Furusato nozei - end to end guide29 Jul 2023 | #japan | #money
What is furusato nozei, a bit of history, and how you can do it end to end. This won’t be short, but I try my best to provide the full picture with all the details. While I do my best to keep this information accurate, if you find any inaccuracies, please let me know.
1. What is furusato nozei?
Furusato nozei (ふるさと納税), or home-town tax payment is a scheme by Japan that allows Japanese tax payers to redirect part of their income tax to a city other than where they currently live. The receiving cities often send some thank you gift in exchange for this, and there are websites set up like webshops where one can choose the city based on the desired gift.
Although the original intention was to let people who moved from the countryside to the city support their old hometown, there is no requirement on which city one can redirect their tax to, and the program is open for foreigners too (as long as they pay income tax in Japan).
While in the end furusato nozei is about redirecting part of your income tax, in practice one needs to make an out of pocket donation to the desired city in a given calendar year, and then receive tax refund and/or tax break in the next calendar year equivalent to the donated amount minus 2,000 yen (this is a fixed fee for using the system). So at the end of the day, one can get some gifts in exchange for 2,000 yen plus a bit of paperwork.
2. Income tax
Furusato nozei allows one to redirect part of their income tax, so we need to understand income tax first to fully understand furusato nozei.
The income tax consist of two main parts:
- the national income tax (個人所得税): a progressive tax rate of 5% to 45%
- residence tax (個人住民税, individual inhabitant tax) a flat 10% split into two parts:
- Prefectural tax (都道府県民税) of 4%
- Municipal tax (区市町村民税) of 6%
Payment timelines are different for these:
- national income tax is generally paid in the year when the income is received. For salaried employees their company usually withholds it, and then does a final adjustment in December (YETA, Year-End Tax Adjustment, 年末調整). If one files tax return (確定申告, kakutei shinkoku) in February-March next year, it is possible to pay more tax then or receive a tax refund.
- residence tax is based on the prior calendar year’s income and calculated in June each year. So the residence tax of May 2023 is still based on the income of 2021. Then from June 2023 until May 2024 the residence tax is based on the income of 2022 and so on.
Sidenote: for foreigners this also results in not having to pay any residence tax until their second year’s June, and often a reduced amount even for that year. E.g. if someone moved to Japan in July 2021, they would start paying residence tax in June 2022, but that would be based on their 2021 income (received in Japan), which is only 6 month’s income, thus the residence tax paid from June 2022 to May 2023 will be around half of what they will need to pay from June 2023, assuming no changes in income.
Furusato nozei is deducted from both the national income tax and the residence tax using a rather complicated formula. If you have to file your taxes online, this calculation is taken care of by the website, and if you don’t need to file taxes (and using the one-step exception process described below), then the entire amount is deducted from your residence tax bill of next year.
3. The amount
Since furusato nozei is a donation, there is no upper limit on how much one can donate, but there is a limit on how much tax refund/break one can get. Since the calculation is a bit complex, the official site has some example amounts based on income and family composition. Many furusato nozei websites also have their own calculators.
It’s important to keep in mind that the maximum tax refund/break essentially depends on the amount of tax paid, so if you are eligible for any income tax deductions (dependent, medical expenses, eartquake insurance, etc.), those will reduce the amount of furusato nozei you can do. I usually leave a ~20% safety margin between what I could use (based on the online calculators) and what I actually use.
Also this depends on the tax paid in a calendar year, and due to the progressive tax rate if you are a high income earner and loose some expected income (e.g. part of your bonus), since that comes out of your highest income tax rate it will disproportionally reduce the furusato nozei amount. For example: going from 1100万円 to 1000万円 income (9% decrease) reduces the furusato nozei maximum amount from 218,000 yen to 180,000 yen (17% decrease). Thus many people often only do furusato nozei towards the end of the year, when their yearly income is mostly finalized and unlikely to change.
Also due to the progressive tax rate, the amounts grow much faster than the income:
- 450万円 income (national average) -> 5.2万円 furusato nozei (assuming no dependent or other deductions)
- 1000万円 income 18万円 furusato nozei
- 1500万円 income 39.5万円 furusato nozei
- 2000万円 income 56.9万円 furusato nozei
- 2500万円 income 85.5万円 furusato nozei
To receive the tax refund/break, there is some necessary paperwork with two main options:
- one-stop exception: this is a simplified process for people fitting the following criteria:
- they don’t need to file tax return. This is usually company employees where the company takes care of their taxes, their income is less than 20 million yen and they don’t have any other deduction (e.g. medical expenses), or other income (e.g. capital gain/divident where the brokerage doesn’t withhold taxes).
- they only donated to 5 municipalities or less in the calendar year. The limit is on the number of donation destinations, so making multiple donations to the same city still only count as one.
If one is eligible, they should indicate this when making the donation (there is usually a checkbox on the donation website), and then the receiving city will send a form to fill out and return. Important: these forms need to arrive to the cities by January 10th the next year, which can be a problem if you donate late December, as many city halls close early for the year-end holidays.
