# US citizen working remotely from Japan



## mrdonut

Hello,

I am trying to plan a move to Japan with my family, and I wanted to run my plan by all of you to see if there are any tax gotchas that I might be overlooking. 

About me: I'm a U.S. citizen married to a Japanese citizen. We are currently living with our 2 children in the U.S., but would like to move to Japan for an indefinite amount of time (3 years at least). My wife and our two children are Japanese citizens and passport holders, and I am currently in the process of applying for a spousal visa - which grants me the ability to live and work in Japan without restriction. 

I work as a software engineer in the U.S., and my wife is currently unemployed. I currently work remotely 4 days a week, and my company has given me the green light to move to Japan and continue to work remotely with my team. I'm still trying to work out the details of the move with my company. Unfortunately, since this move is by choice and not really work related, my company will not be providing much (any) assistance with moving expenses or tax advice. 

Here's the plan:

We plan to sell our house prior to moving. Since it is our primary residence and we have lived in the house for 4 years, we should not need to pay any capital gains taxes in the US prior to moving. I also believe that we should not be liable for any capital gains taxes in Japan. Is this correct?

If possible, I am trying to convince my company to keep me on the US payroll for another year or two at least rather than officially transferring to our Tokyo branch. The reason for this is that software engineers in Tokyo seem to make about half as much on average as engineers in California, and I am trying to avoid a cost of living adjustment. Not sure this is possible, but worth a try. Are there any legal reasons anyone can think of why remaining on the U.S. payroll wouldn't be possible (assuming my company is on board)? 

And if I were to remain on the U.S. payroll and work remotely for the U.S. office, but live in Japan, would the "source" of my income be U.S. or Japan? I believe it would be considered "Japan source" income, but would like some clarification here. The terms "Japan source" and "foreign source" show up prominently in both Japanese and U.S. tax codes and I would like to make sure I am understanding this correctly. 

And if the above assumptions are correct, here are the taxes I am expecting to pay:

Japanese national income tax (probably somewhere in the 33% bracket)
Prefectural tax (~4%)
Municipal tax (~6%)
National Health Insurance (~5%)
National Pension (~9%)
U.S. capital gains taxes on the sale of any stocks sold in our U.S.-based accounts.

And I am not expecting to pay:
U.S. federal income tax (I'm expecting the credit for Japanese taxes paid to bring this down nothing)
Social security / medicare tax (due to enrollment in the Japanese system). 
California state income tax (due to no longer being a California resident). 

Does this sound about right to everyone? Are there any fatal flaws in my planning so far? 

Thanks in advance for any input!


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## Moulard

some food for thought.....

Federal Income Tax.

You should be able to exclude the foreign earned income if you need to meet certain requirements. If you are have flexibility to plan when you emigrate, it may be worthwhile planning your move to ensure eligibility for the FEIE. 

You may want to look carefully at any US-Japan Dual Taxation Convention. It will outline who gets to tax you if you reside in Japan but are paid in the US from a US company.

However if you are on a US payroll, a question to consider is whether or not your tax home is actually Japan. 


Social Security.

If there is a totalisation agreement between the US and Japan you should only have to pay into one system. The treaty may dictate which one you pay into given you will be working for a US company but residing in Japan. 

I expect that if you are on the US payroll, and effectively just remote working you will have to pay into US Social Security and thus be exempt from paying into the Japanese scheme.

California State Tax.

Would be wise to check Californian Tax rules carefully. If you are working for a Californian company you may well still have to pay Californian state tax. I know some states tax non-residents who work for in-state companies. 

This IRS publication is a good starting point.. if you haven't read it already...

https://www.irs.gov/pub/irs-pdf/p54.pdf


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## mrdonut

Thank you Moulard for your suggestions. I have looked further into all of your suggestions and I believe this is where I stand (note: I tried to include links to quoted sources, but unfortunately since I am a new poster I am not able to):

I believe my "tax home" would be Japan, and any income earned while physically working in Japan would be "Japan sourced", and taxes would be owed in Japan. 

