Japanese Inheritance Tax vs. US Estate Tax (2014 Update)

BRIEF OVERVIEW OF
JAPANESE INHERITANCE AND GIFT TAXES
vs.
AMERICAN ESTATE AND GIFT TAXES

(2014 Update)

I. Estate Taxes

A. America

1. If the Decedent is a Citizen or Permanent Resident

a. Tax on Worldwide property (credit for taxes paid to foreign countries)

b. Exemption of $5,340,000 in 2014 (indexed for inflation). For married couples, the exemption amount is $10,680,000 as a result of portability.

c. Federal Estate Tax of 40% on amount over $5,340,000

d. Unlimited Marital Deduction for Surviving Spouse if Surviving Spouse is a citizen

2. If the Decedent is a Non-Citizen/Non-Permanent Resident

a. Tax only on Real Property and business interests in the United States (Cash in foreign banks and foreign stocks are not taxed)

b. Exemption of $60,000 for US based Assets

c. Tax of between 18%-40% on amount over $60,000

d. Unlimited Marital deduction if Surviving Spouse a citizen
e. Tax on bequest to surviving spouse can be delayed by creating a Qualified Domestic Trust

3. If the Decedent is not a United States Citizen or permanent resident alien, assets outside of the US can pass to a US person with no US estate tax.

B. Japan (Actually an Inheritance tax, not an estate tax)

1. Japanese Citizens and Permanent Residents

a. Tax on Worldwide property (credit for taxes paid to foreign countries) - [NOTE - this is new for 2013, previously Japan did not tax worldwide assets] 
b.  Exemption of ¥30,000,000 + (¥6,000,000 for each statutory heir); Possible additional exemption for insurance money, retirement savings, and money left to handicapped individuals [NOTE - this is a reduction from the previous exemption of ¥50,000,000 and ¥10,000,000 per statutory heir.]

c. Additional exemption for life insurance received of ¥5,000,000 multiplied by the number of statutory heirs

c. Until December 31, the highest tax rate is 50%.  Effective January 1, 2015, tax between 10%-55% for statutory heirs (spouse, children and parents) after you go over the exemption amount;

• Up to ¥10 million 10%
• Above ¥10 million up to ¥30 million 15%
• Above ¥30 million up to ¥50 million 20%
• Above ¥50 million up to ¥100 million 30%
• Above ¥100 million up to ¥200 million 40%
• Above ¥200 million up to ¥300 million 45%
• Above ¥300 million up to ¥600 million 50%
• Over ¥600 million 55% 

d. An additional 20% surcharge for everyone other else other than charities (this does include a surcharge on gifts to grandchildren);

e. For property outside of Japan, a beneficiary that acquires property will be subject to Japanese inheritance tax. (THIS IS A MAJOR CHANGE, prior to April 1, 2013, Japan did not tax gifts or inheritance of property outside of Japan received by non-Japanese nationals.)

f. A surviving spouse is entitled to a tax deduction. This is a complex formula based upon who is living at the time of the Decedent's death and where the money goes. Generally, a surviving spouse can deduct about 1/2 to 2/3 of the tax.

2. Non-Citizens/Non-Permanent Residents

a. If beneficiary is not Japanese and not living in Japan and property is not in Japan, appears Country where property located will tax such property.
b. I'm currently double checking to see if the Beneficiary is a Japanese Domiciliary whether Japan CAN tax inheritance regardless of where Decedent lived and regardless of where assets are located (subject to tax treaties)

c. If there is a tax, it appears a surviving spouse is entitled to the same marital tax deduction as for Japanese citizens.

3. Real estate acquisition tax is exempt if passing by bequest.  There is a registration and license tax at the rate of 0.4% of the assessed value of the land and building. (currently reduced?)

II. Gift Taxes

A. America

1. Citizens and Permanent Residents

a. Tax on all gift transfers of Worldwide property

b. Annual exemption of $14,000 per person/per donee (unlimited gifts for donees if different donors)

c. An annual gift to a non-citizen, permanent resident spouse, of $145,000 is available.

d. Lifetime exemption of $5,340,000

e. Gifts may be split with spouse

f. Tax rate of 40% if lifetime gifts exceed $5,340,000

2. Non-Citizens/Non-Permanent Residents

a. Tax on all gift transfers of US Property (including real estate and Stocks in US companies)

b. Annual exemption of $14,000 per person/per donee (unlimited gifts for donees if different donors)

c. Annual gift tax exemption if gift to a spouse of $145,000 (Note that a person can gift more to a spouse than they can bequest to a spouse)

c. No Lifetime exemption

d. Gifts may not be split with spouse

e. Tax rate of 18%-40% if gifts exceed $14,000

B. Japan (Rates between 10%-55%)

1. Citizens and Permanent Residents of Japan

a. Tax on gifts of property Worldwide (credit for taxes paid to foreign countries) - [NOTE - this is new for 2013, previously Japan did not tax gifts worldwide assets to certain people] 

a. Annual exemption of ¥1,100,000 for each beneficiary (beneficiary taxed after this)

b. One time spouse exemption of ¥20,000,000

c. Effective January 1, 2015, tax between 10%-55% for statutory heirs (spouse, children and parents) after you go over the exemption amount;

• Up to ¥2 million 10%
• Above ¥2 million up to ¥4 million 15%
• Above ¥4 million up to ¥6 million 20%
• Above ¥6 million up to ¥10 million 30%
• Above ¥10 million up to ¥15 million 40%
• Above ¥15 million up to ¥30 million 45%
• Above ¥30 million up to ¥45 million 50%
• Over ¥45 million 55% 
• The threshold is lower for gifts to other individuals.

d. For property outside of Japan, a donee that acquires property will be subject to Japanese gift tax.  (THIS IS A MAJOR CHANGE, prior to April 1, 2013, Japan did not tax gifts or inheritance of property outside of Japan received by non-Japanese national.)

