U.S. Taxes

Apologies to those of you who are not from the US. Please speak with one of the PAs if you would like to submit comprehensive information about any other country's tax information.
The following information was compiled by Adam Rogers, a JET in Ibaraki prefecture.
As you may notice in the title alone, this document is a little out of date. Please keep in mind that the IRS regularly updates forms and some of the information presented in this document may have changed. The information provided is intended as a guide. Please contact the IRS with any questions you may have.

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2004 Tax Guide for American JET participants

Mar 21, 2004

Contents

Introduction 2

Part 1 - 1st year JETs: Filing for an extension 3

Part 2 - 1st year JETs: Completing the return 5
Foreign Income Exclusion 5
1040 6

Part 3 - 2nd and 3rd year JETs 8
Foreign Income Exclusion 8
1040 9

The End 11

Prepared by: Adam Rogers, 2nd year JET in Koga City, Ibaraki.
Contact: adambrogers@hotmail.com, 090.6122.7036

Disclaimer: I am not a tax professional. I hold no licenses or certifications to make me qualified to give tax advice. The information I present here I gathered from my own research. To the best of my knowledge, it is both accurate and complete. But, of course, mistakes are possible. This disclaimer is to inform you that in the case of any mistake I made here causing you a loss of any kind; I shall not be held responsible.
Introduction

Being in Japan as an ALT has many great points, but I think one of the best is the special treatment we get from the IRS. The IRS allows Americans living abroad to exclude the income they earn abroad (up to $80,000) from taxes. However, we are still required to file tax forms. This guide takes you through the filing process. It starts with how to get extensions on filing your forms, explains how to qualify for the income exclusion mentioned above, and then goes through how to complete the actual tax form itself when the time comes.

This document will be split into three sections. For 1st years, part 1 - what needs to be done before June 15 2004, and then part 2 - what to do later. For 2nd & 3rd year JETs, go straight to part 3. Since you now have lived in Japan for more than 12 months, you do not need to file for an extension. You only have until June 15 to complete you forms, but your forms this year are very easy. So, meeting the earlier deadline should not be any problem.

Last year, as I was completing my taxes, I could not find one place with all of the information I needed. So, in order to spare JETs all the effort of searching in many different places for information; I wrote a tax guide. Now in 2004, after having completed a full year of tax forms while on the JET program, I am building upon what I wrote last year, and my entire tax experience while on JET, to produce a guide that I truly feel includes everything a JET needs to know (for the majority of JETs at least) for federal taxes.

First a few quick, but important, notes:

For quick reference The 2003 average Yen/USD exchange rate as reported by the IRS office in Tokyo is 113.873 ¥/$. You can use any exchange rate you like as long as it’s reasonable, and you site a source for it. 1st years, use form 4868 to file for extension until Aug 16 2004. Or use form 2350 to extend your deadline until 30 days after meet the physical presence test. 4868 is recommended. Form 8822 is the change of address form, but not required. When you file, you need your statement of income from your Japanese employer, the regular 1040 form, and either form 2555 or 2555EZ, EZ is recommended. All US tax forms mentioned here can be found in PDF format at www.irs.gov, or in the 1040-7 packet that most of you have received.

Important notice This information is only for federal taxes. You must still file state taxes in you home state. As each state has different tax laws, I cannot provide information on how to file your state taxes (unless you are from Indiana, my home state). Researching and preparing your state taxes should be high on your priority list along with preparing you federal ones. The IRS is good about granting extensions for those of us outside of the US, but your home state might not be. Find out now what is required by your home state as it’s your responsibility to meet state deadlines. After completing your federal forms however, state taxes shouldn’t be too difficult. Most state tax forms involve the same or similar steps to the federal forms. These similarities, combined with experience from the federal forms, will make the state forms easier.
Part 1, what do I need to do now?
Getting an extension for 1st year JETs

To qualify for the foreign income exclusion, where all the money you make in Japan is exempt from US taxes, there are two hurdles. 1st you must have a ‘tax home’ outside of the US. By virtue of the fact that your primary residence and primary place of employment is Japan, you pass this hurdle. The second hurdle comes in two forms. You must meet either the ‘bona fide residence test’ or the ‘physical presence test.’ To pass the bona fide residence test, you pretty much have to have permanent residence status in Japan, which none of us do. So that leaves the physical presence test. The test states that you must be outside of the US for 330 days in a period of 12 consecutive months. The 12 months can be any 12 months (starting at any time, on any day, and ending 12 months later). This test is certainly attainable! But, as of the spring of 2004, no 1st year JETs have been in Japan for 330 days yet. So, you must file for an extension.

