How do you calculate your furusato nouzei limit exactly?

tl;dr: i built a furusato nouzei calculator. It's also in the website's navigation bar. Feedback? Let me know at emailpassengertokyo@gmail.com.

This post started as an attempt to figure out what my exact furusato nouzei donation limit is. Over the course of researching, i discovered a gap in how furusato nouzei calculations are defined, that have a very real impact on how much you can donate without paying out-of-pocket costs. (if you want to skip to this part, click here) This required a lot of math and interpretation of law - neither of which is my forte. If you think i've made a mistake, let me know at the email above.

I wrote about furusato nouzei a while back. Its a mechanism for residents of Japan to donate tax dollars to municipalities they don't live in, in exchange for a gift valued up to 1/3 the price of the donation.

As far as policies go, the best policy on an individual level is obviously, reducing my taxes. The second best is probably furusato nouzei - it makes paying taxes in Japan a little (just a little) more palatable.

Going on a tangent for a moment - i think of furusato nouzei as a great way of democratising craftsmanship for the common folk. When your average resident has easy access to, say, the same high-end knives that top-tier restaurants use - without the burden of out-of-pocket cost - it raises the baseline quality of living across the board. Individuals get quality, businesses producing these things can now earn otherwise-inaccessible dollars, and small cites housing these businesses get a little bit more investment. It also creates a whole new economy that eases the relentless burden of optimise-for-profit-or-die. Producing interesting things now becomes a (slightly more) viable way to survive, and society is more diverse and enjoyable when there are people producing interesting things. It's an incredible policy and i think more countries should adopt it.

Anyway. On to the story.

I fell sick a short while ago, and spent those days alternating between sleeping and scrolling through Rakuten for things i could buy using furusato nouzei.

While looking at some pretty ridiculous items (fridge? Washing machine? Handcrafted wooden bedframe with a tatami surface? A fishing trip with an expert fisherman who will catch you a tuna and film the experience for you?) i had to stop for a moment and ask myself, what's my donation limit again?

So i went back to my old post for reference. And i quote myself:

As far as i know, nobody really knows how to calculate your furusato nouzei limit accurately. People i talk to simply say they use a furusato nouzei calculator online. My tax consultant, a literal professional in figuring out all things tax, says she uses Rakuten’s tax calculator because she doesn’t know how to calculate it herself.

Different calculators will give different outputs as well. For example, someone earning JPY10M/year can have a deductible of

JPY186K on Rakuten’s calculator

JPY180K on furusato tax’s simple simulation

JPY220K on furusato tax’s advanced simulation

JPY172K on satofull’s calculator

JPY219K on furusato bible’s calculator

And this gave me pause. Not for the first time, but this time i actually stopped to ask myself - if the formula is the same, how is it possible that everyone calculates it differently, to such large variance?

And so in a (almost literal) fever dream, Claude (you may know him) and i built a furusato nouzei limit calculator.

Sorting out how you calculate your furusato limit, definitively.

Furusato nouzei limits have typically been a case of, hey you can donate money to get gifts AND a tax credit, just trust me your limit is X. Tax can be (sometimes by design) a black box, but even then this feels a little unsettling. You're telling me i need to spend money, from my own pocket, with no assurance of how that sum is calculated, to maybe receive a credit one year in the future, that may or may not match what i'd put in originally?

I did what any natural skeptic would do - spend 2 years doing exactly that without asking any questions, before having a come-to-(tax)-Jesus moment and doing the research.

Having looked it up, here's what i wish my tax consultant could have explained to me about the policy back then.

How this calculation actually works

• The donation limit is the sum of 3 independent calculations
• Calculation 1 impacts your income tax. The amount you donate is deducted from your taxable income, pre-assessment. This is the same as how donations in Singapore work.
• Calculation 2 impacts your resident tax. 10% of the amount you donate is deducted from the amount of tax you owe.
• Calculation 3 is a de-facto ceiling (and is the most confusing). It's treated as a special deduction on resident tax, and is calculated as

(donation - JPY2K) * (90% - (your marginal income tax rate) * 1.021)

This is capped at 20% of your resident tax bill.

• Calculations 1 and 2 do not have a cap. If i earn JPY10M and donate JPY8M, calculation 1 results in an assessable income of JPY2M, while calculation 2 is a JPY800K deduction (10%) on my assessed resident tax
• To prevent people from abusing this and donating their full tax amount to receive gifts back, calculation 3 acts as a cap. Any dollar over this cap becomes an out-of-pocket cost.

Putting it all together in an example...

Lets say I earn JPY10M and donate JPY200K.

The income used for assessing the amount of tax i owe is JPY9.8M (there are other deductions applied too, but for simplicity i won't include them in these examples).

We'll calculate how much tax i owe at an income of JPY10M, and do the same at an income of JPY9.8M. The difference is roughly JPY40K (again, its not so straightforward because there are a lot of other deductions at play, but for example's sake lets assume this is true). This is the amount of tax i save from calculation 1.

At a JPY10M income, my resident tax is assessed at JPY635K. 10% of my donation is JPY20K. This is the amount of tax i save from calculation 2. I now owe JPY615K instead.

Now calculation 3 comes into play. Looking at the formula's calculation, i'd should get a deduction of

(JPY200K - JPY2K) * (90% - 20% * 1.021) = JPY137K

However, 20% of my assessed resident tax is JPY127K. This is lower than the result of calculation 3, so the 20% cap is applied instead. I'd only get a deduction of JPY127K instead of JPY137K.