_Where or how you are paid has no effect on the source of the income. For example, income you receive for work done in France is income from a foreign source even if the income is paid directly to your bank account in the United States and your employer is located in New York City._ - IRS explanation of "What is foreign earned income"

_Article 4. (6) Income ... received by an individual for his performance of labor or personal services whether as an employee or in an independent capacity shall be treated as income from sources within a Contracting State only if such services are performed in that Contracting State._ - US/Japan tax treaty

Regarding the Foreign Earned Income Exclusion, given the above I think that it would be an option in my situation. However, since I am currently earning more than the max that can be excluded under FEIE, I think that I will be able to get more mileage out of the Foreign Tax Credit. 

For social security, there is a totalization agreement between the U.S. and Japan. If you work for a U.S. company who "sent you to work" in Japan for 5 years or less, then you would pay U.S. payroll taxes. 

_As the table indicates, a U.S. worker employed in Japan can be covered by U.S. Social Security only if he or she works for a U.S. employer. _ - Social Security Administration "Totalization Agreement with Japan"

For California state taxes, the good news is that once I leave, it appears that I will not need to pay California income taxes for work done in Japan. It seems like it might get a little tricky though with business trips back to the home office. Apparently everyone who earns California source income is required to pay California taxes, whether they are a resident or not. 

_When LeBron James travels to California to play the Clips at Staples Center, California gets a cut of his pay for that night.
...
But what if the employee is a nonresident who doesn’t have to set foot in California to perform his services? Then the source rule works for the nonresident. Remember, the source of the services is the location where the work is actually performed. A nonresident programmer who monitors and upgrades satellite dish software for his Los Angeles-based media company, all while sitting comfortably in front of his computer in his Austin, Texas condo, doesn’t earn California source income and doesn’t have to pay California income taxes._ - NONRESIDENTS WORKING REMOTELY FOR CALIFORNIA BUSINESSES

That's all the research that I was able to dig up on the matter. One of the things that I'm realizing as I do all of this research is that I really need to be positioning this as a "temporary" move for now (say for 2-3 years). That is short enough that I will remain a "non-permanent resident" for taxation purposes in Japan, and avoid having to pay into the Japanese Pension system. It's long enough to clearly establish that I am no longer a California resident. And it's a good way to position it to my company to keep the cost of living adjustment off the table for a few years at least.


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## Bevdeforges

Let me caution you very strongly about the idea of "remaining on the US payroll." If you do, that means that you will have US Federal taxes withheld from your pay, and most likely US Social Security, too. You should be able to claim back the Federal tax, but getting reimbursed for SS is considerably more problematic.

You are considered to be "working in" whatever country you are physically located in while you do the work, therefore you will be working in Japan and will have to meet Japanese work rules and tax requirements. If your employer has a Japanese payroll, you'd be far better served to be paid from that. If not, you may need to look into setting up a freelancer or "self-employment" registration in Japan so that you can make tax and social insurance payments for yourself at the proper levels. You may also want to discuss with your employer what expenses they are willing to cover for you. The usual approach is that you become an "independent" (contract worker, in effect) and you bill the employer for your services plus any reimbursable expenses (even if that's only pens and paper, plus some equipment charges - say, for your Internet connection at home, or specific computer equipment you need to do your job remotely). As long as you are registered in the Japanese social security (i.e. social insurances) system, you should be able to avoid paying "self-employment tax" (i.e. Social Security) to the US. 

I don't know how the "self-employment" system works in Japan, so you may want to ask in our Japan section here on the ExpatForum.

For US tax purposes, you'll be "working in Japan" and will be eligible to exclude your earned income on forum 2555 (Foreign Earned Income Exclusion). Have a look at IRS publication 54 for more on this. For "unearned" income and anything over and above the FEIE limit, you can go for the Foreign Tax Credit (form 1116).
Cheers,
Bev


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## Moulard

mrdonut said:


> Regarding the Foreign Earned Income Exclusion, given the above I think that it would be an option in my situation. However, since I am currently earning more than the max that can be excluded under FEIE, I think that I will be able to get more mileage out of the Foreign Tax Credit.



It may still be worth excluding of your earned income up to the limit and then using a foreign tax credit to cover the remainder. 

If Japanese income tax rates are higher that the US ones, then generally it can be more beneficial to revoke the earned income exclusion. If Japanese income tax rates are lower than the US ones, you will likely be better off taking the exclusion.
That said, the FEIE can be a handy way to lower your AGI and thus avoid the AMT and Form 6251.

