What is furusato nouzei and how do i use it?

Japan has this thing where you pay a municipality money, and they give you stuff in return.

Isn’t that just a regular purchase?

Yes. But! In addition to them giving you stuff, they also give you a donation certificate. You then use this donation certificate to offset your taxes.

You’re basically paying your taxes by buying stuff.

This is done through furusato nouzei, a mechanism to redistribute tax dollars out of the city centres to regions that could benefit from it the most.

If you’d read my previous post on the financial implications of moving to Japan and paid attention to the numbers, you’d realise the taxes are on the higher end (at least compared to Singapore). Nobody ever seems to be certain on how exactly one can definitively calculate one’s taxes, but conservatively, based on the calculator linked previously - on an income of JPY9M/year, you’d pay about JPY1.2M in income tax, or about 13% of your total salary.

This other example from PWC, which i assume is as accurate as it gets because if the tax firm doesn’t get it right who will, notes you pay JPY1.9M in income and residence tax on an income of JPY10M/year, or 19% of your total salary.

Looking at the numbers in aggregate makes me feel nauseous already, but the silver lining is that Japan introduced a rather innovative way of making this all more bearable through the furusato nouzei, or hometown tax.

What is furusato nouzei?

Furusato nouzei, widely established via tax law in 2008, is essentially a donation you make in advance, to a municipality of your choice, in exchange for a tax credit. The tax credit is then used to offset your taxes the following year. In short, any donations i make in the calendar year of 2024 can be used to offset my taxes in 2025, up to a limit. As a sign of gratitude for the donation, the municipality sends you a gift, not exceeding 1/3 the donation amount.

In other words, a purchase. You are buying an item from the stated municipality for 3 times the item’s usual price and receiving a tax credit in return.

Why does this matter?

Primarily, furusato nouzei aims to faciliate wealth redistribution from densely populated areas to sparsely populated ones. Japan has a national government and local governments. From this paper i gather than income tax is paid to the national government and redistributed according to budget, at the national government’s discretion. Residence tax, on the other hand, is a local government’s local tax revenue that can be used at their own discretion. This means that densely populated areas, like Tokyo, will have a large amount of tax revenue, and sparsely populated areas will have very little.

Furusato nouzei allows people living in the former to donate their tax dollars to the latter, to aid in regional revitalisation (and get a gift in return, of course).

The effectiveness of this policy is debatable (the paper linked above seems to argue that furusato nouzei revenue is offsetting other revenue streams leading to a net zero outcome), but at an individual level this certainly does have a benefit.

The secondary outcome is that it returns some value to taxpayers for facilitating this redistribution - I don’t like paying taxes but i did have a lot of fun looking for novel things i could buy within my furusato nouzei limit.

How does it work, and how do you calculate your furusato nouzei limit?

If you’ve ever made a donation for anything, what likely happened is:

• You gave them a sum of money
• They wrote you a receipt saying “this is a donation”
• Then you bring that to your tax authority and say “i gave away this amount of money for a good cause”
• And they’ll respond “great, for being the magnanimous being that you are, we’ll deduct this amount from your assessable income”

And so this is how it works here, with one additional caveat - furusato nouzei costs JPY2,000 to use. This means that if you donated JPY10,000, you'll get a credit for JPY8,000. It's a one-time entry fee each year, so 2 donations of JPY10,000 each would receive credits of JPY8,000 and JPY10,000 respectively... up to the predefined donation limit.

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

(I suspect the calculators with more advanced inputs, like furusato tax or furusato bible, require you to input your insurance and pension deductibles yourself, whereas simple calculators will derive a figure for you based on your income. This could have contributed to the large discrepancy i saw. But even amongst the simple calculators there's no consensus.)

Japan’s Ministry of Internal Affairs and Communications website lists JPY180K. I assume that’s the most accurate one, but like all things related to tax, nobody knows for sure.

How do you actually make a purchase?

