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 tax. The amount of the deduction is based on the amount of the employment income and is determined by reference to a deduction table.
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 designated by the Ministry of Finance in Japan are tax deductible, with certain limitations. 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 inhabitants taxes.
Earthquake insurance premiums are also deductible for the purpose of both national and local inhabitant’s tax to a limited extent.
Mortgage interest is not tax deductible. However, a tax credit on housing loans may be available for up to ten years where certain conditions are met. The total amount of tax credit is determined by the year in which the taxpayer began to reside in the property as well as mortgage balance at the end of the tax year.
Prior to the 2018 Japan Tax Reforms, a permanent and/or non-permanent resident employee can take an earned income deduction, computed by applying an appropriate rate to gross employment income as follows (the minimum standard deduction is JPY 650,000 or gross employment income, whichever is lower). The deduction is currently capped at JPY 2.2 million.
|Taxable income (JPY)
||Formula for exclusion amount calculation
||Salary income exclusion - up to 2019 (JPY)
||40% of income
||650,000 minimum, up to 720,000
||30% of income + 180,000
||720,000 minimum, up to 1,260,000
||20% of income + 540,000
||1,260,000 minimum, up to 1,860,000
||10% of income + 1,200,000
||1,860,000 minimum, up to 2,200,000
Prior to the 2018 Japan Tax Reforms, resident taxpayers are entitled to a personal exemption (JPY 380,000 for national income tax purposes, JPY 330,000 for local inhabitant’s tax purposes) for themselves and their dependent spouses.
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 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 380,000 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 of age. For each category of dependants, the deductions also increase if the dependant is a handicapped person.
In general, a non-resident taxpayer is not permitted to take any of these deductions.
Business expenses are tax deductible in some limited cases. An employer’s reimbursements of business expenses, such as moving, 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.
Currently, capital losses derived from the sale of listed shares may be offset against dividends from listed shares for the same year up to the amount of the dividends, provided the taxpayer elects separate taxation by filing. With effect from 1 January 2016, interest income and capital losses derived from specified bonds was included in this offset arrangement; and, accordingly, capital losses arising from the sale of listed shares and specified bonds ('listed shares group') will be offset against dividends from listed shares and interest from specified bonds, provided separate taxation by filing is elected.
Under current tax law, capital losses within the listed shares group after offset against dividends and interest may be carried over for three years.