Once you revoke, or fail to file a 2555 when eligible to do so you may not use the exclusion for 5 years without a private letter ruling.

The other thing to bear in mind is that the foreign tax credit get split proportionally between different types of income. Depending on your income profile this can sometimes leave a gap in eligible tax credits resulting in a tax liability. But this is something you will need to deal with regardless given you will need to file the 1116.

But the primary point I was trying to make on the FEIE, is given you are planning to emigrate you have some control over your trave; dates. This makes it easy to plan your departure to ensure you meet a physical presence or Bona Fide Residency Test for the the first year you are in Japan. Not an issue if you are planning on revoking the choice straight away... but something to consider.


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## Bevdeforges

> If Japanese income tax rates are higher that the US ones, then generally it can be more beneficial to revoke the earned income exclusion. If Japanese income tax rates are lower than the US ones, you will likely be better off taking the exclusion.


People have cited this "rule of thumb" very often on the forum - but it may or may not be true. It's not only the rates you need to consider, but also the available deductions, allocations and exemptions and how they apply in your specific case.

Don't be too quick to throw away the FEIE - at least not until you have gone through a cycle or two of the Japanese taxing system. I can tell you that, for several years, we wound up paying 0 in taxes here in France (which definitely has higher rates for taxation than the US) - due to a particular series of circumstances with my husband's finances, mostly involving "unearned income" - so the FTC wouldn't have done me any good whatsoever.

Be careful, too, about the mechanism for allocating your foreign taxes - between earned and unearned income, between spouses - and for allocating your expenses and deductions between categories of income and spouses. It definitely pays to run the numbers, particularly in your first few years in a new country.
Cheers,
Bev


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## Moulard

I will concede one point.. and amend my comment to say effective tax rate and rather than tax rate.

If Bev ended up paying zero tax in France then her (or their) effective tax rate was higher in the US even though the marginal rate was higher in France.

With that correction, I suspect that my posit still holds true.

Lets face it taking a foreign tax credit will do you little good if you aren't paying any foreign tax.

As for expenses, deductions and the like, you always have to consider differences between what is allowable in one tax jurisdiction and not in the other. In my case I could easily come up with a hand-full of significant differences in deductions that would need to be considered. For starters, the US allows a deduction for mortgage interest, the ATO does not. Likewise the ATO allows home office expenses for shared use space, while the IRS does not. I won't even start on the inequitable treatment of Super.

I am happy to concede that it may be wise to forgo that while your circumstances are in flux or until you have a good grasp of what your foreign tax return looks like. 

Similarly if your income profile is likely to change significantly, it may also be worth while taking a more conservative approach. 

But the income profile of most tax payers does not change significantly from year to year unless there is a significant life event. Fundamentally what you can deduct does not vary too significantly from one country to the next (at least in my limited experience and setting aside what is allowable in one country but not in the other).

For what it is worth, I would ALWAYS recommend running the numbers... not just on the numbers today, but also your likely (and possible) circumstances in the next five-ten years. 

If you expect you will be retiring (or receiving a bequest, promotion, parnernship or something else in the forseeable) you need to consider the impact you what you decide to do today on your tax position in the future.

In short don't revoke something that you don't need today, but you will need tomorrow.


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## Bevdeforges

I wasn't trying to say that you were "wrong" about anything. Just that it pays to take your time and get to know a new taxation system before making any decision about an option (like the FEIE) that may be difficult to reverse in future years.

Just as an example, the French system of taxation works with "parts" rather than personal exemptions to recognize family size (and married people must file as a "household" - there is no separate filing option in France). That has the effect of reducing the marginal rate for a couple (or family), which may then negatively impact a US spouse filing as "married filing single" based solely on their "own" income rather than the joint income.

Anyhow, we definitely agree that in transition years and perhaps until you get to know the new system, you just about have to run the numbers to know which option suits you best. 
Cheers,
Bev


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## Moulard

For what its worth, I didn't think you were saying I was wrong. 

Our points of view are coloured by our personal experiences and the unique character of each tax jurisdiction.


