Let’s Talk U.S. Taxes While on JET!
Disclaimer
I, Casey Corbin, am not an attorney, Certified Public Accountant, IRS Enrolled Agent, or licensed tax professional of any kind. Therefore, I cannot offer tax advice and I am unable to represent you in front of the IRS or any U.S. State tax agency. You can find credentialed tax preparers at the following link: https://irs.treasury.gov/rpo/rpo.jsf
The information presented in this article is sourced from experts and is intended for educational purposes only. This is not tax advice. Please consult a licensed tax professional for advice.
No links are affiliate links. I do not benefit from this article in any way, shape, or form.
Edit History
December 4, 2023. I included new pictures, changed my expat tax software recommendation from H&R Block Expat Taxes to MyExpatTaxes, added additional expat tax software options to consider, and added several new hyperlinks. No hyperlinks are affiliate links, I simply don’t roll that way.
December 10, 2023: I revised the section titled “Disagreement 1” with further citations from the IRS. I also added a new paragraph under “Which Tax Software Should I Use?” including info about U.S. phone numbers.
February 9, 2024: I changed my personal tax software recommendation from TurboTax to 1040.com, which offers a FreeFile edition that works for all U.S. JET Program participants. Once again, no affiliate links. I also updated the yearly currency average exchange rates cited to their 2023 equivalents as KumamotoJET is not publishing a 2023 tax guide.
March 18, 2024: I revised my wording for both 1040.com and TaxAct FreeFile Edition as most JET Program participants won’t be eligible for 1040.com’s FreeFile edition. I also deleted my paragraph about MyFreeTaxes.com as I cannot confirm eligibility for U.S. taxpayers living abroad.
March 22, 2024: I no longer recommend 1040.com as their user interface is not user friendly, and accessing required forms is difficult for the average taxpayer. As of March 22, 2024, my recommendations no longer include 1040.com. Shout out to Emmy for testing out 1040.com!
Let’s Talk U.S. Taxes
When you’re an American JET, you have to file your U.S. tax return as well as pay Japanese taxes. However, most won’t be double-taxed. The U.S. tax code is structured in a way which prevents double taxation on your foreign-earned income (See Publication 54). There are two ways which this is accomplished:
First is the Foreign Earned Income Exclusion (Form 2555), which reduces your U.S. tax liability by zeroing out your foreign earned income up to $112,000 USD (as of 2022). If you have federal student loan debt and are on an income-driven repayment plan, a tax professional might advise you to take the Foreign Earned Income Exclusion. If you have an Individual Retirement Account (IRA), you would not be able to contribute to it if you use this path.
Second is the Foreign Tax Credit (Form 1116), which gives you a credit for the equivalent USD amount you “overpaid” to Japan. The foreign tax credit is a bit too complicated for my knowledge, but 1040Abroad.com has a great explanation on how it works. However, if you have an IRA in the U.S. and you want to contribute to it, a tax professional might advise you take this credit instead.
Many JETs, including myself, consult the KumamotoJET Unofficial U.S. Tax Guide, which is updated annually. This comprehensive guide walks you through how to properly file your U.S. taxes using the Foreign Earned Income Exclusion, how to convert your foreign earned income to its USD equivalent, how to report your foreign bank account, and how to file. I consider this guide the Holy Bible of filing U.S. taxes while living in Japan, although I have two minor disagreements with it.
My Disagreements with the KumamotoJET Tax Guide.
Let me reiterate that my disagreements are minor and insignificant. I truly consider the KumamotoJET U.S. Tax Guide the Holy Bible of tax preparation for Americans living in Japan. Anyway, here are my critiques.
Disagreement 1
My first disagreement is with the average annual exchange rate used in the KumamotoJET guide. They use the Federal Reserve’s Average Annual Currency Exchange Rate, which was $1 USD = ¥140.5001 in 2023. KumamotoJET says it’s perfectly okay to use the Federal Reserve’s rate, as the IRS themselves state the following:
The Internal Revenue Service has no official exchange rate. Generally, it accepts any posted exchange rate that is used consistently.
