The Highest-Tax Country in Our Coverage
Japan's combined national income tax (5-45%), local inhabitant tax (roughly 10%), and 2.1% surtax on national tax can reach approximately 55.945% at the very top, higher than any other country in our coverage, including Australia and Taiwan. This makes the FEIE-vs-FTC decision genuinely consequential here, more so than almost anywhere else.
Qualifying for the FEIE: Two Tests
Physical Presence Test: 330 full days outside the US in any 12-month period.
Bona Fide Residence Test: An uninterrupted full tax year of Japanese residency, easier to satisfy once settled on a work visa with a lease and ongoing employment.
Where the Crossover Happens
Japan's combined national and local rate reaches roughly 43% well before the top national bracket alone, meaning many mid-career professionals, not just senior executives, cross into effective rates that exceed comparable US brackets. Once that happens, the Foreign Tax Credit, with no dollar cap and a ten-year carryforward for unused credits, generally beats the FEIE's flat $132,900 exclusion.
How Non-Permanent Resident Status Interacts
During your first 5 years as a Non-Permanent Resident, unremitted foreign income escapes Japanese tax entirely, meaning there's no Japanese tax on that income for the Foreign Tax Credit to work with. Your Japan-source salary is still taxed normally, and the FEIE/FTC choice on that salary proceeds as described above, but foreign investment income kept offshore during this window needs no US-side credit against Japanese tax, since none was paid, though it's still fully reportable and taxable to the IRS.