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## mrdonut

Thank you both for your input. I was definitely getting a little ahead of myself in saying that I was not interested in taking the FEIE. At this point I'm really just trying to get a basic grasp on what my tax situation will look like once I move to Japan... big picture stuff like what taxes will I need to pay and to whom, and whether it's better to stay on the U.S. payroll or switch to the Tokyo office's payroll. 

At this point the bit about which payroll to stay on is pretty much out of my hands, unfortunately. My HR department is looking into it, and I've let them know it's my preference to stay on the US payroll for a year or two if possible, but as they are already being really accommodating by allowing me to make the move, I don't think I'll put up too much of a fight whatever they decide. For sure I agree with Bevdeforges that the process of actually filing taxes will be much, much easier if I'm on the payroll in Japan. In fact, I've heard that most people in Japan don't even file taxes - it's all handled automagically via withholdings. 

With regards to whether or not it makes sense to claim the FEIE, I must have misread something on the IRS website as I thought that it was possible to take either the FEIE or the FTC (but not both), but I stand corrected. And while previously I was assuming that we wouldn't be eligible for the FEIE in our first year, I've since learned that it should be possible to meet the Physical Presence Test in 2017 so long as we leave within the next month or two (as we are planning). With this new information, I definitely plan to run the numbers both ways around tax time and go with whatever makes sense. 

"Once you revoke, or fail to file a 2555 when eligible to do so you may not use the exclusion for 5 years without a private letter ruling."

Good to know. Seems strange that they do it that way, though.


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## Bevdeforges

You can qualify for the Physical Presence test even if you move in October or November. You just have delay filing your taxes for the year of your move until 12 months after your arrival in the country to "claim" the FEIE for the time worked outside the US that year.
Cheers,
Bev


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## Moulard

You actually more than a month or two to meet the Physical Presence Test for your 2017 tax returns.

You must be physically present in a foreign country, or countries, for at least 330 full days during any period of 12 months in a row. Those 330 days don't all need to be in the same tax year.

Conceptually, you could fly out in October 2017, Prep your taxes using 2555, file form 4868, then sit on the returns until October 2018 and voila, you have met the physical presence and filed a timely return having only been physically present in Japan for 3 months during 2017.


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## bluedelphinium

My husband is facing this same situation, but we are getting conflicting info from H&R Block. I posted this in a separate thread, but adding it here since it's a similar situation:

Up until now, everything I've read says that WHERE you perform the work determines whether income is foreign. So the plan was: work in Denmark as a resident, perform work remotely for US company, pay taxes to Denmark, use the foreign income tax exclusion on US taxes. 

So I asked this question to an H&R Block Expat Taxes advisor and here is the response:

"If your income is derived from a US source it will not be considered foreign earned."

Completely confused by this answer. Although, beneficial as US taxes are lower, I highly doubt Denmark will see it this way. 

Thoughts?


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## Bevdeforges

I've answered your query in the other thread. There are quite a few factors you have to take into account and it's possible you may have either been mis-advised or have misunderstood the response you got.
Cheers,
Bev


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## Moulard

From pub 54 on the FEIE



> *Source of Earned Income*
> The source of your earned income is the place where you perform the services for which you received the income. Foreign earned income is income you receive for working in a foreign country. Where or how you are paid has no effect on the source of the income. For example, income you receive for work done in Austria is income from a foreign source even if the income is paid directly to your bank account in the United States and your employer is located in New York City.


As Bev says it appears that either you have been misadvised, misunderstood the response, but if you are performing the work outside the US, then it is foreign sourced for the purposes for the FEIE. I believe the primary exception to that is if you are performing work for the US Government.

... edited...

Just read the other post. What Bev says there is also correct.


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## bluedelphinium

Thank you Moulard. I've answered Bev's other comments in the main thread: 

http://www.expatforum.com/expats/ex...telecommuters-working-us-co.html#post12493354

but want to cross post for clarity. We received a second email from H&R Block about an hour after the first with answers to the same two questions. (Perhaps they forward tax questions to multiple advisors?) The answer to the question on foreign income contradicted the first email and confirmed what you have posted (and what I thought was correct) that work performed in the foreign country for a private employer is considered foreign income. 

Thanks for your help!


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