The Highest-Tax Country in Our Coverage
Japan's combined national income tax (5-45%), local inhabitant tax (roughly 10%), and 2.1% surtax on national tax can reach approximately 55.945% at the very top, higher than any other country in our coverage, including Australia and Taiwan. This makes the FEIE-vs-FTC decision genuinely consequential here, more so than almost anywhere else.
Qualifying for the FEIE: Two Tests
Physical Presence Test: 330 full days outside the US in any 12-month period.
Bona Fide Residence Test: An uninterrupted full tax year of Japanese residency, easier to satisfy once settled on a work visa with a lease and ongoing employment.
Where the Crossover Happens
Japan's combined national and local rate reaches roughly 43% well before the top national bracket alone, meaning many mid-career professionals, not just senior executives, cross into effective rates that exceed comparable US brackets. Once that happens, the Foreign Tax Credit, with no dollar cap and a ten-year carryforward for unused credits, generally beats the FEIE's flat $132,900 exclusion.
How Non-Permanent Resident Status Interacts
During your first 5 years as a Non-Permanent Resident, unremitted foreign income escapes Japanese tax entirely, meaning there's no Japanese tax on that income for the Foreign Tax Credit to work with. Your Japan-source salary is still taxed normally, and the FEIE/FTC choice on that salary proceeds as described above, but foreign investment income kept offshore during this window needs no US-side credit against Japanese tax, since none was paid, though it's still fully reportable and taxable to the IRS.
The First-Year Timing Trap: Form 2350
Arriving mid-year means you likely won't satisfy either FEIE test by the normal April 15 deadline. Form 2350 requests an extension specifically to wait until you qualify, avoiding a forced early filing that locks you into a worse outcome for that year.
Worked Example: The Crossover Point
An American engineer in Osaka earns ¥14,000,000 (about $93,000 USD). Combined Japanese national, local, and surtax liability runs roughly ¥3,700,000 (about $24,700 USD), an effective rate near 27%, already exceeding what she'd owe the IRS on the same income at ordinary US rates. Her accountant models the Foreign Tax Credit against this Japanese tax paid and finds it fully absorbs her US liability with credit to spare, a stronger result than the FEIE would have produced on its own, especially once she's a Permanent Resident and her worldwide income (not just Japan-source) is in scope.