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Reducing income tax by breaking up of Taxable income

Reducing income tax by breaking up of Taxable income

Reduction of Income tax of Japan

As you may know, when the amount of taxable income becomes higher, tax rate becomes higher ( Progressive taxation = Ruishin kazei= 累進課税).

So, it is better to receive salary of 8 million yen by several persons than by one person.

For example, if Mr Husband ( president of company ) receives salary  of 8,000,000 yen, his income tax is 772,500 yen. ——————-  ①

But,  when Mr Husband is director and Ms Wife is employee of the company, and they receive salary of 4,000,000 yen each.

Mr Husband’s income tax is
( 4,000,000 – 1,340,000(employment income deduction) ) × 10% – 97,500 yen(deduction ) = 168,500 yen.

Ms Wife’s income tax is
( 4,000,000 – 1,340,000 (employment income deduction) ) × 10% – 97,500 yen(deduction ) = 168,500 yen.

168,500 yen × 2 persons = 337,000 yen.

772,500 yen – 337,000 yen = 435,500 yen.

So, by breaking up the income, this household can reduce  amount tax by 435,500 yen.

And compared with sole proprietor,  this household can reduce  tax of 867,000 yen per a year.

( In the case of sole proprietor, Mr Husband can pay salary to Ms Wife and can reduce taxable income. But, there is limit of Mr Wife’s salary.  )

Deduction from Taxable Income

Income tax (所得税,shotoku zei), resident’s tax is not calculated by money received × tax rate.

Before you multiply by tax rate, you can deduct some amount from money received.

This amount is called Deduction from Taxable Income ( 所得控除,shotoku kojo ).

There are some kind of Deduction from taxable Income.  When Mr Husband sustains his wife, 2 children, Mr Husband can use spousal deduction and dependents deduction.

These amounts are in general 380,000 yen each. So, when Mr husband’s salary is 8,000,000 yen, amount of income tax is
( 8,000,000 yen – 2,000,000 yen – 380,000 yen – 380,000 yen – 380,000 yen  ) × 20% – 427,500 yen(deduction ) = 544,500 yen.
 (https://www.nta.go.jp/taxanswer/shotoku/1180.htm Quoted from Japan National Tax agency = Kokuzei cho = 国税庁)

So, if  Mr Husband can apply for spousal deduction and dependents deduction for 2 children, he can reduce tax amount.
(380,000 yen  + 380,000 yen + 380,000 yen  ) × 20%  = 228,000 yen.

If Mr Husband of sole proprietor pays salary for his wife and his children, he can not use spousal deduction and dependents deduction for 2 children.

But, in the case of incorporate, you can use this method.  When Mr Husband  pays salary to his wife and 2 children (Of course, his wife and 2 children have to work for the company actually in some ways. )

As long as the amount of wife’s and children’s salary each is below 1,030,000 yen per a year, Mr Husband can apply spousal deduction and dependents deduction.

Deduction for Retirement Income Tax of Japan

When you resign from the company and receive money as retirement allowance (Taishoku kin 退職金), you can avail “Deduction for Retirement Income”.

For example, when Mr. husband receives salary of 20,000,000 yen, income tax will be
20,000,000 yen - 2,450,000 yen (Deduction from taxable Income) - 380,000 yen (spousal deduction) yen – 380,000 yen ( dependents deduction ) – 380,000 yen ( dependents deduction ) × 40% – 2,796,000 yen = 3,768,000 yen.

On the other hand when Mr. husband has worked at the company for 25 years and received retirement allowance of 20,000,000 yen, the amount of deduction for retirement income will be

8 million yen + 700,000 yen × ( 25 -20 )= 8 million yen + 3,500,000 yen = 11,500,000 yen.
(https://www.nta.go.jp/taxanswer/shotoku/1420.htm   National tax agency )

So, the amount of income tax will be
= ( 20,000,000 yen  -  11,500,000 yen ) ×1/2 = 4,250,000 yen.
4,250,000 yen ×20%-427,500 yen = 422,500 yen. 😆 

So, the difference between the amount of income tax of salary and retirement income is
3,768,000 yen – 422,500 yen = 3,345,500 yen. 

But, in the case of sole proprietor, Mr. Husband can not apply for deduction for retirement income. Because, it is not admitted that Mr. Husband pays retirement allowance to himself. And Mr. Husband can not apply for deduction for retirement income for his wife and children even if he pays money ( wages for family employees of blue return taxpayer ) for them.

If you hope to incorporate a company to save tax, you can refer to this page.
Incorporation of Company in Japan

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