Sid in Japan

Living and working abroad offers exciting opportunities, but it also comes with financial responsibilities, especially when it comes to filing taxes and managing your savings. Both are essential aspects of long-term financial health, and they go hand-in-hand. While you file taxes to meet your legal obligations, growing your wealth through smart investments ensures that your hard-earned money keeps working for you.

This guide provides an overview of two critical financial topics for expats: filing taxes and investing your money. Keep in mind that I am not a financial expert and this guide was written with assistance from the Nagano JETs community. This is not comprehensive; always double-check your country’s specific rules and seek professional advice when needed.

Filing Taxes as an (American) Expat

Taxes can be confusing at the best of times, but they get even trickier when you’re living and working abroad. As an expat, you may be working in Japan or another foreign country, but you’re still tied to the tax laws of your home country.

The Essentials for U.S. Expats

If you’re a U.S. citizen, filing taxes is not optional—even if you don’t owe money, you still need to report your income to the IRS each year.

• Annual Filing is Mandatory: U.S. citizens are required to file taxes annually, no matter where they live.
• Filing Deadline Extension: If you need more time, you can apply for an extension, but don’t wait—apply as early as possible to avoid delays.
• File Early: Start as early as January or February, especially if you’re mailing in your forms. Filing early can help you avoid missing the deadline if errors or issues arise.

How to File Your Taxes

• Expat Tax Services: If the idea of filing from abroad feels overwhelming, services like H&R Block offer expat-specific tax filing assistance. These services are expensive but provide peace of mind.
• Filing by Mail: You can file your taxes on your own, but this must be done by mail, which can take longer and lead to delays if corrections are needed. Any mistakes can take months to resolve, so accuracy is key.

Important Tax Considerations for Expats

• Japanese Income Statement: You’ll need a hard copy of your income statement from your Japanese employer to file.
• Foreign Bank Accounts: If your combined foreign bank account balance exceeds $10,000 USD at any point during the year, you’ll need to file the FBAR (Foreign Bank Account Report) in addition to your tax return.
• Student Loans & Investments: Remember to gather all your tax documents, including student loan interest forms (1098-E) and investment statements.
• Foreign Earned Income Exclusion: In many cases, if your foreign-earned income is under $100,000 USD, you won’t owe income tax in the U.S., but you are still required to file.

Filing taxes is essential to stay compliant with the law. However, once you’ve met those obligations, the next step is ensuring that the money you’ve earned works for you, rather than sitting idle. That’s where investing comes in.

Growing Your Money Through Smart Investments

Once you’ve filed your taxes, you may be wondering how to best manage your savings. Simply keeping money in a bank account isn’t enough to protect it from the effects of inflation. Over time, inflation reduces the value of your cash, so it’s important to make smart investments that can help you not only maintain your savings but grow them.

Why You Should Invest

Money does not age like wine.

The value of money decreases over time due to inflation. The more governments print currency, the less your money can buy. This is why investing is crucial—it helps you counteract inflation and potentially grow your wealth.

• Inflation Reduces Value: Think of it this way: the price of gold doesn’t change drastically, but the value of the currency used to buy that gold decreases over time.
• Investing Grows Your Wealth: By investing in stocks, mutual funds, or ETFs, you can increase the value of your money, allowing it to outpace inflation and secure your financial future.

Common Investments: Stocks

Buying individual stocks allows you to own a share of a company, and as the company grows, so does the value of your investment. However, stocks can be volatile and require careful research.

• Where to Buy: Platforms like TD Ameritrade allow you to buy and sell stocks online. It’s important to do your research, or even consult a financial expert if needed.
• Practice First: Investopedia’s stock simulator lets you practice buying and selling stocks using imaginary money, which is great if you’re new to investing.

Tip: Avoid using platforms like Robinhood, which have been criticized for encouraging risky, inexperienced trading behaviors.

Common Investments: Mutual Funds & ETFs

For those who prefer a less hands-on approach, mutual funds or ETFs (exchange-traded funds) are managed by professionals and contain a diversified mix of stocks.

• What They Are: These funds pool together money from multiple investors to invest in a mix of assets. This spreads out risk while offering growth potential.
• Management Fees: Be aware that these funds come with management fees, but the expertise of professionals managing your money can make it worthwhile.
• Where to Buy: You can invest in mutual funds or ETFs through your bank or investment companies.

Connecting Your Taxes and Investments

While filing taxes is a yearly task, smart investing is a long-term strategy that can help you grow your wealth over time. These two areas are closely connected when you consider the tax implications of your investments. For example, selling stocks or mutual funds at a profit triggers capital gains tax, which must be reported on your tax return.

Key Points to Keep in Mind

• Track Your Investments: It’s essential to keep track of all your investments, as these need to be reported when you file your taxes each year.
• Capital Gains Tax: Whenever you sell a stock or mutual fund for a profit, the IRS will want a percentage of that profit as a capital gains tax.
• Short-term vs. Long-term Gains: Investments sold within one year are considered short-term and are taxed at a higher rate. Investments held for over a year are considered long-term and are taxed at a lower rate.

Conclusion

Filing your taxes and managing your investments are both necessary for maintaining financial health as an expat. Although the process of filing taxes can feel burdensome, once you’ve met your legal obligations, you can focus on using smart investment strategies to grow your wealth and secure your future. Keep these considerations in mind, and when in doubt, seek professional advice to make sure you’re on the right track.

Remember: Plan for taxes. Invest for growth.