Like any great deal, you have to jump through the right hoops. If you jump through the wrong hoops, you’re still jumping - you’d still put in time and effort figuring out the system and fighting through paperwork - but you’d be jumping in place. You’d end up paying 3 times the amount for an item, on top of your full tax bill - not ideal.

The right hoops are:

1. The donation is only valid for the calendar year the purchase is made. If i buy something in 2024, i'll receive a tax credit in 2024, which is deductible from my 2025 taxes. Buying something in 2025 means the tax credit is issued in 2025, and cannot be used to offset 2025's taxes.
2. The item you’re buying cannot be from the same municipality you’re staying in. If you live in, say, Wakayama city in Wakayama prefecture, you cannot donate to Wakayama city for an item in return. Everything else is fair game.
3. The purchase must be billed to the exact name and address on your residence card. That’s the name and address they have in their registry. If it doesn’t match, no deductible.
4. If you’re using the One Stop system (more on this later), you have to register the purchase on the system. If you’re not, you have to keep the physical donation certificate as proof of the donation for submission when filing your taxes

With these hoops lined up, you can make your purchase.

I used Rakuten, which seems to be the most popular platform for this based on responses from people i've asked, but you can easily Google for a variety of platforms. Some i looked at are Satofull, Furunavi and Furusato Japan - the latter is available in English. I ultimately went back to Rakuten because i felt it had the most options. If you used their furusato tax calculator, they also log your remaining donation limit on your profile after each donation, so you don't have to manually keep track of how much you have left to spend. It's a small but pleasant detail that made the experience that much nicer.

Here's an actual thing i bought from Rakuten using furusato nouzei back in November, to tide through the impending winter - a futon from Fujiyoshida City in Yamanashi prefecture:

A brief segue to parrot the virtues of this futon because it was life changing for me - the first winter spent in Japan we turned on the heater every night because i felt the chill in my bones despite wearing 3 layers and 2 blankets. This winter we haven't needed to turn on the heater once. It gets warm enough under the futon that i sometimes remove it while i'm sleeping - i don't enjoy that feeling in summer but it feels like a luxury in winter. As a benchmark, this is 85% down feathers and has kept us warm despite 0 degree weather.

Anyway, back to regular programming - here's how i bought the futon.

The important part of the page looks like this - it's where you select the specifications of the item you're buying, and fill in a questionnaire that comes with furusato nouzei purchases.

First, they'll reiterate that this is a furusato nouzei purchase, and that the order details must match your residence card / residence certificate. There's only 1 option here, to agree.

Second, they'll ask what you want your donation to be used for. In this case, Fujiyoshida city allows you to allocate the donation to (i'm taking a lot of liberties with the translation here) improving regional administration, educational projects, town revitalisation, safety, infrastructure and disaster preparedness, environmental preservation, support for mount Fuji as a world heritage site, or no preference. If you have no idea what's being asked here, you could select the last option, which is no preference (事業の指定なし), to allow the city to use the donation as they see fit.

Third, they'll ask if you want a One Stop exception application form. This is useful if you're a salaried employee whose company handles your taxes via withholding, because the full tax amount is already accounted for. The One Stop system integrates with these deductions, so no additional filing is needed. If you have other sources of income from rental, equity, or other business ventures, these need to be declared separately. That means filing taxes manually, which excludes you from using this system. For me, as a general rule here - when in doubt, just request for the form (the 希望する option). You can always choose not to use it if you find it's not inapplicable, but you can't re-request the form if it turns out you do need it.

Fourth is a disclaimer that you can't cancel, exchange or return the item. There's no real option here either, you have to select the 2nd option in the dropdown to consent, 同意します, in order to proceed.

After filling in the form and clicking the big red button, they'll send you to another confirmation page with a bunch of warnings. The gist of it is:

• The donation will be credited according to the buyer's information on Rakuten
• If the buyer's information does not match your residence card / residence certificate, make sure to edit the field to align it before finalising the purchase
• If you want the item to be delivered to a different address, make sure to edit the delivery information
• The item will not be delivered if, upon processing, they find you're donating to your own city of residence

Acknowledging this (again, the big red button) takes you to your cart, where you can click (surprise) another big red button to continue with the purchase

If you don't have a Rakuten account, this is where you're prompted to make one. Otherwise, this is where you login.