This leads to an actual out-of-pocket cost of JPY12K (JPY10K uncovered, plus JPY2K for the furusato nouzei fee)

What are the implications here?

Well, first - you want to be extremely precise with your limit so you know what you can afford to donate.

Second, you want err on the side of underspending your limit, unless you're a truly altruistic soul who wants to give away money just for the benefit it'll bring the other party.

But if you've done furusato nouzei before, you already know all of this.

Third - and this is the biggest thing i learnt from my research - the formulas for calculating income tax and resident tax deductions in furusato nouzei can diverge and lead to you paying money out-of-pocket.

Here's an example to illustrate.

Lets say someone earning JPY12M donated JPY100K. This person's taxable income after all the basic deductions is about JPY8.1M, which sits in the 23% tax bracket. For this person,

• The income tax deduction from furusato nouzei donations is (tax assessed at JPY8.1M) - (tax assessed at JPY8M) = ~JPY23K
• The resident tax deduction is JPY9.8K (10% of the JPY98K donation, after deducting the JPY2K furusato nouzei fee)
• The third calculation is JPY98K * (90% - 23% * 1.021) = ~JPY65.2K
• Summing this up, the value received back is 23+9.8+65.2 = JPY98K.
• This matches the donation exactly

Now lets say someone earning JPY13M donated JPY100K. This person's taxable income after basic deductions is JPY9.04M, just into the 33% tax bracket

• The income tax deduction is (tax assessed at JPY9.04M) - (tax assessed at 8.94M) = ~JPY27.5K
• The resident tax deduction is JPY9.8K
• The third calculation is JPY98K * (90% - 33% * 1.021) = ~55.2K
• Summing this up, the value received back is 27.5+9.8+55.2 = JPY92.5K
• This is less than the JPY98K donated.

Where did the other JPY5.5K go???

Why crossing tax brackets can lead to losing money

I couldn't believe the math, so i had to check this multiple times. I'm also not good at math, so i had to check it multiple times after checking multiple times to be sure.

In as simple terms as i can frame it - when your donation brings you down a tax bracket, the special deduction on resident tax (i.e calculation 3) has no way of factoring in your new, lower tax bracket. It thus ends up overestimating the amount you'll get back from your income tax portion (i.e calculation 1).

In slightly more complicated terms:

Donations are applied against assessable income for income tax, and as a tax credit for resident tax. So when you make a donation,

• income tax assessments will take that donation into account early on.
• But resident tax won't factor it in anywhere when calculating your assessable income (since the donation is applied as a credit at the end)

And therein lies the gap.

Your income tax's tax bracket can change, but the tax bracket applied on your resident tax's calculation cannot.

Here's where i went down the rabbit hole of trying to definitively prove this.

Exhibit A: Japan's Local Tax Act, Article 314-7, tax credit for donations （寄附金税額控除）第三百十四条の七

This article defines how tax credit is applied for donations:

当該納税義務者が第三百十四条の三第二項に規定する課税総所得金額（以下この項において「課税総所得金額」という。）を有する場合において、当該課税総所得金額から当該納税義務者に係る前条第一号イに掲げる金額と当該納税義務者の前年分の所得税に係る所得税法第八十六条第二項に規定する基礎控除の額（租税特別措置法第四十一条の十六の二第一項の規定の適用がある場合には、その適用後の額）から四十八万円を控除して得た額（当該控除して得た額が零を下回る場合には、零とする。）との合計額（次号及び第三号において「人的控除差調整額」という。）を控除した金額が零以上であるとき　当該控除後の金額について、次の表の上欄に掲げる金額の区分に応じ、それぞれ同表の下欄に掲げる割合

The bolded portion points us to 314-3 paragraph 2, which defines how the tax base for resident tax is calculated:

前項の「課税総所得金額」、「課税退職所得金額」又は「課税山林所得金額」とは、それぞれ前条の規定による控除後の前年の総所得金額、退職所得金額又は山林所得金額をいう。

Which then points us to the clause before it, 314-2, which defines the exhaustive list of deductions, and the order in which they are applied when calculating resident tax deductions (this is a list of deductibles which i won't paste here because its too long).

The main thing from 314-2 is, donations aren't listed as a deductible on assessable income. This makes sense because it only factors in after taxable income is assessed, as a tax credit.

So coming back to the calculation in the table above. Once you cross a tax bracket, your shortfall is the difference in tax brackets, multiplied by amount you crossed the threshold by.

If you donated 100K and fell from a 33% to 23% tax bracket, your shortfall is the amount that the calculation assumed would be taxed at 33%, but was taxed at 23% instead.

Calculating your (real) limit.

If you're confused about how this calculation works concretely, you're not alone. I wrote that explainer above and have done days and days of research, and i still get confused about how this works at times.

So i built a calculator. That way i don't have to remember how it works (my brain has seemingly shrinking capacity these days). The calculator will tell me.

I believe verifiability is important, so I tried to build in a "show your work" aspect as much as possible. You should be able to put in a number and your variables, see every step of each deduction, how it leads to your final assessable tax, and how your maximum donation limit is calculated.

If you live in Japan and want to calculate your furusato nouzei donation limit, feel free to use it.

If you don't live in Japan but want to get a sense of Japanese taxes... feel free to mess around with it as well.

If you're worried about privacy, this doesn't log or store any input (or anything else, for that matter) anywhere.

And lastly, if you've noticed i've made a mistake or overlooked something in the law or the math, let me know at emailpassengertokyo@gmail.com so i can correct myself.

Calculate away.