国市民の税務義務

The United States is one of only two countries in the world (the other being Eritrea) that taxes its citizens on worldwide income regardless of where they live. This is known as citizenship-based taxation. If you hold a US passport or green card, you owe US taxes on your global income even if you have lived in Japan for 20 years and have not set foot on American soil.

This creates a unique burden for US citizens in Japan. Unlike British, Australian, Canadian, or other foreign nationals who generally only file taxes in Japan once they become Japanese tax residents, US citizens must file in both countries every year. You are subject to two complete and independent tax systems simultaneously.

The US-Japan Tax Treaty does not override this fundamental obligation. The treaty contains a "saving clause" (Article 1, Paragraph 4) that explicitly preserves the right of the United States to tax its own citizens as if the treaty did not exist. The treaty does help prevent double taxation through credits and exclusions, but it does not exempt you from filing.

Filing both returns 日米両方の確定申告

As a US citizen living in Japan, you have two separate filing obligations each year:

Japanese tax return (確定申告)

If you are a Japanese tax resident (which you generally become after living in Japan for 1 year or more with the intention to stay), you must file a 確定申告 for all income — including your Japan salary, freelance income, investment gains, and any other worldwide income. The Japanese tax year runs from January 1 to December 31, and the filing deadline is March 15 of the following year.

If you are a regular employee (正社員 or 契約社員) and your employer handles 年末調整 (year-end adjustment), you may not need to file 確定申告 unless you have other income sources (side income exceeding ¥200,000, foreign income, multiple employers, etc.). See our Tax Filing Guide for details.

US tax return (Form 1040)

You must file a US federal income tax return (Form 1040) every year, reporting your worldwide income — including your Japanese salary, Japanese bank interest, Japanese stock dividends, and any other income from any source anywhere in the world. All amounts must be converted to US dollars.

The standard US filing deadline is April 15, but US citizens living abroad receive an automatic 2-month extension to June 15. You can request a further extension to October 15 by filing Form 4868. However, any taxes owed are still due by April 15 — the extension is for filing, not for payment.

Key US forms for expats:

• Form 1040 — Your main federal tax return, reporting worldwide income.
• Form 2555 — To claim the Foreign Earned Income Exclusion (FEIE).
• Form 1116 — To claim the Foreign Tax Credit (FTC).
• FinCEN 114 (FBAR) — Reporting foreign bank accounts (filed separately via BSA E-Filing).
• Form 8938 — FATCA reporting of foreign financial assets (filed with your 1040).
• Form 8621 — PFIC reporting (if you hold Japanese mutual funds).
• Form 3520/3520-A — If you have certain foreign trusts or receive foreign gifts over $100K.

FEIE vs FTC: avoiding double taxation 外国勤労所得控除と外国税額控除

The IRS provides two primary mechanisms to prevent you from being taxed twice on the same income: the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC). You can use one or both, but understanding which is better for your situation is critical.

Foreign Earned Income Exclusion (FEIE) — Form 2555

The FEIE allows you to exclude a certain amount of earned income (salary, wages, self-employment income) from US taxation. For tax year 2024, the exclusion amount is $126,500. This means the first $126,500 of your earned income is not subject to US income tax.

To qualify, you must meet either the bona fide residence test (you are a bona fide resident of a foreign country for an entire tax year) or the physical presence test (you are physically present in a foreign country for at least 330 full days during any 12-month period). Most long-term residents of Japan meet the bona fide residence test. (26 USC §911)

You can also claim a Foreign Housing Exclusion to exclude qualifying housing expenses above a base amount. This is especially valuable in expensive cities like Tokyo.

Foreign Tax Credit (FTC) — Form 1116

The FTC gives you a dollar-for-dollar credit against your US tax liability for income taxes you have already paid to Japan. If you paid ¥1,000,000 in Japanese income tax, you can credit the equivalent amount in USD against your US tax bill. (26 USC §901)

Unlike the FEIE, the FTC applies to all types of income — not just earned income. This means it can offset US tax on your investment income, rental income, and capital gains as well. It is also not subject to a dollar cap (though the credit is limited to the US tax that would be owed on that foreign-source income).

Which should you choose?