Filing for an extension.
As a person living abroad, you automatically get a 2 month extension from the normal deadline (Apr 15 to June 15 2004) to file your federal taxes. But, this is still not enough to meet the physical presence test. Most 1st years will meet the test sometime in the 1st few weeks of July. So, you need another extension. Fortunately, the IRS makes it easy to get one. You must file either form 4868 ‘Application for Automatic Extension of Time to File U.S. Individual Income Tax Return’, or form 2350 ‘Application for Extension of Time to File U.S. Income Tax Return’ by the deadline (June 15). After filing for the extension, you then have until either Aug 16 (via form 4868) or until 30 days after you meet the 330 day requirement (via form 2350) to file your regular 1040 form. Either way, you will have met the physical presence test when you file the 1040.

I recommend form 4868 over 2350 for 2 reasons. 1st, 4868 is much simpler to complete than 2350. 2350 is longer and requires more calculation than 4868. 2nd, 4868 actually gives you a little longer time to finish than 2350. 4868 is good until Aug. 16th, it is simply an additional 2 month extension over the automatic 2 months you get by living abroad (for a total of 4 months). With 2350, your deadline is 30 days after you meet the 330 day requirement, which will be around the beginning of August for most people. So, form 4868 will give you up to a couple of extra weeks to finish your return. However, if you went back to the US for an unusually long time during the year, e.g. 6 weeks or more, then using 2350 will give you a later deadline. Calculate when you meet the physical presence test to see which form for the extension is best for you.

Form 4868:
This form is the general IRS form for getting an extension. It is very short, very easy to complete. It first asks for your basic information on the left side. Also, just to note, the instructions say to be sure to write ‘taxpayer abroad’ on the top of the form. Next, if you did not earn income before JET, the following does not apply to you; simply write ‘0’ for all of the lines on the right side of the form. If you did earn money before JET, you basically have to calculate your return (i.e. refund) based on that income. See p.6 for instructions and an example on how to calculate your return.

The form asks for the amount of tax that you should have paid based on the money you made - your total tax liability. Then it asks for what you’ve actually paid already - total payments (taken each month from you paychecks). The reason it asks you this is that if you expect to owe money after filing your form (i.e. what you paid is less than your expected tax liability), you must estimate what you will owe and send a payment up front with this form. Don’t worry about the section on Gift/GST tax unless someone was kind enough to give you a gift of value greater than $11,000. Details of the Gift/GST tax are beyond the scope of this guide. Send the form to the address listed; note however that the IRS will not send a reply informing you of your extension status.

Form 2350:
This form serves the same function as form 4868, but it is more complicated. As mentioned before, it gives you 30 days to file your return after meeting either the bona fide residence test of the physical presence test. This means that you must calculate the actual day you will meet the test to determine when your filing deadline is. Like form 4868, you first provide basic information about yourself. On line 1 it then asks for your new filing deadline. Again, this date will be 30 days after your calculated day of meeting the physical presence test. Check ‘no’ for lines 2 & 3, you shouldn’t need to worry about those 2 things. For line 4, part b, your qualifying period is the term of your JET contract (e.g. Aug 4 2003 - Aug 4 2004).

As with form 4868, you must calculate your return on pre-JET income and estimate tax liability (if any). List this amount on line 5. Again, if you expect to owe money to the IRS, you must send a payment along with this form. Also in line with 4868, you shouldn’t need to worry about gift/GST tax. With this form, unlike form 4868, the IRS will send you a reply informing you of your tax extension status.

Change of Address.
You can use form 8822 ‘Change of Address’ to officially inform the IRS of your presence in Japan. It’s short and very east to fill out. But, it is not required. Completing this form is really more of a courtesy to the IRS than anything else. If you’ve ever had any contact with the American embassy in Tokyo or any of the consulates, and gave your address, the embassy reported the address to the IRS. But, whether the IRS has your old address or your Japan address on file does not matter. This form really has no effect at all on your tax return. They certainly will change your address for you after you file from Japan if you don’t use form 8822. In short, is this worth your time?

After you file for the extension, you can relax for a little while.