If the municiplaity doesn’t send you the form, the Ministry of Internal Affairs has a form that one can use (see these instructions). Some donation sites also provide this form, e.g. https://www.furusato-tax.jp/about/onestop.
One also needs to attach an ID and proof of My Number to the form. This can be either the My Number card alone, or an accepted ID (e.g. residence card, driving license) and the My Number notification card. More details here.
Once the forms are returned, there is no other paperwork to do. The receiving cities notify the National Tax Agency and the city you live in (or maybe the NTA does that), and they also let your company know, so that they will withhold less taxes next year.
- the normal process: if one is not eligible for the one-stop exception (they need to file tax return, or donated to more than 5 places), they need to file tax return and include furusato nozei there.
- if filing on paper: after donation the receiving city sends a certificate of donation, which one needs to include with the tax return (though I have never done this, so correct me if I’m wrong)
- if filing online: most furusato websites provide a digitally signed xml file (寄附金控除に関する証明書, Certificate of Donation Deduction) that one can simply upload to the e-Tax website. See my other post on how to do this in detail
- One goes to a furusato nozei website, selects the desired goods and makes a donation (the flow is very similar to shopping on a webshop, including the payment being done via credit/debit card). This can be done anytime during a calendar year, but often done towards the end of the year for a few reasons:
- the maximum amount of refund depends on the amount of tax paid in the year, which in turn depends on the income for the year. This amount is more certain towards the end of the year (otherwise loosing one’s bonus or job might reduce their income, and then they won’t be able to get refund for the entire furusato nozei donation)
- to minimize the time between making the donation and receiving the refund (the opportunity cost of not investing this money)
- furusato nozei websites often run campaigns in December (e.g. Amazon Pay often has a 2.5-3% cashback campaign (Internet Archive) during December)
- One receives the donation certificate in the mail with the one-stop exception form (if requested)
- One receives the selected “thank you” goods
- One completes the necessary paperwork:
- One-stop exception: simply fill out and return the form sent by the receiving municipality, or
- File income tax return in February-March next year
- One gets the money back in the calendar year after the donation was done (source):
- If one-stop exception was used: the residence tax will be reduced by the entire amount donated (minus 2000 yen) starting from June the year after the donation (e.g. for donations in 2022 the residence tax from June 2023 to May 2024 will be reduced)
- If tax return was filed: the tax refund/break is split into national income tax and residence tax. The national income tax part is refunded when the tax return is processed, and the residence tax portion reduces the residence tax from June (same timeline as above)
To understand the reason for this system, we need to look at the history of it.
The program started in 2008, without the “thank you” gifts. The problem they wanted to solve was that many young people are moving from the countryside to cities, and their home towns are struggling financially (since a big part of their income comes from local’s residence tax). So the government’s solution was: let these young people send part of there tax back to their home town. But why didn’t the central government simply send money to these countrside towns instead of coming up with this complicated system? I don’t know the official reasons, but with this system part of the money is coming from the other (mostly urban) municipalities where the participants currently live, so the central government doesn’t have to fully foot the bill.
From 2008 to 2010 the program wasn’t too popular: in each of these year only around 33,000 people participated with an overall donation amount of 7 million yen per year. From 2011 the numbers start to increase (likely due to the ‘thank you gift’ system becoming widespread) reaching 1.3 million people in 2015, 2.2 million in 2016, almost 3 million in 2017 and 4 million in 2018 (source).
However since the ‘thank you gifts’ were not part of the original plan, there was no regulations about them. Initially cities would send their local specialities, but later as the program gathered steam, some places started to game the system and offer things like Amazon Gift cards in exchange for the donation. However this led to cities trying to out bid each other (why donate to a city for 10% cash back gift card if another city offers 12%) reaching to gift cards with more than 40% returned amount by 2018. So in 2019 the law was updated to limit the ‘thank you gifts’ to locally produced items with a maximum 30% value of the donated amount.
7. The websites
At the end of the day, most of these will be very similar, so don’t stress too much on which one to choose. You can always change it later too.
8. My usual picks
Here are some of the things that I got in the past and liked:
- Recurring food deliveries - many places offer to send either the same, or different food every 1 or 2 months for 6-10 or 12 months. For example:
- monthly vetegables from Kyoto
- meat or vegetable every other month from Hokkaido
- organic eggs monthly, 10 times
I usually look for these by searching for １２回. With these I usually forget what will come next month, so it has an additional suprise element. One thing to look out for: the amounts can be huge. Once we got 5 kg of corn (15 corns), so we ended up eating corn every day for 2 weeks. Same when we got 1.6 kg of aspargus.
Another potential downside with these is that you have to tell the place if you go for a longer holiday, otherwise they might send it during that. Since most places ship with Yamato, another option we have done is to call Yamato when you get the notification of something coming, and ask them to deliver it to a different address(e.g. friend or family). Yamato offers this for free, but only if you call them.
- one-off food, when we need it:
The listings usually indicate when they ship it, which is really important to check as some stuff is only shipped after the harvest, which can be months away.
- one-off items where quality is important