Japan

Employment expenses

A resident taxpayer who earns income from employment is eligible for an earned income deduction for purposes of both the national income and local inhabitant’s taxes. The amount of the deduction is based on the amount of the employment income and is determined by reference to a deduction table.

Personal deductions

Interest is not tax deductible. Japanese social security contributions are fully deductible. Medical expenses (irrespective of where they were paid) are tax deductible, with certain limitations.

Charitable contributions

Charitable contributions designated by the Ministry of Finance in Japan are tax deductible, with certain limitations (generally, only charities in Japan qualify). Qualified contributions or donations that total, in aggregate, over JPY 2,000 are deductible in computing the national tax. The total deduction is limited to 40% of income, less JPY 2,000. The definition of a qualified contribution is extremely restrictive (see the Other tax credits and incentives section for more information).

Life insurance premiums

Life insurance (or private pension) premiums paid to a Japanese agency in local currency are deductible to a limited extent in computing national and local inhabitant’s taxes.

Earthquake insurance premiums are also deductible for the purpose of both national and local inhabitant’s tax to a limited extent.

Standard deduction

Personal exemptions

From tax year 2020, resident taxpayers are entitled to a personal exemption for both national income tax and local inhabitants tax purposes based on their total income during the tax year, as follows:

In the case of a non-dependent spouse, a special spouse exemption (a maximum JPY 380,000 and JPY 330,000 for national income tax purposes and local inhabitant’s tax purposes) can be taken, depending on the spouse’s income, by taxpayers whose income amount does not exceed JPY 10 million.

Resident taxpayers are allowed a deduction for each dependant who is 16 years old or older. A dependant is a relative, other than a spouse, who is supported by the taxpayer provided that the dependant’s income does not exceed JPY 480,000 for the year. The dependant is not required to live with the taxpayer but should receive support from the taxpayer as part of the taxpayer’s household. The amount of the deduction increases if the dependant is aged 70 or older at the end of the year or is at least 19 years old but less than 23 years old. For each category of dependants, the deductions also increase if the dependant has a disability.

In general, a non-resident taxpayer is not eligible for any of these deductions.

Business deductions

Business expenses are tax deductible in some limited cases. An employer’s reimbursements of business expenses, such as commuting, travel, and entertainment expenses, do not constitute taxable income to the employee, provided the expenses are required for the employer’s business.

A self-employed taxpayer is allowed to claim business expenses against income, provided it can be substantiated that the expenses are necessary.

Losses

With effect from 1 January 2016, capital losses arising from the sale of publicly traded shares and specified bonds (‘publicly traded investments group’) through a qualified Japanese broker will be offset against dividends from publicly traded shares and interest from specified bonds, provided separate taxation by filing is elected.

Under the current tax law, capital losses through sales from a qualified Japanese broker within a publicly traded investments group after offset against dividends from publicly offered shares and interest from bonds or bond funds may be carried over for three years.