Internal Revenue Service
However, the IRS publishes their own rate every year. The IRS’ average annual rate between dollars and yen for 2023 was $1 USD = ¥140.511.
Note that when converting your maximum Japanese bank account balance(s) for tax purposes, you use the Treasury Reporting Rates of Exchange for December 31st of the tax year. For 2023, that rate was $1 USD = ¥141.47.
I hired a CPA to prepare my 2021 and 2022 U.S. tax returns and he used the IRS’ average currency exchange rate for both years. I confirmed this with him through email exchanges. In addition, H&R Block’s Expat Tax software, which allows you to enter foreign earned income in the currency it was earned in, converts to USD using the IRS’ published rate. Finally, many tax preparers use software, such as Intuit ProConnect or Drake Tax, which convert currencies using the IRS’ published rate.
In short, when converting yen to dollars for tax purposes, use the IRS’ published rate as that’s what industry professionals use.
Disagreement 2
My second disagreement is with the urgency of filing IRS Form 8822 – the Change of Address form. While I agree that it is a good idea to update your address with the IRS as soon as possible, it’s not the end of the world if you don’t. The IRS will update your address information when you file your first U.S. tax return using your Japanese address (or when you file extension for your first year).
Preparing Your U.S. Taxes
If you are looking for guidance on how to self-prepare your taxes, I hereby refer you to the KumamotoJET Tax Guide. Please refer to their 2022 edition as there is no 2023 edition. However, please use the 2023 yearly average currency exchange rates from the IRS and Department of the Treasury, not the ones listed in the tax guide.
My article goes on to offer software recommendations for those self-preparing their U.S. taxes while on JET. If you are looking for a credentialed tax professional, please consult this link: https://irs.treasury.gov/rpo/rpo.jsf
When reporting foreign-earned income for tax purposes, you need to convert your Japanese Yen salary to USD. Here’s how to do it.
How to Calculate Your Dollar-Equivalent Yen Income
Method 1
First, take your gross income in Yen, then divide by the average annual exchange rate in yen. Let’s say you earned 3,460,000 yen in 2022. In 2022, $1 = ¥131.454 according to the IRS. Therefore, we divide 3,460,000 by 131.454 to get roughly $26,320.99, your equivalent JET salary in dollar terms. This rounds up to $26,321 for tax purposes. If the decimal is .49 or less, then you round down, as per IRS publications.
- Formula: (Yen Gross Income / Yearly Average USD/JPY exchange rate) = USD Gross Income
- Example: ¥3,460,000 / ¥131.454 = $26,320.99
Method 2
Another way is to divide 1 by the average annual exchange rate, then multiply by your Japanese gross salary.
- Formula: ($1 / Yearly Average USD/JPY exchange rate) * Yen Gross Income = USD Gross Income
- Example Step 1: ($1 / ¥131.454) * ¥3,460,000
- Example Step 2: ($0.007607223819739) * ¥3,460,000 = $26,360.99
Reminder: The above examples use the 2022 yearly average currency exchange rate between USD and JPY as reported by the IRS. Please make sure you’re using the correct exchange rate for your tax year.
Which U.S. Tax Software Should I Use?
Since the KumamotoJET Tax Guide does not recommend tax software to use, I will suggest some options which are popular among JETs. I will start with my personal recommendation, followed by popular choices for those seeking FreeFile options, as well as software designed for Americans living abroad.
Most tax software shown below, such as TurboTax and TaxAct, require you to have a U.S. phone number. If you do not have a U.S. phone number, try downloading an app which gives you one. You need a U.S. phone number for two-factor authentication purposes.
My Personal Recommendation: TurboTax
I’ve used TurboTax for many years and find their software fairly easy to navigate. More importantly, it’s comprehensive and allows you to file your U.S. Federal (and State) taxes while living abroad. However, you will need an active U.S. phone number as you must enter it in TurboTax. Since TurboTax no longer participates in the IRS FreeFile Program, this will cost you about $80 USD. I’ve experimented with other tax software courtesy of my friends, and TurboTax is by far my favorite for filing expat taxes.
