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:
- You select the gifts you want, or region you wish to support, via a Furusato Nozei supermarket.
- You make a donation to a chosen municipality, in exchange for the promised gift.
- 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.
Note that it is not necessary to use a supermarket. It's possible to apply directly to the municipality you wish to "donate" to.
Donation amount and Tax Deduction
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)
The amount of residence tax you can donate is shrouded in mystery and unknowable in advance. 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, and complex rules. The best way is to use an online simulator such as the one at Furusato Choice🇯🇵, and keep a healthy buffer below that amount.
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.
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.
After that, a portion of the deduction is applied to your income tax for the year, and a portion is applied to residence tax.
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.
You must check both checkboxes on the form. The Japanese legalese translated into plain English for the checkboxes is:
- You do not plan on submitting a tax return for this tax year.
- You do not plan to donate to more than 5 municipalities this year.
Two things to be careful of:
- If donating to more than 5 municipalities, the one-stop system is void and you must submit a tax return.
- 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).
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 Supermarkets
- Furusato Nozei🇯🇵 portal site at the Ministry of Internal Affairs and Communications.