The answer depends on your income level and tax situation:

• Income below ~$126,500: The FEIE may be simpler — it excludes all your earned income, leaving no US tax to pay. But you lose the ability to use excess Japanese taxes as credits against other income.
• Income above ~$126,500: The FTC is often better because Japan's tax rates are generally higher than US rates at equivalent income levels. You will accumulate excess foreign tax credits that can carry forward for up to 10 years.
• Significant investment income: The FTC is generally preferable because the FEIE does not apply to investment income (dividends, interest, capital gains). The FTC can offset US tax on both earned and unearned income.
• Self-employed: Be careful — the FEIE does NOT exclude self-employment income from self-employment tax (Social Security and Medicare taxes). You may still owe 15.3% SE tax on your first $126,500 even with the FEIE. The US-Japan totalization agreement can help (see below).

FBAR and FATCA 外国金融口座の報告義務

Beyond income tax reporting, US citizens living abroad face two major financial account reporting requirements. These are informational reports — they do not create additional tax — but the penalties for non-compliance are severe.

FBAR — FinCEN 114

If the aggregate value of all your foreign financial accounts exceeds $10,000 at any point during the year, you must file a Report of Foreign Bank and Financial Accounts (FBAR) with FinCEN. This includes Japanese bank accounts (Mizuho, MUFG, SMBC, JP Bank, etc.), brokerage accounts (SBI Securities, Rakuten Securities, etc.), and even PayPay or Line Pay accounts if they hold balances. (31 USC §5314)

The FBAR is filed electronically through the BSA E-Filing System (not with your 1040). The deadline is April 15 with an automatic extension to October 15. No separate extension form is needed.

Penalties for non-filing: Non-willful violations can result in penalties of up to $10,000 per violation. Willful violations can reach $100,000 or 50% of the account balance, whichever is greater, plus potential criminal penalties. These are among the harshest penalties in the US tax code.

FATCA — Form 8938

The Foreign Account Tax Compliance Act (FATCA) requires you to report specified foreign financial assets on Form 8938, which is filed with your 1040. For US citizens living abroad, the reporting threshold is $200,000 at year-end or $300,000 at any point during the year (these thresholds double for married filing jointly). (26 USC §6038D)

FATCA also works from the other direction: Japanese financial institutions report information about accounts held by US persons directly to the IRS through Japan's tax authority (国税庁). This means the IRS already knows about many of your Japanese accounts. Failing to report them on Form 8938 while the bank is reporting them to the IRS is a compliance risk you do not want.

The NISA problem for US citizens 米国市民のNISA問題

Japan's NISA (少額投資非課税制度) is designed to encourage investment by making dividends and capital gains within the account tax-free for Japanese tax purposes. For most foreigners in Japan, NISA is an excellent deal. For US citizens, it is a potential minefield.

The US does not recognize NISA

The IRS does not recognize Japan's NISA as a tax-advantaged account. From the US perspective, a NISA is just a regular brokerage account. All dividends and capital gains within your NISA are fully taxable on your US return. The "tax-free" benefit of NISA only applies to Japan — not to the US.

This creates a painful asymmetry. You earn gains in NISA, pay no Japanese tax on them (great!), but then owe US tax on those same gains — and because you paid no Japanese tax, you have no foreign tax credits to offset the US liability. You end up paying full US tax rates on your NISA gains.

The PFIC nightmare

The real problem comes when you invest in Japanese mutual funds (投資信託) through NISA — or any mutual fund that is not a US-registered fund. The IRS classifies most non-US mutual funds as Passive Foreign Investment Companies (PFICs). PFIC rules impose punitive tax rates and require complex annual reporting on Form 8621.

Under PFIC "excess distribution" rules, gains can be taxed at the highest marginal rate (currently 37%) plus an interest charge — regardless of your actual income bracket. Filing Form 8621 for each PFIC you hold adds significant compliance costs (a cross-border CPA may charge $200-500+ per form).

This effectively means that the popular Japanese index funds many people hold in NISA — such as eMAXIS Slim, SBI V Series, or Nikko AM funds — become toxic assets for US tax purposes.

