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Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 15729
Experience:  15years with H & R Block. Divisional leader, Instructor
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I am an American citizen. I live and work in Tokyo, Japan,

Customer Question

I am an American citizen. I live and work in Tokyo, Japan, where I have Permanent Resident status. I have already filed my taxes for Japan for 2010. I have yet to file my taxes for the USA for 2010.

Here is my tax situation: I had capital gains from the purchase and sale of gold and silver bullion at a precious metals corporation in the USA. I have already paid Japanese national taxes on those capital gains. An important point is that I made the capital gains profit in the USA, not Japan.

Question one: Can I use the USA tax Form 1116 for a foreign tax credit for the taxes I paid Japan? Or do I have to use Schedule A for itemized deductions where I declare the tax paid to Japan as an income tax paid to a foreign country? Or is there another possibility? Obviously, a tax credit (Form 1116) would amount to a greater reduction in my USA taxes than an itemized deduction for foreign taxes (Schedule A) from my income.

Question two: How can I take a foreign tax credit on my Japanese tax return or future Japanese tax return for the US taxes I will pay on the same capital gains I have already paid taxes on to the Japanese government? I was taxed 17% on the precious metals by Japan and I will apparently be taxed another 28% by the USA. This is double taxation.

For the year 2010, my earned income as salary in Japan was very low compared to my much higher unearned capital gains income in the USA. Is it possible that through the USA/Japan Tax Treaty, I could get some sort of credit for my tax payment to the USA that would reduce my tax to Japan? My earned income as salary in Japan was about 5% of my total income as about 95% of my income was from the capital gains on the sale of precious metals in the USA.

Question three: I also presently own gold bullion in Japan. In the future, if I have capital gains on that gold when I sell it in Japan, I am expected to pay taxes on the profit to Japan. Can I use the American tax Form 1116 for a tax credit for the tax I will pay Japan for the profits on the gold bullion?

Question four: As stated, I presently own gold bullion in Japan. If I left Japan and gave up my Permanent Resident status in Japan and then later sold my gold in Japan at a profit, would I owe capital gains tax on the profit from the gold to the national government of Japan?
Submitted: 6 years ago.
Category: Tax
Expert:  Robin D. replied 6 years ago.

Robin D :

Hello and thank you for using Just Answer

Robin D :

Your situation will remain the same no matter were the income is earned. As a US Citizen you will continue to report the worldwide income on your US return. You are allowed to use the Form 1116 for the taxes that you must pay to Japan as a Resident there. This does not result in double taxation but double reporting , yes. You may use the Form 2555 to exclude your earned income while residing in Japan. This will allow you to exclude the earned income but to use the Foreign Tax Credit for the capital gains, just make sure that you do not use the tax paid for the earned income on the Form 1116 also since you are not allowed to claim a tax benfit for the earned income in 2 ways. Pick and choose which works best for you when it comes to the earned income. You can use Form 2555 or the Form 1116 for the taxes you paid in Japan for the earned income but not both.
Your last question is the most complicated. Japan has a pay at source requirement so if you becoame a nonresident you will have tax withheld when the sale occurs. The US and Japan does have a tax treaty so if you have withholding as a nonresident and the capital gains came from a Japanese company you could file in Japan and use the traty to avoid tax (or pay a lower rate) in Japan.

JACUSTOMER-0ibip79y- :

Regarding my taxes paid to Japan on capital gains from gold and silver bullion sold in the USA, my main issue is can I get a Foreign Tax Credit (Form 1116) or only an Itemized Deduction (Schedule A, Form 1040).

JACUSTOMER-0ibip79y- :

Looking at the Foreign Tax Credit Form 1116 for "Passive category income" it says, "Part I Taxable Income or Loss from Sources Outside the United States (for Category Checked Above)". My capital gains came from precious metals sold in the USA, not from "Sources Outside the United States". Would it be correct to assume that you can get a foreign tax credit only for income earned in a foreign country (such as Japan) on which you have paid taxes to that foreign country (such as Japan)? In contrast, I earned the income in the USA, but paid taxes on it to Japan. How can I get my American income taxes credited against my Japanese income tax? I need the Japanese government to give me credit for foreign taxes I paid to the USA.

Robin D :

Because you paid the foreign tax in Japan you can claim the credit against the US. You cannot claim a credit in both countries. You will need to choose which country gives you the better tax benefit from the foreign tax credit.