Part 2, Conquering the big bad monster.
You got the extension, now it’s time to complete the forms

So you filed for the extension, time passes and it’s time to file the paperwork and be done with it. What’s important to remember is your deadline. Again, depending on which extension form you use, you’ll either have until Aug 16, or 30 days after you meet the physical presence test to file. This is good as most of us won’t meet the 330 day requirement until around the beginning, to middle of July (did you calculate the exact date when you meet the requirement?). So, when you are finally clear to file, there are two things to complete: the foreign earned income exclusion form (2555) and the main tax form itself (1040).

Foreign Income Exclusion.
One of the (many) nice things about working in Japan is that our income here, up to $80,000, is free from taxes in the US (at least federal, depending on your home state). To complete this process of excluding your Japanese income, you need to complete either form 2555 or 2555EZ ‘Foreign Earned Income Exclusion’.

Form 2555EZ
I’ll begin with the EZ version, which is recommend. This form is fairly straightforward; it begins by checking you eligibility for taking the exclusion. Just fill number 2 for the physical presence test. Part II asks for you information. The only thing to note here is concerning your ‘tax home;’ your tax home is Japan. In part III ‘Days Present in the United States,’ you only need to list any days that you were in the US after you came on JET. Your time before JET does not matter here.

Part IV can be confusing however. This is where you determine the amount you are actually excluding. You first determine how much your maximum exclusion is. Do this by first dividing the number of days in your qualifying period by 365. Your qualifying period is the number of days that you were both outside of the US and on the JET program in 2003. Any time traveling while on JET is counted as well, given that it was outside of the US. Then, multiply this fraction by $80,000. This is your maximum exclusion. For example, if you came to Japan is early August, and didn’t return to the US at any time in 2003, you would have been in Japan for about 150 days (rough estimate) at the end of the year. So, you would divide 150 / 365, which equals 0.411. Multiply this number by $80,000 to arrive a figure of $32,880. $32,880 would be the maximum you can exclude for 2003.

Next, you must calculate the amount you are actually excluding, the amount you actually made in Japan. To do this take the amount you made in Yen from your Japanese statement of earnings and convert it to US dollars. As long as this dollar amount is less than the maximum allowed for exclusion ($32,880 in the example above), you can exclude everything. If your foreign earned income is more than the maximum allowable (which won’t happen unless your employer throws a few extra million yen your way), you can only exclude the maximum allowable. For a quick example, if your Japanese income was ¥1,200,000, and the exchange rate 113.873, then 1,200,000 / 113.873 = $10,583 (round the fraction). Whatever amount you calculate, write it both on this form and on form 1040 (see below) as well.

Some things of note:
As for which exchange rate to use, I was told by the IRS that you can use whatever you like, provided that it’s reasonable, and you give a source for it. The next thing is the statement of earnings (Gensenchoshuhyo, 源泉徴収票) from your base school/BOE. If you have a copy of it, make a photocopy and include it when you file your forms. If you don’t have a copy, just write a statement yourself of what you believe your earnings in Japan were and sign it. This sounds a little funny right? Well, according to the IRS, when you sign your name to the form (or any other form for that matter), and submit it to the IRS, you are certifying, under threat of prosecution for perjury, that what you say is true.

There are many numbers on the Gensenchoshuhyo, the only one you need is in the leftmost box, directly under the box with your address in it. The number should have shiharaikingaku, 支払金額, printed above it. When you send this form in with everything else, be sure to point this number out for the people processing your return. Just circle it and write ‘gross income’ or something similar.

Form 2555:
You can file the long form of the foreign earned income exclusion (form 2555, not 2555EZ) if you wish, so that you can claim the foreign housing exclusion in addition to the foreign income exclusion. But, you are only eligible to do this if your foreign earned income is more than the maximum allowable amount for exclusion. So, this really doesn’t apply to any of us. Thus, a detailed explanation of 2555 is not necessary here. Anyone whom this does apply to will find an explanation of the foreign housing exclusion in the 1040-7 packet.

Fun with Form 1040, the last step.
The last thing to do is complete the main tax form itself, the 1040 ‘US Individual Income Tax Return’. The 1040 is long, can be confusing, and explaining it in its entirety is beyond the scope of this guide (that’s a textbook in itself). Most things on the 1040 you don’t need to worry about however, so I’ll stick to the basic elements.

I want to emphasize again that this procedure is for your federal tax return. The procedure for your state tax return may be different.

Form 1040
There are many different versions of form 1040 available; for example 1040, 1040EZ, etc. However, in order to take the foreign income exclusion, you must use the original form 1040. For this form, you start with basic information about yourself and your filing status (single, married, etc.).