The iDeCo problem for US citizens 米国市民のiDeCo問題

iDeCo (個人型確定拠出年金) is Japan's individual defined-contribution pension plan. Contributions are tax-deductible in Japan, investment gains grow tax-free, and withdrawals after age 60 receive favorable tax treatment. For Japanese tax purposes, it is one of the best tax-advantaged vehicles available.

For US citizens, iDeCo presents several complications:

• No US tax deduction: The IRS does not recognize iDeCo contributions as deductible. Your Japanese taxable income decreases (good for Japan), but your US taxable income does not (bad for the US). You lose half the benefit.
• PFIC issues again: If your iDeCo account holds Japanese mutual funds (which most do), you may trigger PFIC reporting requirements on those holdings. The IRS has not provided clear guidance on whether iDeCo investments are subject to PFIC rules, creating uncertainty.
• Foreign trust classification: There is an argument that iDeCo could be classified as a "foreign trust" under US tax law, which would require filing Forms 3520 and 3520-A annually. This is a gray area with no definitive IRS ruling.
• Treaty protection unclear: The US-Japan tax treaty's pension provisions (Article 17) may provide some protection, but the interaction between the treaty, PFIC rules, and foreign trust rules is complex and not well-settled.

Investment restrictions for US citizens 米国市民の投資制限

Due to the PFIC rules and reporting requirements, US citizens in Japan face practical limitations on their investment choices. Here is what works and what does not:

What to avoid

• Japanese mutual funds (投資信託) — Classified as PFICs. Punitive tax rates and complex reporting (Form 8621 per fund). This includes all the popular eMAXIS Slim, SBI V, and Nikko AM funds.
• Japanese ETFs listed on TSE — Most are also PFICs because they are organized under Japanese law, not as US-registered investment companies.
• Non-US registered funds of any kind — Irish-domiciled ETFs (popular in Europe), Luxembourg-registered funds, etc. are all PFICs from the US perspective.

What works

• US-listed ETFs and mutual funds — Vanguard, iShares, Schwab, Fidelity funds listed on US exchanges (NYSE, NASDAQ) are NOT PFICs. These are the safest investment vehicles for US citizens anywhere in the world.
• Individual stocks (Japanese or US) — Individual company stocks are not PFICs. You can buy Toyota, Sony, or any individual stock on the TSE without PFIC issues.
• US retirement accounts — IRA, 401(k), Roth IRA. Continue contributing if you have earned income (Roth IRA income limits still apply). The US-Japan treaty generally protects these from Japanese taxation while you are a Japanese resident.
• Japanese individual stocks in NISA — Individual stocks (not funds) in NISA avoid PFIC issues. You will still owe US tax on gains, but the compliance is straightforward.

US-Japan social security agreement 日米社会保障協定

The US-Japan Social Security Agreement (社会保障協定), also called the totalization agreement, serves two purposes:

• Eliminates dual social security contributions: Without the agreement, you might owe social security taxes in both countries. The agreement provides that you pay into only one country's system based on where you work. If you are employed in Japan by a Japanese company, you pay into the Japanese system (厚生年金) and are exempt from US Social Security tax. If you are temporarily posted from a US employer (for up to 5 years), you can remain in the US Social Security system.
• Combines contribution periods: If you have worked in both countries but do not have enough credits in either country to qualify for benefits, the agreement allows you to combine periods. For example, if you have 8 years of US Social Security credits and 5 years of Japanese 厚生年金, you can count both to meet the US 10-year (40 credits) qualification threshold.

Self-employment tax

For self-employed US citizens in Japan, the totalization agreement is especially important. If you are self-employed and enrolled in Japan's 国民年金, the agreement exempts you from US self-employment tax (Social Security and Medicare portions — 15.3%). Without this exemption, you would owe 15.3% to the US on top of your Japanese 国民年金 contributions.

To claim this exemption, you need a Certificate of Coverage from Japan's pension office (日本年金機構), which you attach to your US return. You then complete Schedule SE showing the exemption.

