Furusato Nozei

From RetireWiki.jp

Furusato Nozei (ふるさと納税), or home-town tax payment, is a system that allows you to transfer a portion of your residence tax from the municipality where you reside to one or more other municipalities, in exchange for gifts.

The way the system works in practice is:

  1. You select the gifts you want, or region you wish to support.
  2. You make a donation to a chosen municipality, in exchange for the promised gift.
  3. You claim back the donation as a tax deduction via either a tax return or the one-stop system for people who do not plan to submit a tax return.

There is a fee of ¥2000, (once annually, not per donation) for participating in Furusato Nozei. This is not paid directly, but handled during the calculation of the tax deduction.

Donation amount and Tax Deduction

The amount you can donate can only be estimated. This is due to it being based on your income for the current calendar year, which is not known until the end of the year.

If you donate more than the maximum amount, the extra amount is non-refundable.

The method of tax deduction or refund depends on whether you submit a tax return.

  1. One-Stop system: the donation minus ¥2000 is deducted from your residence tax due the following year.
  2. Tax return: Part of the donation (minus ¥2000) is deducted from national income (and special reconstruction) tax. Part is deducted (minus ¥2000) from residence tax.

The deduction is called "donation deduction" or 寄付控除. This deduction is also used for donations to registered non-profit organizations. Normally this reduces the amount of taxable income by the amount donated, but does not result in 100% of the donation being refunded. However, in the case of Furusao Nozei, special rules apply where the full donation amount is refunded (there are exceptions to this if submitting a tax return, see the section below).

Rough Guide

The maximum amount of tax credit deductible for Furusato Nouzei is 20% of the total amount of Residential Taxes, which in turn is probably 10% of Total Taxable Income after allowances and deductions, so probably 2% of Total Taxable Salary, after allowances and deductions. (See Below)

However, if you have a large deduction such as for Medical Expenses in the year (first of all you must do Kakuetei Shinkoku if you combine claiming Medical Expense Allowances and Deductions along with Furusato Nouzei), but that would reduce your Residential Taxes, and hence the amount you can use for Furusato Nozei.

Also, if some income is doubtful for this tax year, than you should probably limit your Furusato Nouzei purchases in this year to the limit of Tax you can guaranty. If the income comes through, then you can make your purchases at the last minute.

You probably need to go through the motions of doing a dummy Kakutei Shinkoku to determine the amount of your expected Total Taxable Income and Residential Taxes to determine your Furusato Nouzei limit.

Residential Taxes are

10% of Aggregate Income under the Aggregate Taxation Method. (So 2% of this income)

5% of Dividend and Interest Income and (Long-Term) Capital Gains under the Separate Taxation Method. (So Only 1% of this income)

9% of Pension Income under the Separate Taxation Method. (So Only 1.8% of this income)

10% of Other Income under the Separate Taxation Method. (So 2% of this income)

Submitting a Tax Return

When submitting a tax return, it's necessary to get a Donation Receipt Certificate (寄付金受領証明書) from each municipality you donate to, which is submitted with your tax return. Recently some Furusato Nozei supermarkets provide an XML file that can be imported into eTax, removing the need for manual data entry.

A portion of the donation is applied as a deduction to income tax, and the remainder is deducted from residence tax. In some edge cases, online simulators can generate an amount much higher than your actual donation limit, causing the full amount to not be refunded due to the inaccurate estimation, see this guide on Reddit.

One Stop System

If you do not plan to submit a tax return, you can use the one-stop system. When using the one stop system you need to request (or print) a File:Furusato Nozei One Stop Form.pdf (寄附金税額控除に係る申告特例申請書) from each municipality you donate to, which must be filled out with your My Number and proof of identity documents, and returned to them. The form must arrive at the municipality by 10 January the following calendar year[1]. Some municipalities use an online service to do this digitally, some require the form to be physically posted.

You must check both checkboxes on the form. The Japanese legalese translated into plain English for the checkboxes is:

  1. You do not plan on submitting a tax return for this tax year.
  2. You do not plan to donate to more than 5 municipalities this year.

Two things to be careful of:

  1. If donating to more than 5 municipalities, the one-stop system is void and you must submit a tax return.
  2. If you end up submitting a tax return anyway, you will need to submit the Donation Receipt Certificate (寄付金受領証明書) form from each municipality, as the one-stop forms become invalid, even if already submitted. You should have received the certificate at the same time they sent you the one-stop form.

With the one-stop system, 100% of the deduction is applied to the following year's residence tax (none to income tax).

Advance Payment

Furusato Nozei is effectively an advance tax payment.

What would have been paid in tax the following year, is paid in the current year, then deduced from the following year's payments.

There is opportunity cost, in terms of money that is out of your hands faster. It is worth considering whether the benefits (gifts, supporting a different municipality, potential points/cashback rewards) are worth the costs (¥2000 fee, taxes paid earlier with money that can no longer be put to use elsewhere in the mean time).

Furusato Nozei Portal Sites

It's possible to apply directly to the municipality you wish to "donate" to, but most people donate via portal sites. Some municipalities offer cheaper rates when donating directly rather than via a portal, which takes its own transaction fee. Portal sites may offer point rewards, although these rewards are likely to be less than donating directly to the municipality.

See Also

Credits

Many thanks to the following RetireWiki.jp users for writing this article:

Adamu, Tkydon

Footnotes

  1. ↑ If a single form does not arrive in time, you will need to submit a Tax Return, which will change how the deduction is applied, see the Tax Return section above
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