Income
Then you dive into your income. Here, include both the income from Japan that you calculated for form 2555EZ, and any income you had before coming on JET. Information about wages earned and taxes paid before coming on JET can be found on your W2 (statement of earnings) from your job before JET. Enter the combined income from Japan and America on line 7 of the form. Then, write your Japan income again on line 21: other income. Write it in either brackets or parentheses to show it as a negative number. What you are doing here is adding your income in on line 7, and then subtracting it out on line 21. The net will of course be zero. Also, be sure to write ‘2555EZ’ next to your income on line 21.
Line 8 is for interest you earned, if any, on savings accounts. This amount is taxable even though you live in Japan; it’s not excludable. Lines 9 through 20 will not apply to most JETs, so they are beyond the scope of this guide. If you have any income for these areas, investments for example, then be sure to report it properly. Enter the final amount on line 22.

Adjusted Gross Income
Most of the items in this section will not apply to you. The possible exception will be the student loan interest deduction. If you paid interest on student loans, you can deduct the amount you paid, up to $2,500, from you income. Include the interest statement: Form 1098-E Student Loan Interest Statement from your loan servicer, with your return. You will receive this statement is you paid $600 or more in interest during the year. If you paid less than $600, contact you loan servicer to get your information. Of course, you can only deduct from income you earned before JET as your JET income is zero.

Taxes and Credits
After calculating your adjusted gross income (line 34) you next work through any exclusions and/or deductions you have. The area of exclusions and deductions can be very complex, but most of them will not apply to you. So I recommend you simply take the standard deduction of $4,750. The itemized deductions are beyond the scope of this guide. If any would apply to you, the details are available from the IRS.

For line 41: Tax, you must calculate the amount of tax you are liable for. Your Jet income is of course not taxed, and much of your income from before JET will be excluded or deducted. If you have remaining income, then that amount is liable for tax. Refer to the tax table on page 62-73 of the 1040-7 guide (it is also available online, search for ‘tax table’ on the IRS website). Find your income that is liable for tax and the amount of tax will be listed. Note that you will most likely not have to pay this amount as it should have already been deducted from your paychecks.

Lastly, complete lines 43, 53 and 54; they are only simple addition/subtraction.

Payments, Refund & Amount you Owe
The rest of the Taxes and Credits section, and the Other Taxes section will not apply to most JETs, so let’s skip to the Payments section. All tax payments to the IRS, of any kind, should be entered in this section. For most people, this figure will simply be the total amount taken from your paycheck each month before you came on JET. That amount will be on your W2 form from your old job, if you had one of course.

Lastly, subtract the amount from the Payments section from the Taxes and Credits section. If that number is negative, you get a refund! Complete the Refund section. If the amount is positive, you owe money to the IRS. Complete the Amount you Owe section and make arrangements for payment with the IRS. Note that you should have made payment arrangements when filling for the extension if you owe money to the IRS (see part 1).

A quick example.
Say you made $15,000 before coming on JET, had $1,500 deducted from your paychecks for federal taxes, are single, and only plan on taking the standard deduction. So, you subtract the standard deduction of $4,750 from the $15,000 to get $10,250. This is you adjusted gross income. You then look at the tax table find $10,250 (p.63 of the 1040-7 packet). You’ll see that the tax amount you should owe for $10,250, when you’re single, is $1,191 (use the higher tax amount if your income is borderline between 2 categories). You already paid $1,500, so you’ll get a $1,500-1,191 = $309 refund. Simple right?

Part 3, For the veterans
Taxes for 2nd and 3rd year JETs

As a first year JET, many things you do are very hard; you are in a new and very different situation. But, as you progress through your time on JET and become a 2nd or 3rd year, everything you do becomes easier. Your taxes certainly follow this pattern. Having completed the filing process before, your taxes this year will be much easier. This section discusses the issues specific to the veterans.

Filing for an extension
In short, you don’t need to. You filed for one before because in your 1st year, you had yet to meet the physical presence test by the normal filing deadline. You had only 5 months or so from when you first set foot in Japan as a JET and the end of the tax year. So, you filed for an extension to meet the 330 day requirement before filing your main tax forms. This time though, you have been a resident of Japan for the entire tax year. That year was made up of the 2nd half of your 1st (or 2nd) year, and the 1st half of your 2nd (or 3rd) year. As you lived in Japan for the entire year, you’ve already met the physical presence test. So, you don’t need to file for an extension this year; just jump straight to the main tax forms, the 1040. The procedure for the 1040 this year is almost exactly the same as it was before. The main difference now is that you won’t have non-JET income to report (at least most of you won’t). Therefore, your income will be zero, taxes owed zero, taxes paid zero and refund zero.

