The 2018 Japan Tax Reforms include the following changes to Japanese individual income tax.
Decrease in the earned income deduction for employees by 100,000 Japanese yen (JPY) and the income level deduction cap reduced to JPY 1.95 million
Resident taxpayers are eligible for a deduction against earned income (which is a so-called ‘earned income deduction’) based on the percentage of their employment income. Currently, the earned income deduction has a minimum deduction amount of JPY 650,000 and it is capped at JPY 2,200,000.
Under the 2018 Tax Reforms, the earned income deduction for employees will be decreased by JPY 100,000 and the income level deduction cap will be reduced to JPY 1.95 million; however, the reduced deduction cap will not apply to taxpayers with dependent children under age 23 or those taking the special disability exemption.
The following changes, effective January 2020, will apply to the earned income deduction for a permanent resident and/or non-permanent resident employee:
|Taxpayer’s annual salary
||Earned income deduction*
|JPY 1,625,000 or below
|Over JPY 1,625,000 and up to JPY 1,800,000
||Gross income x 40% - JPY 100,000
|Over JPY 1,800,000 and up to JPY 3,600,000
||Gross income x 30% + JPY 80,000
|Over JPY 3,600,000 and up to JPY 6,600,000
||Gross income x 20% + JPY 440,000
|Over JPY 6,600,000 and up to JPY 8,500,000
||Gross income x 10% + JPY 1,100,000
|Over JPY 8,500,000
* For taxpayers with gross employment income over JPY 8.5 million with dependent children under age 23 or those taking the special disability exemption, the current rate (10%) will apply (up to gross employment income of JPY 10 million; the deduction is capped at JPY 2.1 million).
Increase in the personal exemption by JPY 100,000 but reduction of all personal exemptions at income levels between JPY 24 million and JPY 25 million and elimination of the personal exemptions for income levels over JPY 25 million
Resident taxpayers are entitled to a personal exemption for themselves (so-called ‘basic exemption’, which is currently JPY 380,000 for national tax and JPY 330,000 for local tax). Currently, there is no income threshold to be eligible for the basic exemption and all taxpayers can take the same level of exemption.
The following changes, effective January 2020, will apply to personal exemptions. For the first time, the basic exemption will be abolished for taxpayers with total annual income over JPY 25 million.
|Taxpayer’s total annual income
||‘Basic exemption’ for national tax
||‘Basic exemption’ for local tax
|Below JPY 24,000,000
|Over JPY 24,000,000 and up to JPY 24,500,000
|Over JPY 24,500,000 and up to JPY 25,000,000
|Over JPY 25,000,000
Decrease in the public pension income deduction by JPY 100,000 and an introduction of a cap on the deduction at JPY 1,955,000 for seniors whose annual pension income exceeds JPY 10 million.
Taxpayers are entitled to a deduction against qualified public pension income. Currently, this deduction is not limited by the taxpayer’s income level.
Under the 2018 Tax Reforms, the public pension income deduction will be capped at JPY 1,955,000 when the gross public pension income reaches JPY 10 million. Furthermore, the public pension income deduction will be reduced for taxpayers with income other than public pension income of over JPY 10 million in two phases (for further details, please see the footnotes in the table below).
The following changes, effective January 2020, will apply to the public pension income deduction:
|Recipient’s age (years)
||Amount of pension received (A)
||Public pension income deduction
||Below JPY 1,300,000
|Over JPY 1,300,000 and up to JPY 4,100,000
||(A) x 25% + JPY 275,000
|65 and above
||Below JPY 3,300,000
|Over JPY 3,300,000 and up to JPY 4,100,000
||(A) x 25% + JPY 275,000
||Over JPY 4,100,000 and up to JPY 7,700,000
||(A) x 15% + JPY 685,000
|Over JPY 7,700,000 and up to JPY 10,000,000
||(A) x 5% + JPY 1,455,000
* For individuals who have income other than public pension income of over JPY 10 million and up to JPY 20 million, the pension deduction from the table above is reduced by JPY 100,000 (the maximum deduction of JPY 1,855,000).
** For individuals who have income other than public pension income of over JPY 20 million, the pension deduction from the table above is reduced by JPY 200,000 (the maximum deduction of JPY 1,755,000).
Decrease in the ‘blue form’ tax return deduction by JPY 100,000 and increase in the ‘blue form’ deduction by JPY 100,000 for filing and maintaining tax returns and accounting documents electronically
Under the 2018 Tax Reforms, effective January 2020, the maximum ‘blue form’ deduction for taxpayers with business income will be reduced by JPY 100,000 from the current JPY 650,000. As an incentive for taxpayers to file 'blue form' tax returns electronically, taxpayers who do so or maintain accounting documents electronically will receive an additional JPY 100,000 'blue form' deduction (i.e. JPY 650,000 in total).
Japan non-permanent residents to be taxed on sale of personal property outside of Japan
Effective 1 January 2017, there is an increase in scope of taxation of non-permanent resident taxpayers of Japan. Income from the sale of personal property located outside of Japan will be taxable in Japan even if the proceeds are not remitted to Japan.
The 2017 Japan Tax Reform provided an exemption on the issue of capital gains taxation on certain foreign-listed securities sales for non-permanent residents, but the new rule on income from sale of other personal property will still apply.