On the final page pre-purchase, delivery information (お届け先) will be populated with your information. If it doesn't match with your residence card / certificate, stop right here, go to your profile page, and edit your name and address in your profile. It's the first option with the human outline icon ( 会員情報の登録・確認・変更) on your profile page.

If it does align, set your payment method and go ahead and click the (again, surprise) big red button to complete your purchase.

How do you handle the paperwork?

The two ways to do this are through the One Stop system or through manual filing.

I will start by saying i don't use the One Stop system - i'm excluded from using it because my salary through payroll is not my only source of income. Unfortunately, i did not know this until only recently, which means i used the One Stop system all of last year thinking it was the more convenient option.

Using the One Stop system

If you're a company employee and get your full compensation through company payroll, all your taxes are already withheld. In this case, they already know what your furusato nouzei donation limit is based on your total income. The One Stop system will then credit any donations logged, up to the limit, and offset the following year's taxes.

How it works functionally is, you are registering your donations into a system that the recipient municipality will verify. The municipality you live in will then recognise that verified donation and deduct it from your taxes.

If, at step 3 of the Rakuten purchase example above, you request a One Stop exception application form, the municipality will send you a package via snail mail that contains

1. the purchase certificate
2. an application form for you fill up with your details, and a return envelope for you to return the application form in
3. if the municipality is more digitally savvy (i think most of them are these days), instructions for registering your purchase online instead

You just need to select one option between 2 and 3 - they're the analogue and digital paths, respectively, to reaching the same end point .

Having optimised their operations for paper forms over years, instructions for option 2 came across as much more straightforward to me. Simply complete the application form, and submit it together with documents to verify your identity.

Identity verification here requires your My Number ID, which is only listed on your My Number card or residence certificate. So you can either submit a copy of your My Number card, or a copy of your residence certificate (I say copy, but I mean the original. It's an original copy. I talk briefly about this in my previous post) together with any other photo ID. Residence card, driver's license or passport are among the commonly accepted IDs.

Option 3, the digital option, was less clear cut to me. One example of digital registration I went through, referring to instructions from Fujiyoshida city upon purchase of the futon, was

• Register on a furusato nouzei One Stop website, furumado.jp
• On the website, register a new donation, and enter the registration number listed on the donation certificate
• Redirect to download an app, IAM, to digitally verify my My Number
• Use the app to scan a QR code provided in the instructions in step 3 above
• Scan my My Number card using the app and successfully verify my identity
• Here, it's supposed to redirect me back to the website. This was a a source of friction for me because the redirect failed every time, for whatever reason. Since the redirect fails, my identity can't be verified.
• Get frustrated, give up
• Come back 5 minutes later because JPY55,000 is a lot of money
• Try a different route on the website instead, opting to manually key in my purchase details
• Successfully manage to verify my identity this time, breathe a sigh of relief for salvaging a JPY55,000 donation

As a creature of habit I find relief in figuring out a process because now I know the outlines of how to do it again a second time. I think I'm all set up for future donations. Well guess what? (You can probably see where I'm going with this)

Each municipality is self-governed, have their own budgets, and their own contracts... Meaning it's possible for each municipality to have different vendors handling their digital One Stop registration service.

Imagine my dismay when a later furusato nouzei purchase required

• Me to download another My Number card verification app, Mynaportal
• And register on another furusato nouzei website, mypg.jp
• That is mutually exclusive from the previously used website, furumado,jp
• So while the Japanese government might somehow have a database of all my furusato nouzei purchases, I myself do not have a centralised view of what I've submitted

Digital registration is the faster option, but the fragmented systems makes it more painful than it has to be. If you're not keen to navigate the digital trenches, the paper route is tried-and-true.