You are able to enter all required information for Form 2555 or Form 1116, whichever one you use. However, you will need to compute the USD equivalent of your gross income yourself. Please refer to the section “How to Calculate Your Dollar Equivalent Yen Income” on how to do this.
Upon trying different tax software, I appreciate how user-friendly TurboTax is. In TurboTax, it only takes one (1) step to enter your foreign-earned income AND apply for the exclusion (Form 2555). Most other tax software listed, including TaxAct and 1040.com, require users to enter their “Foreign Earned Compensation” and apply for the “Foreign Earned Income Exclusion” as two (2) separate steps.
My FreeFile Recommendation: TaxAct FreeFile Edition
Up until 2021, TurboTax and H&R Block were part of the IRS FreeFile Program. Since then, many JETs have switched over to other FreeFile providers which support foreign earned income exclusion (Form 2555). TaxAct FreeFile Edition was a popular choice among JETs for the 2021 and 2022 tax years. This is because it offered free federal tax filing, and for some lucky JETs who needed it, free state filing. In addition, TaxAct FreeFile Edition allows taxpayers with an AGI of $0 to file for free!
When using TaxAct FreeFile edition, or any FreeFile edition tax software, always access it through the IRS’ website. This is to ensure you’re using the FreeFile edition of the software.
As with TurboTax, you are responsible for converting your Japanese salary into dollars. Please refer to the section “How to Calculate Your Dollar Equivalent Yen Income” on how to do this.
If you are using the Foreign Earned Income Exclusion (Form 2555), please note that you will need to enter your info under two different sections. First, enter your data under “Foreign Earned Compensation” in the income section. Next, enter your data again under “Foreign Earned Income Exclusion” to properly exclude your income. If done correctly, you should see a positive number in Line 1h and a negative number in Line 8 of your Form 1040, with the sum of both lines equaling zero.
U.S. Expat Tax Software: MyExpatTaxes.com
If you’re looking for tax software specifically designed for Americans living abroad, MyExpatTaxes may be right for you. MyExpatTaxes was started in 2018 by American expats living in Austria after having a horrible experience with a U.S.-based CPA. Their CEO is listed by the IRS as an enrolled agent (I confirmed this), which adds credibility to their software offering and services. MyExpatTaxes is listed by the IRS as an authorized e-File provider.
I have never used MyExpatTaxes personally, and I used to be skeptical of them as they are based in Austria. Since I confirmed they are listed by the IRS as an authorized e-File provider, and their CEO is an enrolled agent, I am more comfortable listing them here. Their software costs $169 for their standard package, making them the most expensive option in my post. If you want someone to do your taxes for you, MyExpatTaxes offers a premium package for $599.
Other Expat Tax Software Options
I recommended the big names in tax preparation software because they are more established. However, I am aware Intuit and H&R Block lobby Congress to keep the U.S. tax system complicated. In recognition of this, I changed my expat tax software recommendation from H&R Block to MyExpatTaxes. However, since I personally use TurboTax, they remain my overall recommendation.
H&R Block Expat Taxes
H&R Block Expat Taxes is popular with JET participants, costs $100, and takes the guesswork out of converting your salary to dollar terms. In addition, this software helps you decide whether the foreign earned income exclusion or the foreign tax credit is better for your filing situation.
Some JETs choose this software because it allows them to enter their Japanese salary in yen terms. The software automatically converts their yen salary to its dollar equivalent, ensuring no errors were made in their calculations. Plus, you have access to a tax professional (though in my experience, they don’t compare to an actual CPA).
Expatfile
Expatfile is another expat tax software popular with JETs. The company’s website lists very little, which makes me skeptical. Expatfile is based in Chicago, and offers tax preparation software for as little as $119, which is comparable to H&R Block’s software. Expatfile is listed by the IRS as an authorized e-File provider. If you want an expert to prepare your return, Expatfile offers an unlimited package for $499, which is cheaper than MyExpatTaxes’ offering.
While I have friends who use this software to file their U.S. taxes, I cannot recommend it because of the company’s lack of transparency. However, they offer a highly-detailed guide about U.S. expat taxes in Japan which is worth reading.
