Todd's Accounting Services Inc. / Ozaki Accounting Office

This time the theme is the departure tax

Many people might be wondering, "What is an exit tax?"

Actually, this is a tax that all U.S. residents should be aware of

It seems that the number of people who have permanently returned to Japan has increased over the past two years due to COVID-19

Many people have probably been debating whether to return to Japan for a long time, and the pandemic was the catalyst that finally made the decision

Those considering a permanent return to Japan should be aware of the following

There are many different scenarios that could lead to a complete return to one's home country

— I've lived in America for many years, but maybe I should spend my retirement in Japan?

— I got married to an international woman but got divorced, so maybe I should go back to Japan?

— My elderly parents need care, so maybe it's time to go back to Japan?

I'll pack up my belongings, submit the necessary paperwork to the immigration office, and return to Japan

But wait a minute!

It's not simply a matter of returning permanent residency or citizenship to the U.S. government

You might have to pay taxes before returning to Japan

You need to check whether you are subject to taxation

That tax is called the Expatriation Tax

<Those subject to the departure tax>

Under what circumstances is an exit tax levied?

You will need to pay an exit tax if you fall into one of the following two categories

• If your average tax liability over the past five years is above a certain amount (over $171,000 in 2020)
• If the total value of your assets worldwide is more than $2 million

Furthermore, you are required to file income tax returns for the past five years and to have paid all your taxes

It's important to note that this includes not only tax returns but also the declaration of assets held outside the United States

<What are the measures to avoid the exit tax?>

◎ File separate tax returns for husband and wife

Regarding the average tax amount over the past five years, if a couple files a joint tax return,

Even if only the wife gives up her permanent residency, the amount declared on the joint tax return for both spouses will be used for tax purposes. Therefore, when divorce becomes a concrete possibility and giving up permanent residency is being considered, filing separate tax returns for each spouse is one possible measure to take

◎ Put the maximum amount of your assets into your 401(k)

A 401(k) is taxed when the assets are withdrawn, so it is not subject to Expansion Tax

While not directly related to the exit tax, there are other very important things to consider when returning or relinquishing U.S. permanent residency or citizenship

If you are returning or relinquishing your permanent residency or citizenship, you will need to submit a document called "Form 8854," but the fine for not submitting this document is very high!

The fine is a whopping $10,000

Those of you who are planning to return to Japan permanently should definitely keep the above points in mind as you prepare for your return

If you are concerned, I recommend consulting with an accountant