Japan’s FY2026 Tax Reform – Part 2: Individual Income Tax (For foreign residents in Japan)

In this series, we start with individual income tax, because the tax return season is approaching and many foreigners are directly affected.

Why individual income tax comes first

• Most foreign residents earn salary income or business income in Japan.

• Income tax changes affect monthly payroll, year-end adjustment, and final tax returns.

• Even small rule changes can change the amount of tax you pay or get refunded.

Main Income Tax Changes in the FY2026 Outline

1. Increase in Basic Deduction

The government plans to increase the basic deduction again, for the second year in a row.

• Purpose: To reduce the burden caused by rising prices.

• Effect: Many taxpayers will have slightly less taxable income.

2. Increase in Minimum Employment Income Deduction

The minimum guaranteed employment income deduction will also be increased.

• This mainly benefits:

  • Employees with lower or middle income

  • Part-time workers

• It can reduce income tax automatically through payroll.

3. Expansion of Housing Loan Tax Credit

The housing loan tax credit will be expanded.

• This applies to individuals who buy or build a home in Japan.

• Foreign residents who meet residency requirements may also qualify.

What foreign residents should keep in mind

• These changes are planned, not final yet.

• Some changes may apply through:

  • Year-end adjustment (for employees)

  • Final tax return (for self-employed or mixed-income earners)

• Japan’s deduction system is very different from many other countries, so assumptions based on home-country rules can be risky.

Timing – When will this matter?

• The outline was announced in December.

• Laws are expected to be finalized early next year.

• Most income tax changes will apply from the 2026 tax year, but preparation should start now.

What’s next?

In the next article, we will look more closely at:

• Who benefits most from these income tax changes

• How employees and self-employed foreigners should prepare for filing

※ Note: In Japan, income tax rules often change through the annual tax reform process. Actual application depends on the final law passed by Parliament.