Comparing Japan’s taxes to America’s — single filer.

(Click to enlarge)

Here are what the eight columns show you:

1. annual income in yen
2. estimated national tax on that income (assuming 12% shakai hoken deduction)
3. resident’s tax (assume 2x national tax)
4. total Japanese national and resident’s tax
5. this total expressed in US dollars at 79 yen to the dollar

6. annual income expressed in US dollars (79 JPY/USD)
7. federal income tax due on that amount
8. difference between what is owed in Japan and what is owed to America

As mentioned, I adjust the Japanese numbers for a deduction for Shakai Hoken, which you can substitute either, or both, national pension and national health insurance for. This means it is an added cost that you don’t see in the numbers. Conversely, I don’t include US social security or any state income tax in the figures for America. For US figures, it’s the standard deduction plus one personal exemption.

As I say consistently, it is very important for Americans to file a 1040 when they are working in Japan. Not only is it important, it’s actually a requirement of the law, unless you meet general exceptions that are available to us all. There is no “anything under $80,000 is exempt” rule. It’s all taxable, the same as if you were back in America.

You are allowed to exclude your “foreign earned income” IF you file a 1040. You use Form 2555 or 2555-EZ to do this. [Update 2/26/12: The foreign earned income figured on the 2555 is a subtraction to your line 7 income, and so goes as a minus on Line 21. The instructions tell you this, right?]

If you do not file your taxes, the BEST you might get, if you ever receive a letter from the IRS, is a credit for what you paid Japan. If you notice, though, the Japanese taxes (national and resident’s tax combined) are consistently less than what Uncle Sam asks. That jives with what the National Tax Agency has been telling the Japanese.

So if the IRS catches you not filing, and they deny your Form 2555 “Foreign Earned Income Exclusion” request, then you must come up with the difference between your “Section 901 creditable” taxes (national and resident’s) that you paid Japan, and what you owe Uncle Sam under the tax formula that applies to the rest of us.

As you miss the filing deadline, interest and penalties are attached to what you didn’t pay.

I am told that people who go first to the IRS—before the IRS sends a letter asking for a return—may still claim the income exclusion. But it’s better to simply file, rather than play that game of catch me if you can.