Things to look out for when using the One Stop system

1. The One Stop system allows you to donate to a maximum of 5 municipalities. This seems like an arbitrary limit, because I can't imagine why a donation to a 6th (or 7th, or 8th) municipality would break the system. But just know that it does. Donating to more than 5 municipalities will automatically exclude you from using the One Stop system, and you will need to file your taxes manually.
2. There is a deadline to submissions using the One Stop system. Forms must be received by the municipality by Jan 10th of the following year, or the donation won't be processed. Also, if they receive your submission on Jan 10th, find flaws in it and need a resubmission, there won't be time for you to complete this and you might lose the benefit. I'm not sure how strict they are here, but I wouldn't risk it. I'd say build in 1-2 months of buffer and make your purchases early, to account for your receiving the donation certificate, submitting the form, and the municipality successfully processing it.
3. According to this Retirejapan wiki, the donation will only be applied to residence tax if you're using the One Stop system. I cross checked this with Saga prefecture's furusato nouzei website as well. The implication here is that your actual furusato nouzei donation limit will be lower than what most calculators list. Some calculators like furusato tax show a breakdown between income and residence tax deductions, so you could reference these for a rough idea of your possible donation amount. If you want to maximise your donation limit, you'll have to file taxes manually.

Through manual filing

Your final tax return is known as kakutei shinkoku (確定申告). It's a document to finalise your income and deductions for the assessable year. I have a tax consultant to help me with this process, and from what I understand you need to list the municipalities you donated to, the item received in return, and the donation amount, to document your total deductible amount in the submission. The government then performs some black magic between March (when the tax return is finalised) and April to calculate the net amount due, and bills you for it.

I don't have much additional information on this point since the process is ongoing, but I'll update this section in future when I have more clarity on how this works.

Things to look out for when using furusato nouzei overall

If you're using this as a vehicle for tax deductions, and not because you're donating out of your own free will, you will need to consider 2 things

1. Is the effort worth it for the return
2. What your residency status is on January 1st

Is the effort worth it for the return?

Given there's a JPY2,000 entry fee to the program each year, the value of effort invested grows proportionate to income, because the start-up cost is spread over a larger amount of returns. For example, someone with low taxes may pay JPY2,000 to receive an item valued at JPY2,500. Their investment yields JPY500. In comparison, someone with high taxes may pay JPY2,000 for multiple items with total value of JPY50,000. The investment here yields JPY48,000.

Depending on your income level, and how you value your time and effort, furusato nouzei might not be worth pursuing.

What's your residency status on January 1st?

A major factor to consider is that residence tax is assessed based on your residency as of January 1st.

• If you are not a resident of Japan on that date, you do not pay any residence tax for that calendar year.
• Residence tax is calculated based on your assessable income. If you are a resident as of January 1st, but only moved to Japan, say, on December 1st the year prior, your payable residence tax is calculated based on the prorated income you earned for that calendar year (in other words, from Dec 1st to 31st).

Furusato nouzei calculators will not account for this - they will spit out an amount that includes a full year's residence tax.

Some scenarios, based on this knowledge:

• As an example, if you're earning JPY9M/year and moved on April 1st, your actual assessable income for the following year's residence tax is JPY9M / 12 months * 9 months worked = JPY6.75M, before any deductibles. In this scenario, you'll need to calculate your assessable income before inputting this figure into any furusato nouzei calculators, to derive your furusato nouzei limit.
• If you're planning to leave Japan before January 1st, you won't need to pay residence tax the following year. In this scenario, if you still want to use furusato nouzei, you should avoid the One Stop system, which will forcibly assign the tax credit to residence tax only. You should also exclude the residence tax portion from any limits provided by furusato nouzei calculators .

In Conclusion

Tax is complicated. Getting something back in return for paying your taxes is even more so.

This post consolidates what little knowledge I've acquired on furusato nouzei, but there's still a lot more technicalities to uncover - as someone who takes great pleasure in having optimised any process in my life, I'll hopefully be able to eventually determine a definitive limit calculation.

If there's anything I got wrong, or any specific scenario you think I could look into, feel free to drop me a message at contact@passengertokyo.com.