Practical tips for US citizens in Japan 実践的なアドバイス

• Hire a cross-border tax professional: The complexity of dual filing makes it worth the cost. Look for a CPA or EA who specializes in US-Japan cross-border tax. Budget $1,500-4,000+ per year for preparation of both returns. This is one area where DIY can cost you far more in penalties and missed optimization.
• Keep records in both currencies: Track income, expenses, and investments in both JPY and USD. You will need to convert all JPY amounts to USD for your US return using the IRS average exchange rate or spot rate for specific transactions.
• File on time even if you cannot pay: Failure to file carries much steeper penalties than failure to pay. Always file on time, even if you need to set up a payment plan with the IRS.
• Do not forget FBAR: The FBAR is the most commonly overlooked filing for US expats, and the penalties are disproportionate. If you have any Japanese bank accounts with combined balances over $10,000 at any point in the year, file the FBAR.
• Invest in US-listed ETFs: Avoid Japanese mutual funds and Japanese-listed ETFs for your taxable investment accounts. Stick to US-listed ETFs (VTI, VT, VXUS, etc.) through a brokerage that serves US clients abroad.
• Consider Roth IRA contributions: If you use the FTC instead of the FEIE, you maintain "earned income" for Roth IRA contribution purposes (subject to income limits). Roth IRA growth is tax-free in the US, and the US-Japan treaty should protect it from Japanese taxation.
• State taxes may still apply: Some US states (California, New Mexico, Virginia, etc.) continue to tax former residents even after they move abroad. Check your former state's rules.
• Renunciation is an option but expensive: Renouncing US citizenship eliminates your future US tax obligation, but it costs $2,350 in State Department fees, requires filing Form 8854 (exit tax), and may trigger a "covered expatriate" exit tax on unrealized gains if your net worth exceeds $2 million or average annual tax exceeds ~$190,000. This is an irreversible decision with permanent consequences.

Frequently asked questions よくある質問

I have never filed US taxes from Japan. Am I in trouble?

If you are a US citizen who has not been filing US returns, the IRS offers the Streamlined Filing Compliance Procedures for taxpayers who can certify their non-compliance was non-willful. Under this program, you file the last 3 years of income tax returns and the last 6 years of FBARs. If you qualify for the "streamlined foreign offshore" procedures (you live abroad), there is no penalty. This is a well-established program specifically designed for expats in your situation. Do not panic, but do act — the program may not be available forever.

Do I owe US tax on my Japanese salary?

You must report it, but you likely will not owe additional US tax. If your salary is below $126,500 (2024 FEIE limit), you can exclude it entirely. If it is above that, Japan's income tax rates are generally higher than US rates, so the Foreign Tax Credit will likely eliminate any US tax owed. In many cases, US citizens in Japan owe $0 in actual US income tax — but you must still file to prove it.

Can I open a NISA account?

Yes, there is no Japanese law preventing US citizens from opening NISA accounts. The issue is on the US side — the IRS will tax your NISA gains, and if you hold mutual funds in NISA, you face PFIC complications. If you open NISA, consider holding only individual Japanese stocks (not mutual funds or ETFs) to avoid PFIC issues. You will still owe US tax on the gains, but the compliance is manageable.

My Japanese spouse is not a US citizen. How does that affect filing?

If your spouse is not a US citizen or resident, you typically file as Married Filing Separately. You can elect to treat your non-resident spouse as a US resident for filing purposes (allowing you to file Married Filing Jointly), but this subjects your spouse's worldwide income to US taxation — usually not advantageous. Married Filing Separately has some limitations (lower income thresholds, loss of certain credits), but it keeps your non-US spouse out of the US tax system.

What happens to my US retirement accounts (401k, IRA) while I live in Japan?

Under the US-Japan tax treaty (Article 17), Japan generally respects the tax-deferred status of US pension plans. Your 401(k) and traditional IRA should not be taxed by Japan while the funds remain in the account. When you withdraw, the treaty provisions determine how the withdrawal is taxed. Roth IRA treatment is less clear under the treaty — some tax professionals argue it is protected, others recommend caution. Continue contributing to US retirement accounts if you have eligible earned income.

I am leaving Japan and returning to the US. What do I need to do?

File your final Japanese 確定申告 (or appoint a 納税管理人 to do so after you leave). Close or decide what to do with Japanese brokerage accounts, NISA, and iDeCo. Claim your pension refund (脱退一時金) if eligible and desired — note that the refund is taxable income for US purposes. See our Leaving Japan tax guide for the complete checklist.