Calculating My Cost Basis Exclusion for Tax Purposes

[Zeikin]

I need help understanding some basic accounting math.

I’m a US citizen living in Japan, with income from a US retirement investment account that I have to report to Japan. Using the appropriate exchange rates, I’ve figured my cost basis for the account (US$ 19,464.49) to be equivalent to 2,255,065 Japanese Yen (JPY).

On 2/24 this year, the total value of the account was $36,710.23 (or 5,526,725 JPY at the exchange rate of 150.55), and later the same day I took a taxable withdrawal of US$2000 (301,100 JPY) from the account.

I now need to calculate the excludable portion that represents my non-taxable cost basis.

Questions:

Is the following correct?

(Cost Basis / Total Value) x Withdrawal = Excludable Portion

(2,255,065 / 5,526,725) x 301,100 = 122,858 JPY

If so, then figuring the taxable portion I get 301,100 - 122,858 = 178,242. Right?

After that, I assume I would need to reduce the Cost Basis by 122,858. That is, it would now become 2,255,065 - 122,858 = 2,132,207. Right?

For instance, if by next year the same account has grown to be worth say 5,500,000 JPY on 2/24/2025, and if I were to take a withdrawal of 250,000 JPY later that same day, would the following be correct?

(New Cost Basis / Total Value) x Withdrawal = Excludable Portion in 2025

((2,255,065 - 122,858) / 5,500,000) x 250,000 = 96,919 JPY

I'd greatly appreciate any corrections and feedback. Thanks!

 

[blamocur]

I am not sure this can be answered using math alone because it involves Japanese (and potentially US) tax codes, plus exchange rates. You are using different exchange rates for cost basis (115.86) and withdrawal (150.55) -- is this what the code tells you to do?

Assuming your math corresponds to the tax code your computation seem correct.

P.S. If this happened in the US then I don't know what the exclusion is: on regular IRA you would have no exclusion since you did not pay taxes on the cost basis, and with Roth IRA you would not have to pay any taxes.

 

[Zeikin]

Thank you. I appreciate your reply.

A bit of background: I'm a US citizen residing in Japan, which means I'm obligated to report worldwide income to BOTH countries for taxation. (I settle my Japanese taxes first by their 3/15 deadline, calculate my US taxes second, and then I can claim a Foreign Tax Credit in the US using IRS Form 1116.)

Unfortunately, I have not been able to find clear, detailed information about Japanese taxation of all the various types of US retirement income (from 401a, 403b, 401k, Traditional IRA, Roth IRA, non-annuitized annuity accounts, annuitized annuity accounts, US Social Security, etc) -- not on Japanese government websites, and not on expat- and tax-related forums devoted to these sorts of issues. And the Japanese tax professionals I've consulted so far have been completely unknowledgeable about these non-Japanese forms of income. I assume there are international accountants serving 6- and 7-figure earners who might be up to speed on this, but for me their fees are prohibitive.

Also, the Japanese tax code does not recognize such things as tax-exempt Roth IRAs. So while the US may not tax my Roth, Japan will. So I definitely want to factor out my cost basis in Japan.

Anyway, my plan is to be proactive -- to put together information detailing my approach(es) to retirement income each of my accounts, take the information to the national tax office in advance, run my plan past them, and hopefully get their blessing.

blamocur wrote:

You are using different exchange rates for cost basis (115.86) and withdrawal (150.55) -- is this what the code tells you to do?

You're correct. Again I've found no clear explanation in Japanese. However, a CPA/EA who used to do our US tax returns years ago provided me with the following for reporting income from a Japanese "Nenkin" Pension (the Japanese version of Social Security) to the IRS in US$,

1). Get a listing of every premium you ever paid into the system.​

2). Segregate the payments by year, getting a total (in JPY) for each year.
3). Convert each yearly total to US$ by applying the exchange rate in effect for that year.
4). Add all the US$ yearly totals, to arrive at one US$ Grand Total of premiums paid.

and I have taken his approach, in reverse (US$ to JPY), to arrive at my cost basis in JPY:

1). I got a listing of every premium I ever paid into my US retirement account.
2). I segregated the payments by year and got a total (in US$) for each year.
3). I converted each yearly total to JPY by applying the exchange rate in effect for that year.
4). I added all the JPY yearly totals to arrive at one JPY Grand Total of premiums I paid.

Doing so, my cost basis for the account (US$ 19,464.49) came out to 2,255,065 Japanese Yen (JPY), as mentioned above.

Assuming your math corresponds to the tax code your computation seem correct.

Thank you. I'll give this approach a try with the tax office...

 

[blamocur]

I'd be the last person to consult on any tax-related issues, but I do wish you good luck in minimizing your taxes on both sides of the Pacific

 

[Zeikin]

Thanks.