US citizens and green-card holders living in Japan remain subject to US tax on their worldwide income, and Japan taxes them too. The foreign tax credit (FTC) on Form 1116 is the primary tool for preventing double taxation, but it is not a licence to credit every yen paid to a Japanese authority. Only certain Japanese levies qualify, and one of them is paid a full year in arrears, which trips up more expatriate returns than any other single issue. This article sets out what counts, what does not, and how to compute the credit.
The creditability test
A foreign levy is creditable for US purposes only if it is an income tax, or a tax paid in lieu of an income tax, in the US sense. Under sections 901 and 903, that means a compulsory payment to a foreign government that is levied on net income or gain, realised on a broadly comparable basis to US concepts. Sales taxes, wealth taxes, per-capita charges and social-security-style levies generally fail this test because they are not imposed on net income.
The practical consequence is that you must look through the label on each Japanese tax and ask whether it is genuinely a charge on income.
Creditable Japanese taxes
The following Japanese levies generally satisfy the section 901/903 test and belong on Form 1116:
- National income tax (shotokuzei) — Japan’s central-government income tax, imposed on net income at progressive rates. Clearly creditable.
- The reconstruction surtax — a 2.1 per cent surtax on the national income tax, earmarked for post-2011 reconstruction and running through 2037. Because it is calculated on and shares the character of the income tax, it is creditable.
- The income-based portion of local inhabitant tax (juminzei / residence tax) — the roughly 10 per cent per-income component (a prefectural and a municipal slice) levied on the prior year’s taxable income. As a charge on net income, this income-based portion is creditable.
- Enterprise / business tax (jigyozei) on net business income — for the self-employed or those with a Japanese business, the portion levied on net business profit is generally creditable, since it functions as a tax on net income.
Non-creditable Japanese items
Just as importantly, several charges that appear on Japanese statements do not qualify:
- The per-capita (flat) portion of the inhabitant tax — a fixed yen amount (broadly in the region of 5,000 yen) imposed regardless of income level. Because it is not measured by income, it is not an income tax and is not creditable.
- Consumption tax (shohizei) — Japan’s value-added tax on goods and services. As an indirect consumption levy rather than a tax on net income, it is not creditable.
- Fixed and asset-based levies — fixed-asset tax, inhabitant-tax per-capita elements and similar flat charges fall outside section 901.
Where enterprise tax includes a fixed or size-based (gaikei) element rather than a charge on net income, that element should be treated with the same caution as any other non-income levy.
The inhabitant tax timing trap
Japanese inhabitant tax is assessed and collected in arrears. The tax billed during 2025 is based on your 2024 income and is typically paid across mid-2025 to mid-2026. Your US return, by contrast, measures income and tax on a calendar-year basis. This mismatch means the inhabitant tax you actually pay in a US year does not correspond to the income reported in that same US year.
You have two methods. Under the cash (paid) method, you credit foreign taxes in the year you pay them, and the arrears distortion persists. Under an accrual election, you credit foreign taxes in the year to which they relate, regardless of when paid. A cash-basis taxpayer may elect to accrue foreign taxes; once made, the election is binding for that and all subsequent years. Accruing generally produces a cleaner match between Japanese inhabitant tax and the US-year income that generated it, and many expatriate returns benefit from it, though it should be adopted deliberately rather than by accident.
Interaction with the FEIE
If you also claim the foreign earned income exclusion under section 911, foreign taxes allocable to the excluded income are not creditable. You must reduce the creditable amount by the portion attributable to excluded wages, using the section 911 ratio. Stacking a full FTC on top of a full FEIE for the same income is not permitted, so the two must be coordinated deliberately.
Baskets
Form 1116 separates income into categories. Employment income and business profits fall in the general category basket; interest, dividends and similar investment income fall in the passive category basket. The Japanese taxes must be allocated to the basket carrying the income they relate to, and each basket is computed on its own Form 1116.
Worked example
Consider a US citizen employed in Tokyo during 2025 with employment income of 12,000,000 yen and no other income. She does not claim the FEIE, crediting all foreign tax instead. Illustrative Japanese figures:
| Japanese levy | Amount (yen) | Creditable? |
|---|---|---|
| National income tax (shotokuzei) | 1,150,000 | Yes |
| Reconstruction surtax (2.1%) | 24,150 | Yes |
| Inhabitant tax — income-based (~10%) | 1,020,000 | Yes |
| Inhabitant tax — per-capita (flat) | 5,000 | No |
| Consumption tax paid on purchases | 180,000 | No |
| Total creditable Japanese tax | 2,194,150 | — |
Converting the creditable total at an assumed average rate of 150 yen to the US dollar gives roughly USD 14,628 of foreign tax available on Form 1116, all in the general category basket.
Now the US side. Assume the 12,000,000 yen salary translates to about USD 80,000 of gross income. After the 2025 standard deduction for a single filer (USD 15,000), taxable income is about USD 65,000, producing a US income tax of roughly USD 9,400.
The Form 1116 limitation caps the credit at the US tax attributable to the foreign-source income. Because effectively all of her income is Japanese-source general-category income, the limitation is essentially the full US tax of about USD 9,400. Her available foreign tax (USD 14,628) exceeds that limit, so:
- Foreign tax credit allowed: USD 9,400 (limited)
- Residual US tax on this income: USD 0
- Excess credit carried: about USD 5,228, available to carry back one year and forward ten
The result is typical for Japan: the effective Japanese rate exceeds the US rate on the same income, the FTC eliminates the US liability, and unused credits accumulate. Note that had she claimed the FEIE, the taxes allocable to excluded wages would have been stripped out first, shrinking the creditable figure well below USD 14,628.
Practical guidance
- Obtain the Japanese tax statements and separate each line into creditable (income-based) and non-creditable (flat, consumption, asset) components rather than crediting the total.
- Model the accrual election early; it often resolves the inhabitant tax arrears mismatch and stabilises credit carryovers.
- Coordinate the FEIE and FTC as a single decision, since taxes on excluded income are lost to the credit.
- Track carryovers by basket, as excess general-category credits cannot offset passive-category income.