Do Not Recommend (But Okay If You Know What You’re Doing): 1040.com
1040.com is a little-known online tax filing software which markets themselves as an honest player. I was skeptical at first, then I did some digging. I previously recommended 1040.com because they are developed by Drake Software, a reputable software company known for Drake Tax, which many CPAs and tax preparers use.
1040.com also participates in the IRS FreeFile Program and supports the foreign earned income exclusion (Form 2555) and foreign tax credit (Form 1116). While I linked directly to their FreeFile website, always access it through the IRS’ website. This is to ensure you’re using the FreeFile edition of the software.
As of the 2023 tax year (2024), you must have an adjusted gross income (AGI) of between $17,000 – $79,000 to be eligible for 1040.com’s FreeFile edition. Most JETs won’t be eligible for their FreeFile offering because most second-year and beyond JETs have an AGI of $0. However, their paid service charges a flat rate of $25 at the time of writing. This flat rate includes one Federal and one State tax return.
Their interface is similar to TurboTax Online Edition, but like TurboTax, you are responsible for converting your Japanese salary into dollars. Please refer to the section “How to Calculate Your Dollar Equivalent Yen Income” on how to do this.
Why Did I Change My Opinion?
I was considering 1040.com as a replacement for TurboTax for some time now. Unfortunately, I found their user interface to be lacking intuition. In addition, whereas other tax software, such as TurboTax and TaxAct, make it easy to enter your foreign-earned income and exclusion, 1040.com did not. I had to manually search for the specific form I needed as the software did not even consider this a “common” tax situation. In addition, 1040.com did not update calculations upon entering Form 2555 info, leaving a friend who tried this program confused and stressed. The program kept saying my friend owed taxes to the IRS and didn’t update its calculations until we reviewed the forms. Stay away unless you know what you’re doing!
If you decide to use 1040.com, which is a powerful tax software, here’s what you need to do. If you are using the Foreign Earned Income Exclusion (Form 2555), you will need to enter your info under two different sections. First, enter your data under “Foreign Earned Compensation” in the income section. Next, use the “Help” function and search for either “Foreign Earned Income Exclusion” or “Form 2555.” Select the form and enter your data again under “Foreign Earned Income Exclusion” to properly exclude your income. Then review your return under “Forms” and check to see if you have BOTH “Foreign Earned Compensation” and “Foreign Earned Income Exclusion.” Finally, preview a PDF of your return (if the software cooperates). If done correctly, you should see a positive number in Line 1h and a negative number in Line 8 of your Form 1040, with the sum of both lines equaling zero.
If your adjusted gross income (AGI) is zero, this software will not allow you to even preview your return. It incorrectly suggested that us JETs did not need to file taxes, whereas the IRS themselves say WE DO. While 1040.com can help JETs do their taxes, it was a pain in the ass to use. I no longer recommend 1040.com as a result.
Points To Remember when Filing your Taxes
- You are responsible for collecting your tax documents and filing your taxes properly. If you are missing a document, the IRS will reject your return. Stay on top of your tax documents.
- If you self-prepare your tax return using software, ALWAYS download a PDF copy of your return and review it for errors before efiling your tax return. Do the same after efiling for your records.
- Keep all tax documents and copies of your submitted tax returns in case you get audited. If you get audited, I cannot help you, but a certified tax professional can. You can also purchase audit defense insurance if you want to reduce your anxiety about a potential audit.
- If you want your taxes done right, find a certified tax professional. You can find credentialed tax professionals through the Department of the Treasury at this link: https://irs.treasury.gov/rpo/rpo.jsf. You can also research tax preparation services which specialize in helping Americans living abroad.
Conclusion
The KumamotoJET Unofficial U.S. Tax Guide is the best resource for American JET Program participants who like to prepare their own taxes. However, the guide is designed as if you are preparing your papers manually (or through IRS Free Fillable Forms).
This article provides minor critiques to the KumamotoJET tax guide and offers tax software recommendations for American JETs who want to prepare their own taxes using tax software.
If you find taxes confusing and/or have any doubts about doing them yourself, hire a tax professional. You can find one, including here in Japan, through the Treasury Department at the following link: https://irs.treasury.gov/rpo/rpo.jsf