Here’s a brief description of the process.

Foreign Income Exclusion.
Again you’ll need to exclude your Japanese income; you need to complete either form 2555 or 2555EZ ‘Foreign Earned Income Exclusion’.

Form 2555EZ
This is the one I recommend you use. This form is fairly straightforward; it begins by checking you eligibility for taking the exclusion. Just fill number 2 for the physical presence test. Part II asks for you information. The only thing to note here is concerning your ‘tax home,’ your tax home is of course Japan. Also in part III, list any days you were present in the US during the year.

In Part IV, you determine the amount you are actually excluding. You first determine how much your maximum exclusion is. Do this by first dividing the number of days in your qualifying period by 365. Your qualifying period is the number of days that you were outside of the US in 2003. Any time traveling while on JET is counted as well, given that it was outside of the US. Then, multiply this fraction by $80,000. This is your maximum exclusion. For example, say you spent 15 days in the US during the Christmas holidays in 2003. Your qualifying period would be 350 days for the year. So, you would divide 350 / 365, which equals 0.959. Multiply this number by $80,000 to arrive a figure of $76,712 (round the fraction). This is the maximum you can exclude for 2003.

Next, you must calculate the amount you are actually excluding, the amount you actually made in Japan. To do this take the amount you made in Yen from your Japanese statement of earnings and convert it to US dollars. As long as this dollar amount is less than the maximum allowed for exclusion you can exclude everything. If your foreign earned income is more than the maximum allowable, you can only exclude the maximum allowable. So if your Japanese income was ¥3,600,000, and the exchange rate 113.873, then 3,600,000 / 113.873 = $31,614. Whatever amount you calculate, write it both on this form and on form 1040 as well.

Some things of note:
As for which exchange rate to use, you can use whatever you like, provided that it’s reasonable, and you give a source for it. The next thing is the statement of earnings (Gensenchoshuhyo, 源泉徴収票) from your base school/BOE. If you have a copy of it, make a photocopy and include it when you file your forms. If you don’t have a copy, just write a statement yourself of what you believe your earnings in Japan were and sign it.

Form 1040.
The last thing to do is complete the main tax form itself, the 1040 ‘US Individual Income Tax Return’. The 1040 is long, can be confusing, and explaining it in its entirety is beyond the scope of this guide (that’s a textbook in itself). Most things on the 1040 you don’t need to worry about however, so I’ll stick to the basic elements. I want to emphasize again that this procedure is for your federal tax return. The procedure for your state tax return may be different.

Income
Then you dive into your income. Enter your Japanese income from form 2555EZ on line 7 of the form. Then, write your income figure again on line 21: other income. Write it in either brackets or parentheses to show it as a negative number. What you are doing here is adding your income in on line 7, and then subtracting it out on line 21. The net will of course be zero. Also, be sure to write ‘2555EZ’ next to your income on line 21.
Line 8 is for interest you earned, if any, on savings accounts. This amount is taxable even though you live in Japan; it’s not excludable. Lines 9 through 20 will not apply to most JETs, so they are beyond the scope of this guide. Enter the final amount on line 22.

As your JET income is now zero, the rest of the form is not important. Simply write zero for the totals in the remaining sections. If you had any taxable income that is not covered by the foreign income exclusion however, interest earned on a US bank account or investment income for example, you will need to complete the rest of the form. See page 7 for details on the remaining sections.

The End.

That’s it, you’re finished! Send the paperwork and forget this terrible process, at least until next spring. It’s really not too bad once you get the hang of it.

Send the forms to:
Internal Revenue Service Center
Philadelphia PA 19255-0215
USA

If anything in this guide is unclear, or if there is anything I didn’t address that you have questions about, or if there are any mistakes I made, please don’t hesitate to contact me.

Contact me at:
email: adambrogers@hotmail.com
phone: 0280.32.7636
keitai: 090.6122.7036

Or, call the IRS office in Tokyo directly at 03.3224.5466
However, the office will close permanently on June 30th 2004.
After June 30, call the IRS in Philadelphia: 215.516.2000, M – F, from 6AM – 2AM EST
Of course, information is also available at www.irs.gov

Thanks and best of luck to you.

Adam Rogers
ALT, Koga City, Ibaraki Prefecture, Japan

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