Furusato Nozei With iDeCo, Medical Expense and Housing Loan Deductions: The Effect on Your Limit

Deductions that lower the limit and ones that don't

Your furusato nozei limit starts from "income-based resident tax × 20%." Any deduction that reduces the income-based resident tax lowers the limit too, while a deduction taken after that tax is calculated hardly changes it.

Income deductions reduce taxable income, so they also reduce the income-based resident tax, and the special-portion limit set at 20% of that tax gets smaller as well. The housing loan deduction is a tax credit taken off the tax itself. The income-based resident tax used for the limit is the amount before that credit, so the limit calculation doesn't change.

How much starting iDeCo lowers the limit

Here are the limits with and without iDeCo contributions for a single company employee under 40 (on the Japan Health Insurance Association plan in Tokyo).

At 5 million yen of income, contributing 23,000 yen a month lowers the limit by about 7,000 yen. But iDeCo contributions are fully deductible from income, so income tax falls by 24,700 yen from 120,700 yen to 96,000 yen, and income-based resident tax falls by 27,600 yen from 238,300 yen to 210,700 yen, saving 52,300 yen in tax a year. A lower furusato nozei limit only means a smaller donation allowance, not a loss, so it's fine to put iDeCo first.

The medical expense deduction affects both the limit and the paperwork

The medical expense deduction is your medical costs for the year minus 100,000 yen (or 5% of total income if that's under 2 million yen). With 5 million yen of income, single, and 200,000 yen in medical costs, the deduction is 100,000 yen, your furusato nozei limit falls from 61,731 yen to 59,225 yen, and the rounded estimate is 59,000 yen. For how much the deduction itself gets you back, see how much the medical expense deduction refunds.

The paperwork matters more than the limit. The medical expense deduction is available only through a tax return, which cancels any one-stop exception you've applied for. List all of that year's furusato nozei donations under the donation deduction on your return. The one-stop exception versus a tax return goes into detail.

• You often won't know whether you'll claim a medical expense deduction until the new year, so from autumn on, leave some room below your limit when you donate
• For childbirth costs, the amount after subtracting the health insurance lump-sum childbirth allowance is eligible for the medical expense deduction
• You can use only one of the self-medication tax system (over-the-counter drug purchases − 12,000 yen) and the medical expense deduction

Using it alongside the housing loan deduction

The housing loan deduction doesn't affect the limit calculation, so from the second year on, when you can use the one-stop exception, you can usually use your full furusato nozei limit. The year you file a tax return is the one to watch.

• The first year of the housing loan deduction requires a tax return, so the one-stop exception isn't available and furusato nozei also goes on the return
• Adding the donation deduction to a return lowers your income tax, and any housing loan deduction that can't be used against income tax comes off resident tax instead
• The housing loan deduction available against resident tax has a cap (for move-ins from 2022 on, 5% of taxable income for income tax, up to 97,500 yen). Anything above the cap goes unused and is lost
• If the housing loan deduction already takes your income tax to nearly zero, using the one-stop exception in years when you can makes you less likely to lose part of the deduction

The Furusato Nozei Deduction Limit Simulator doesn't include the housing loan deduction. If you pay almost no income tax because of it, or it's your first year of filing, it's safer to leave some room rather than donating right up to the limit.

When the limit changes mid-year, and how to check it in the simulator

Your furusato nozei limit depends on your income from January to December of the year you donate. In years like these, your actual limit tends to be lower than one based on the previous year's withholding slip.

• A year you change jobs or leave: income tends to fall if there's a gap with no pay or your new employer's bonus is smaller
• A year you take childcare or maternity leave: childcare leave benefits and maternity allowance are tax-free, so the limit falls in line with your lower salary
• The year you turn 40: long-term care insurance premiums begin. At 5 million yen of income, the limit falls from 61,000 yen to 60,000 yen
• A year you file a return for side income or stock gains: income rises and so does the limit, but the one-stop exception is no longer available

In the simulator's "Find my limit" tab, entering your annual iDeCo contributions or medical expense deduction under "Other income deductions" recalculates the limit immediately. The age setting reflects whether you pay long-term care insurance. Once you can estimate your withholding slip at year-end, re-entering your social insurance via the withholding slip option gives a more accurate limit. For estimates by income and family type, see the furusato nozei limit table, and for how much income deductions cut your tax, see how income tax and resident tax are calculated.

FAQ

Does iDeCo lower my furusato nozei limit?

Yes. iDeCo contributions are fully deductible from income, which lowers your income-based resident tax. At 5 million yen of income, single, contributing 23,000 yen a month takes the estimated limit from 61,000 yen to 54,000 yen. But iDeCo saves 52,300 yen in tax a year, so that's no reason to stop.

Does the housing loan deduction lower my furusato nozei limit?

It basically doesn't affect the limit calculation, because the income-based resident tax the limit is based on is the amount before the housing loan deduction. In a year you file a return, though, part of the housing loan deduction can go unused and be lost, so leave some room below your limit.

Can I use the medical expense deduction with the furusato nozei one-stop exception?

No. Filing a tax return for the medical expense deduction cancels the one-stop exception, so list all your furusato nozei donations under the donation deduction on the return. The total deducted is about the same as with the one-stop exception.

What happens to my furusato nozei limit in a year I take childcare leave?

It falls substantially. Childcare leave benefits are tax-free and not counted as income, so your income-based resident tax falls along with your salary. In the year your leave starts, recalculate the limit using the salary you expect to actually receive that year.