How to pay your taxes and receive gifts in return? The Furusato Nozei system
I was once on the Japan Exchange and Teaching (JET) Programme living in a small town in Hokkaido, where I call my hometown even until now. Ever since I moved to Tokyo, I have been donating to my town through the Furusato Nozei system in exchange for locally grown rice. The donation is a tax deduction on my income and is also considered a payment toward my inhabitant tax.
Don’t have a furusato (hometown) in Japan? You can make donations to any local municipality of your choice that offers the return gifts you like. Yes, including Kobe beef and some beer!
By Sorapong Chaipanya from Pexels
What is the Hometown Tax system (Furusato Nozei)?
In Japan, many people were born in their hometowns in rural areas, benefited from various public services, such as medical care and education from their local governments, and eventually moved to cities for further education and employment, where they pay taxes. As a result, urban municipalities receive tax revenue, but the hometown municipalities where people were born and raised do not receive any tax revenue.
The Hometown Tax system, aka Furusato Nozei, was proposed to shift tax revenue back to rural municipalities. This allows everyone a chance to voluntarily give back to the hometown that they were raised in. In return, the hometown municipalities give gifts usually in the form of their local products, like meat, seafood, and vegetables. The gifts really range from luxurious food product like Kobe beef to everyday groceries like eggs, or beautiful crafts to an onsen trip voucher.
Why should I make donation through Furusato Nozei?
The donation you make to the local municipal is counted as dollar to dollar payment into your inhabitant tax for the following year. You are receiving gifts for a tax payment that you are obligated to pay anyway. In addition, the donation reduces your taxable income, therefore reducing your obligation for income tax.
In simple terms, the donation(s) you make to the local municipalities is
directly applied to your inhabitant tax payment
deducted from your income for income/inhabitant tax calculation
Although there are no limit to how much donation you can make, the tax effect varies depending on your income level and the tax rate applied. Try these simulators and see the optimal amount you can donate.
https://furunavi.jp/deduction.aspx
https://www.furusato-tax.jp/about/simulation
Following the above logic, if you do not have income and is not obligated to pay taxes, donating into the Furusato Nozei system will not have any tax effect.
How do I donate via Furusato Nozei?
The first step is simple! You can buy items (=make a donation) via the Furusao Nozei sites such as the ones below.
[Japanese only]
[English available with auto-translate]
Next, claim the donations and receive deductions from income tax and inhabitant tax.
Option 1) One-Stop Special Exemption System - No tax return filing required
If you are an individual who is not required to file a tax return, such as a salaried worker with only one income source from the company and the company performs the year-end tax adjustment (nenmatsu chosei), you can opt for One-Stop Special Exemption System. The donated amount will be automatically deducted off your income and submitted to your local tax office as inhabitant tax payment for the following year.
Step 1: Select to opt for One-Stop Exemption when you make donations on the Furusato Nozei sites.
Step 2: The municipality will then send you the One-Stop application forms along with the gifts you ordered. Simply fill in the applications and send back to the municipalities and the donations would be deducted of your inhabitant tax calculation in the following year.
This system is limited to donations to a maximum of five municipalities.
Option 2) File a tax return
If you are an individual who is required or want to file a tax return, include the donation amount on the donation deduction row of your tax return, and check the box for the donation to apply to inhabitant tax payment.
It is crucial that you choose either Option 1 or Option 2. Otherwise, your payment to the local municipalities will be treated as mere donation and will neither qualify as a tax payment nor a tax deduction. Well, you will still receive some gifts in return while donating for a good cause.
Tax Calculation
For tax gurus, let’s breakdown the calculation in more details.
The donation has the following effect:
Reduction of taxable income for income tax
Reduction of taxable income for inhabitant tax
Reduction of taxable income for special inhabitant tax calculation
[Graphic]
Step-by-Step Example
Determine Annual Income and Residence Tax Amount:
Suppose Mr. Tanaka has an annual income of ¥6,000,000.
His residence tax (住民税, juminzei) is calculated based on his income and other factors. For simplicity, let’s assume his annual residence tax is ¥300,000.
Choose Donation Amount:
Mr. Tanaka decides to donate ¥100,000 through the Furusato Nozei program.
Receive Gifts:
After making the donation, Mr. Tanaka receives various local products (e.g., rice, fruits, meat) worth approximately ¥30,000 in total from the municipalities he chose.
Calculate Deduction and Pay Administrative Fee:
The program allows for a deduction from the residence tax up to a certain limit, minus an administrative fee of ¥2,000.
The deductible amount for Mr. Tanaka is ¥100,000−¥2,000=¥98,000¥100,000 - ¥2,000 = ¥98,000¥100,000−¥2,000=¥98,000.
Apply the Deduction:
Mr. Tanaka’s residence tax will be reduced by ¥98,000 in the following fiscal year.
Therefore, instead of paying ¥300,000 in residence tax, Mr. Tanaka will only pay ¥300,000−¥98,000=¥202,000¥300,000 - ¥98,000 = ¥202,000¥300,000−¥98,000=¥202,000.
Summary
Before Furusato Nozei:
Residence Tax: ¥300,000
After Furusato Nozei:
Donation: ¥100,000
Administrative Fee: ¥2,000
Tax Deduction: ¥98,000
Adjusted Residence Tax: ¥202,000
Final Benefits for Mr. Tanaka
Local Products Received: Worth ¥30,000
Effective Donation Cost: ¥2,000(administrativefee)+¥202,000(adjustedtax)=¥204,000¥2,000 (administrative fee) + ¥202,000 (adjusted tax) = ¥204,000¥2,000(administrativefee)+¥202,000(adjustedtax)=¥204,000
Total Savings: ¥96,000 (since the donation effectively reduced the tax liability and provided valuable gifts)
Ms. Watanabe’s profile
Taxable income: 5,000,000
Tax bracket: 20% (for taxable income between 3,300,000-6,949,000)
Furusato Nozei (Donation): 100,000
Income tax calculation
Before donation: 5,000,000 x 20% - 427,500 = 572,000
After donation: (5,000,000-100,000-2,000) x 20% - 427,500 = 552,100
Inhabitant tax calculation
Before donation: 5,000,000 x 10% = 500,000
After donation: (5,000,000-100,000-2,000) x 10% = 489,800
*There is a 2,000 non-deductible amount for the donation
Total tax saving
Income tax: 19,900
Inhabitant tax: 10,200
Total saving: 30,100
By donating 100,000 via furusato nozei, Ms. Watanabe has
saved 30,100 in taxes
paid 100,000 toward her inhabitant tax for the following year
enjoyed delicious local beef and fruits!
Give it a try. Give and enjoy!
Glossary for Googling
Hometown Tax System｜Furusato Nozei｜ふるさと納税
Inhabitant Tax｜Juminzei｜住民税
Year-end Tax Adjustment｜Nenmatsu Chosei｜年末調整
One-Stop Special Exemption｜Wansutoppu Tokurei Seido｜ワンストップ特例制度
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