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Thanks for doing this! I'm an American planning to live in Japan for 1-2 years starting later this year (I'll be studying the language and working for my exist

Thanks for doing this! I'm an American planning to live in Japan for 1-2 years starting later this year (I'll be studying the language and working for my existing small US business). I won't be working for (or, likely, doing any business with) Japanese companies. I assumed I'd be best off hiring an accountant who could take care of whatever inane forms come with paying taxes in this situation (I do also pay quarterly estimated taxes, if that matters)... aside from the cost of retaining this person, are there any gotchas or pitfalls I should be aware of and/or worried about?

aet 13y ago
Yes - to qualify for the Foreign Earned Income Exclusion you have to be out of the U.S. for 330 days each year, in which case you can write off roughly $100k
philiphodgen 13y ago
The magic form you need to remember is Form 2555. This is the "foreign earned income exclusion" form. The first "close to $100,000" (the amount changes annually for inflation) of income you earn abroad is free of income tax in the USA. The hard part is knowing whether you qualify for this or not. You need to be physically out of the USA for 330/365 days in a 12 month period (not a calendar year--this is stupidly overly complicated and tricky), or be a "bona fide resident" of the other country. Look at the instructions on the form to help you here. Most people fail on this point, and this is the first vector of attack by the government to try and tax you. CAUTION CAUTION CAUTION. I see any number of Americans abroad who work as self-employed independent contractors. Oh, hypothetically, software engineers living in Thailand and working. They successfully spend 330 days out of the USA. They use Form 2555 to eliminate income tax on their Schedule C self-employment income. But Form 2555 _does_ _not_ _eliminate_ the self-employment tax -- the equivalent of Social Security tax for self-employed people. See Schedule SE. Sorry for using all caps and fakey-fake underlining to emphasize this problem. It happens all the time. I saw it yesterday. You think you have no tax liability and you end up owing $16,000 for self-employment tax. Not fun. At all. The next magic form to remember is Form 1116. This is the foreign tax credit. If you earn a dollar of income in Japan and pay Japanese income tax on it, Uncle Sam will give you credit on your U.S. tax return for the Japanese income tax you paid. This is usually the better way for Americans abroad to go when they live in high-tax countries. This is why Americans in Europe pay many thousands of dollars to have a tax return prepared but never give Uncle Sam a nickel of tax. If you are an American abroad working for a foreign employer, you don't have to pay U.S. Social Security. You should look at the totalization agreement between the USA and Japan to see if you can eliminate the need to contribute to the Japanese old age pension schemes since you aren't going to retire and die in Japan.
- mildtrepidation 13y ago
  Thanks very much! To be clear, my company is incorporated in the US, and we don't and won't have an office or subsidiary in Japan. On the off chance we do end up with Japanese clients, I'd anticipate them paying the American company, and not me directly. I'll definitely save this information and look into it so I have some context and questions when I finally end up working with a tax preparer.
- tbyehl 13y ago
  > You need to be physically out of the USA for 330/365 days in a 12 month period (not a calendar year--this is stupidly overly complicated and tricky) That it how you capture partial years. I moved abroad in November of one year, stayed abroad the whole following year, and repatriated myself the follow June. Using the rolling 12-month period I got out of paying US income taxes for the entire time I was out of the country. The forms were straight-forward enough.
sgdesign 13y ago
As a French expat living in Japan, creating a personal company in Japan was surprisingly easy (assuming you have a work visa of course). It was just a matter of filling a one-page form at the tax office. Filing tax was also very easy, I basically just went to city hall and they filed them for me. So despite its reputation as a bureaucratic country, Japan turned out to be much better than France. Of course, I can't help you with the U.S. side of things…
- megablast 13y ago
  Oh, France is awful, very bureaucratic. Worst country I have seen for documentation.
  - shin_lao 13y ago
    It is bureaucratic, very much, but the plus side is that everything can be done online.

aet 13y ago

Yes - to qualify for the Foreign Earned Income Exclusion you have to be out of the U.S. for 330 days each year, in which case you can write off roughly $100k

philiphodgen 13y ago

The magic form you need to remember is Form 2555. This is the "foreign earned income exclusion" form. The first "close to $100,000" (the amount changes annually for inflation) of income you earn abroad is free of income tax in the USA. The hard part is knowing whether you qualify for this or not. You need to be physically out of the USA for 330/365 days in a 12 month period (not a calendar year--this is stupidly overly complicated and tricky), or be a "bona fide resident" of the other country. Look at the instructions on the form to help you here. Most people fail on this point, and this is the first vector of attack by the government to try and tax you. CAUTION CAUTION CAUTION. I see any number of Americans abroad who work as self-employed independent contractors. Oh, hypothetically, software engineers living in Thailand and working. They successfully spend 330 days out of the USA. They use Form 2555 to eliminate income tax on their Schedule C self-employment income. But Form 2555 _does_ _not_ _eliminate_ the self-employment tax -- the equivalent of Social Security tax for self-employed people. See Schedule SE. Sorry for using all caps and fakey-fake underlining to emphasize this problem. It happens all the time. I saw it yesterday. You think you have no tax liability and you end up owing $16,000 for self-employment tax. Not fun. At all. The next magic form to remember is Form 1116. This is the foreign tax credit. If you earn a dollar of income in Japan and pay Japanese income tax on it, Uncle Sam will give you credit on your U.S. tax return for the Japanese income tax you paid. This is usually the better way for Americans abroad to go when they live in high-tax countries. This is why Americans in Europe pay many thousands of dollars to have a tax return prepared but never give Uncle Sam a nickel of tax. If you are an American abroad working for a foreign employer, you don't have to pay U.S. Social Security. You should look at the totalization agreement between the USA and Japan to see if you can eliminate the need to contribute to the Japanese old age pension schemes since you aren't going to retire and die in Japan.

mildtrepidation 13y ago
Thanks very much! To be clear, my company is incorporated in the US, and we don't and won't have an office or subsidiary in Japan. On the off chance we do end up with Japanese clients, I'd anticipate them paying the American company, and not me directly. I'll definitely save this information and look into it so I have some context and questions when I finally end up working with a tax preparer.
tbyehl 13y ago
> You need to be physically out of the USA for 330/365 days in a 12 month period (not a calendar year--this is stupidly overly complicated and tricky) That it how you capture partial years. I moved abroad in November of one year, stayed abroad the whole following year, and repatriated myself the follow June. Using the rolling 12-month period I got out of paying US income taxes for the entire time I was out of the country. The forms were straight-forward enough.

sgdesign 13y ago

As a French expat living in Japan, creating a personal company in Japan was surprisingly easy (assuming you have a work visa of course). It was just a matter of filling a one-page form at the tax office. Filing tax was also very easy, I basically just went to city hall and they filed them for me. So despite its reputation as a bureaucratic country, Japan turned out to be much better than France. Of course, I can't help you with the U.S. side of things…

megablast 13y ago
Oh, France is awful, very bureaucratic. Worst country I have seen for documentation.
- shin_lao 13y ago
  It is bureaucratic, very much, but the plus side is that everything can be done online.