Foreign Income Tax Credit for US/Japan

[Nancy]

Hello everyone. I hope that someone can help me with a Foreign Income Tax Credit question. I need to file a US tax return and a Japanese tax return, as always. This year in the US, I had a large amount of US savings bonds come due, which I cashed all together in September. The estimated tax on the interest was thought to be about 17,000 dollars, which I prepaid while I was in the US. I hope to use the foreign income tax credit in Japan so that I don't have to pay the same amount of tax here. I went to the tax office in Tokyo on Friday to ask, and the accountant basically told me that I needed to pay the full amount with the US, and also this year, pay the full amount on my Japanese taxes (while asking for some kind of extension), and then on my 2023 Japanese tax return, I could ask for some tax reimbursement. I didn't really understand this explanation, but since I pay so little tax in Japan (being retired), the accountant said that the reimbursement would be split up over 3 years, and to not get my hopes up with getting very much money reimbursed.
I have read over as many of the tax threads on this forum as I could, and need to really try and absorb the info that everyone has written, but my basic question is this. If I do my US taxes first, pay the tax on the bonds, can I use this information to pay my Japanese taxes in the same year, so that I won't have to actually ask for a reimbursement. (I would just pay the Japanese tax on the bond interest the same year that it occurred.)
I have been doing a Kakuteishinkoku every year for income from one apartment, and have seemed to get through the process all right, but I was completely blown away trying to decipher the explanation on the Foreign Income Tax Credit page. It seems like maybe the Japanese government doesn't want you to apply for it. (the accountant at the tax office asked "are you going to apply for this yourself.. it's very complicated and only an accountant can do the paperwork correctly". Anyway I hope that someone can help me with this question.

[Tkydon]

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[Nancy]

Tkydon, Thank you so much for your detailed explanation. I will read it over carefully. To explain a bit further on the US side of things, I renounced my US citizenship this year, so I hope that this will be my last time to file US taxes, also filing the 8854 form. So I want everything to go smoothly on the US side, prepaying the interest tax etc. Anyway, thank you so much for taking the time to give me so much information. I really appreciate it!

[ClearAsMud]

Tkydon, Thank you so much for your detailed explanation. I will read it over carefully. To explain a bit further on the US side of things, I renounced my US citizenship this year, so I hope that this will be my last time to file US taxes, also filing the 8854 form. So I want everything to go smoothly on the US side, prepaying the interest tax etc. Anyway, thank you so much for taking the time to give me so much information. I really appreciate it!

To comment briefly on this part, if you really renounced this year (i.e., you submitted your 4083 and other documents to the embassy in 2023 and subsequently received the approved CLN), the date you renounced at the embassy is when your tax liability ends and you still have to file a final dual-status return -- together with the 8854 --next year for 2023. Or maybe you made your final visit to the embassy last year? In any case, not only do you have an automatic extension to June 15, you can also request an automatic extension to October 15 (see this page for how to do it), so that option is available if you need it.

[Nancy]

Thanks so much for commenting. I mistakenly wrote this year, but actually, I renounced my citizenship in October, so hopefully this will be my last year to file with the IRS. I have asked an accountant to do my US taxes for the past 10 years or so, so I feel confident that he will ensure that everything will be in order on the US side. I have been doing the Japanese taxes myself every year, and haven't had this type of declaration to make before, so was feeling anxious. Thank you for your input!

[Tkydon]

Tkydon, Thank you so much for your detailed explanation. I will read it over carefully. To explain a bit further on the US side of things, I renounced my US citizenship this year, so I hope that this will be my last time to file US taxes, also filing the 8854 form. So I want everything to go smoothly on the US side, prepaying the interest tax etc. Anyway, thank you so much for taking the time to give me so much information. I really appreciate it!

If the IRS decides that you renounced your US Citizenship just to avoid paying tax, the IRS reserves the right to continue to Tax its expatriates for 10 years after renouncing your US Citizenship...

[Nancy]

Hopefully this won't be the case. I'm a very normal middle-class person. Another positive is the weak yen at the moment and that Japanese real estate depreciates at a rapid pace, so my net worth is very reasonable, but the process is all is rather stressful. Thank you again.

[ClearAsMud]

Tkydon, Thank you so much for your detailed explanation. I will read it over carefully. To explain a bit further on the US side of things, I renounced my US citizenship this year, so I hope that this will be my last time to file US taxes, also filing the 8854 form. So I want everything to go smoothly on the US side, prepaying the interest tax etc. Anyway, thank you so much for taking the time to give me so much information. I really appreciate it!

I see -- so you'll be filing this year for 2022, the year of your renunciation. Good to go, then, in that respect.

If the IRS decides that you renounced your US Citizenship just to avoid paying tax, the IRS reserves the right to continue to Tax its expatriates for 10 years after renouncing your US Citizenship...

No, this isn't quite correct. If it's found that you renounced for tax reasons, you can be refused entry into the country under the so-called Reed Amendment, which has hardly ever been enforced and is practically unenforceable. It's basically not something to worry about.

As far as the IRS is concerned, beginning from June 17, 2008, an expatriate is simply considered to be a “covered expatriate” (the exit tax applies and there are disagreeable implications regarding future gifts to American citizens) or not (no exit tax, and complete disengagement from citizenship-based taxation). Either way, the HEART Act of 2008 replaced the previous 10-year alternative income tax window with an exit tax applicable only to covered expatriates. The standard SOL applies to the 8854 (apparently there's an effort underway to tweak the period under which taxes can be assesed, for up to three years after filing) -- and of course tax fraud per se doesn't have an SOL -- but otherwise, after filing an 8854 expatriates have no further US tax obligation (unless ordinary nonresident-alien tax applies [edit: or the 8854 itself reports certain items that require continued monitoring]). See this page for a concise summary of post-expatriation paperwork.

[TokyoWart]

You do not get any tax credit in Japan for any State Taxes paid in the US.

For what it's worth, my accountants and local 税務署 don't agree. They have filed tax credits for US state taxes every year for me and that survived a very detailed audit.

[Tkydon]

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