A Quick Guide To Japanese Inhabitant (Resident) Tax

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As the old saying goes, in this world nothing can be said to be certain, except death and taxes. Indeed, taxes are one of those complicated things foreign residents must deal with upon their arrival in Japan, yet there is no way they can avoid them. 

Sad as it may seem, just a few foreigners have a thorough understanding of the Japanese Tax System. Still, ignorance of the law excuses no one. We all are allegedly responsible adults and have a duty to pay taxes wherever we live.  

In this article, we’re going to introduce some basics to help you make sense of the Japanese Inhabitant Tax (also called Resident Tax), its amount, and payment methods.

Table of Contents

WHAT IS INHABITANT TAX?

This question may perplex many people if asked immediately.

Inhabitant Tax is one facet of your tax obligation in Japan. It is being collected to fund education, welfare, and administrative services.

Inhabitant Tax consists of prefectural inhabitant tax and municipal inhabitant tax, and it’s paid to the place of residence as of January 1st.

HOW IS THE INHABITANT TAX AMOUNT DETERMINED?

Resident Tax is levied on the income derived in the period from January to December of the previous year. Therefore, you will not have to pay Inhabitant Tax during your first year in Japan.

Here is the calculation formula used to determine the tax amount:

Inhabitant Tax Amount = Income Rate + Per Capita Rate

  • Income Rate is determined by income amount.  In general, the income amount of the previous year × per income levy rate of Inhabitant Tax (10%: 6% municipal tax + 4% prefectural tax) ;

  • Per capita Rate is imposed equally on people regardless of their income.

Note, however, that taxable income may vary depending on the regulations of the municipality. Moreover, additional local taxes may be added as well. One of such is the Forest Environment Tax, which is intended to finance efforts to manage and conserve abandoned forests across the country. 

Rest assured, though –Inhabitant Tax won’t be collected without a meaningful reason. It’s the exact opposite – the role of the Inhabitant Tax is to help solve various issues in the area. Some of the local governments even use it to secure funds in case of an earthquake or other natural disasters. In fact, you can always check how the Inhabitant Tax you are paying is going to be spent.

PAYMENT METHODS

 

In Japan, you can pay Inhabitant Tax in a number of ways. The exact paying method varies from person to person and depends on what type of work you do.

“Special Collection Method”

If you are a salaried income earner (a company employee, for example), the company deducts the tax from your monthly salary and pays it on behalf of you.

Let’s say you joined the company right after graduation. In that case, your Inhabitant Tax will begin to be collected from June of the second year in the company. The company has to report the amount of your annual salary of the previous year to the city or ward office by the end of January, and then the amount of the Inhabitant Tax is calculated according to it. Since the Notification of the special collection tax amount will be sent to the company, there is a chance that you will never even get a glimpse of it.

Inhabitant Tax: Special Collection Method
Special Collection Payment Flow

“Ordinary Collection Method”

If not withheld by the employer (for self-employed), filing an Individual Income Tax Return and paying taxes by yourself is required. The amount of Inhabitant Tax is decided based on the details of an Individual Income Tax Return, procedures of which are being carried out every year around February. The notification on the tax amount arrives in June. Generally, you will have to pay it either in a lump sum or in four installments, and payments are expected to be in cash.  Some municipalities, however, accept credit card payments as well. 

Inhabitant Tax: Ordinary Collection Method
Ordinary Collection Payment Flow

WHAT IS THE INCOME LIMIT FOR PART-TIMERS?

As a rule, people whose part-time income amount is below 1,030,000 yen are exempted from paying Income Tax. However, they will only be exempted from the Inhabitant Tax if their part-time income is lower than 980,000 yen. 

In other words, even if you’re entitled to an Income Tax exemption, that doesn’t necessarily mean that you won’t have to pay the Inhabitant Tax. So, be sure to assess your individual financial situation with careful consideration.

Another thing worth mentioning is that if you, for instance, quit your job and haven’t found a new one yet, you will still be subject to Inhabitant Tax and receive a payment notification in June even if you don’t have any income source at the moment.  This is because Inhabitant Tax is calculated on the basis of your previous year’s income.

Assessing your financial situation, among other hurdles to overcome when living abroad, can be “taxing” enough. Not only you are expected to comply with foreign tax regulation, but should also make sure to apply for any available deductions, credits, and exemption to your taxes in your home country.

With so many taxes levied on foreign residents in Japan, it’s crucial that you are aware of the system behind them.  Understanding the taxes you are obliged to pay is the key to enjoying life in the country of the rising sun.

What’s been your experience with the Inhabitant Tax?  Let us know if there are still some points left unclear.

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