2. Non-Citizens/Non-Permanent Residents

a. Annual exemption of ¥1,100,000 for each beneficiary(unclear – enforcement is almost impossible)
b. Japan will tax donees who live in Japan.

3. Special real estate acquisition tax of 4% (currently reduced?) in addition to a registration and license tax at the rate of 2% of the assessed value of the land and building.

III. Generation Skipping Taxes (Taxes on gifts or bequests to grandchildren or lower generations)

A. America

1. Exemption of $5,340,000 (indexed for inflation)
2. Tax of 40% on rest

B. Japan

1. None

Remember, there is an estate and inheritance treaty between the United States and Japan to minimize double taxation of assets on death if you own assets in both countries or are a resident of one living in the other country

For more information on Japanese taxes, the Japanese government has a website in English with some helpful facts, but it is now very outdated. 

I am not licensed to practice in Japan, this is just my understanding of Japanese gift and inheritance tax law that I can gather from sources which are written in English.

NOTE- Major rewrite on 9/12/14 to address changes in rates and fact that assets outside of Japan are now subject to Japanese inheritance and gift tax.

Excellent Guide on International Estate and Inheritance Taxes

While I have not had a chance to review it thoroughly to confirm its accuracy, I note that the accounting firm, Ernst & Young, has posted a detailed analysis of the estate and inheritance tax laws of almost every country in this brochure.

For those of you who have assets in multiple jurisdictions or are citizens living abroad, you should familiarize yourselves with these laws and hire competent counsel to asset you in minimizing your taxes.

Follow up to Articles on Expatriation

The New York Times had an interesting article online today about how more and more people are giving up their citizenship. It did not surprise me that many give up their citizenship to save money on income taxes. However, I was surprised to learn that the Patriot Act is also partly to blame.

Apparently, the Patriot Act makes it very difficult for citizens to maintain bank accounts in the United States if they have lived overseas for a long time because the Patriot Act requires a United States residence. Since overseas residents cannot provide a US address, they are being treated the same as terrorists and the banks are closing the accounts.

In the short term, giving up your citizenship may make things easier, but remember, there can be serious income tax and inheritance tax ramifications to giving up your citizenship.

Who exactly is a Covered Expatriate?

In 2008, President Bush signed the Heroes Earnings Assistance and Relief Tax (HEART) Act. One of the major provisions of the Heart Act was to collect substantial taxes from certain United States taxpayers (whether a citizen or a permanent resident alien) who expatriated from the United States after June 16, 2008. The individuals that this law applies to are known as "Covered Expatriates."

There can be harsh federal income tax and federal inheritance tax consequences if you are deemed to be a Covered Expatriate.

A person is considered a Covered Expatriate if he or she:
1) is a US citizen who renounced his or her citizenship OR a permanent resident alien who relinquishes his or her status after being a permanent resident alien for 8 of the last 15 years; AND
2) has had an average annual net income tax of more than $124,000 ($136,000 adjusted for inflation) in the preceding five years OR has a net worth equal to or more than $2,000,000 OR such person fails to certify, under penalty of perjury, that he or she has met the income and asset requirements.

Additionally, this statute does not apply to dual citizens who became a citizen of the United States by birth, but have never had substantial contacts with the United States. A person is considered to have substantial contact with the United States if he or she was ever a resident of the United States, ever held a passport OR was present in the United States for more than 30 days during any calendar year 10 years prior to the person giving up their United States citizenship. There is a slight variation on this rule for dual citizens who give up their US citizenship prior to age 18 and 1/2.

To learn more about who is a Covered Expatriate, wee Internal Revenue Code Section 2801 and Section 877A(g)(1).

Income Tax Consequences of Expatration

In this down economy, many companies are laying off employees. While this could be deeply troubling for those who get laid off, imagine if you were also subject to a huge income tax penalty as a result. This could be happening to you now if you are a permanent resident alien who decides to leave America after losing your job.

In 2008, President Bush signed the Heroes Earnings Assistance and Relief Tax (HEART) Act. This ironically named Act was designed to prevent wealthy people from leaving the United States before paying what Uncle Sam thinks they owed.

The Heart Act applies to citizens and permanent resident aliens who meet certain income and asset requirements. These individuals are known as "Covered Expatriates". To see who exactly Covered Expatriates are, read here.

The Heart Act created Section 877A of the Code. Section 877A takes a snapshot of your assets the day before you expatriate. Then, on the day you expatriate, you are then immediately taxed on the net built in gain which is in excess of $600,000 (indexed for inflation - so this amount is $627,000 in 2010). So, if you are a Covered Expatriate and own several real estate properties with built in gain of $1,000,000, there would be a deemed gain of $363,000, and you would have to pay a tax on that gain.

In the case of an IRA, but not most other retirement accounts, expatriates are also deemed to have received a distribution equal to their entire interest. Luckily, there is no early distribution penalty unless you actually do take the money out early. For most qualified and non-qualified retirement accounts, the IRS will continue their existing practice of requiring the employer to withhold 30% when the money is actually distributed from the account.

Perhaps the only positive feature of this law for those affected is that it does allow certain taxpayers to defer making payments on their tax obligations.

Note: There is an open question about whether Section 121 of the Code, which allows a capital gains tax exclusion on sale of primary residence, still applies to Covered Expatriates. It would probably be advisable to sell your primary residence before expatriating to avoid this issue and also to avoid having to obtain a valuation report for the property.