Different Hurdles: A Comparative Analysis of Medical Expense Deductions in US Itemized Deductions and Japan’s Medical Expense Deduction

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Different Hurdles: A Comparative Analysis of Medical Expense Deductions in US Itemized Deductions and Japan’s Medical Expense Deduction

For individuals navigating international lives, understanding tax deductions across different jurisdictions is paramount. Medical expense deductions, in particular, are crucial for preparing for unexpected high costs. However, the United States and Japan have significant differences in their eligibility criteria and calculation methods. This article provides a comprehensive comparison of the medical expense deduction under the U.S. Itemized Deductions and Japan’s 医療費控除 (Iryohi Kojo, Medical Expense Deduction), aiming to equip readers with a complete understanding of both systems.

Basics: Overview of Medical Expense Deductions in the US and Japan

Medical Expense Deduction in US Itemized Deductions

In the U.S. tax system, taxpayers have the option to choose between the ‘Standard Deduction’ and ‘Itemized Deductions.’ The medical expense deduction falls under Itemized Deductions. If a taxpayer chooses to itemize, medical expenses are deductible only to the extent they exceed a certain percentage of their ‘Adjusted Gross Income (AGI).’ This percentage can vary by tax year, but it has recently been set at 7.5% of AGI. This means that if your total qualified medical expenses do not exceed 7.5% of your AGI, you will not receive any tax benefit from this deduction. This threshold is considerably high, making it challenging for many middle-income taxpayers to qualify for the medical expense deduction.

Adjusted Gross Income (AGI) is your gross income minus certain deductions (e.g., contributions to an IRA, student loan interest deduction). A lower AGI can make it easier to meet the 7.5% threshold, but typically, substantial medical expenses are still required.

Japan’s Medical Expense Deduction (医療費控除)

Conversely, Japan’s Medical Expense Deduction applies to medical expenses paid for the taxpayer, their spouse, or other relatives who share a livelihood. The deductible amount is calculated by subtracting any reimbursements from insurance or other sources from the total medical expenses paid, and then further subtracting the lower of 100,000 yen or ‘5% of the total income amount.’ The maximum deductible amount is 2 million yen. Compared to the U.S. AGI threshold of 7.5%, Japan’s standard of ‘100,000 yen or 5% of total income’ is designed to allow more people to benefit from the medical expense deduction.

Total income amount (総所得金額等) refers to the sum of various income categories under the Income Tax Act, including employment income and business income.

Detailed Analysis: Comparison of Deductible Expenses and Calculation Methods

Eligible Medical Expenses

Both countries generally cover doctor’s fees, treatment costs, and prescription drug purchases, but there are specific differences.

United States (Itemized Deduction)

  • Medical services for the diagnosis, cure, mitigation, treatment, or prevention of disease.
  • Prescription drugs and insulin.
  • Hospital stays and surgical fees.
  • Dental treatment, eye care (including eyeglasses and contact lenses).
  • Mental health services.
  • Long-term care services (under specific conditions).
  • Medical transportation expenses (mileage allowance, public transport fares, etc.).
  • Health insurance premiums (self-paid premiums, excluding those paid by an employer).

Cosmetic surgery and other purely aesthetic procedures are generally not eligible.

Japan (医療費控除)

  • Consultation and treatment fees by doctors and dentists.
  • Purchase of medicines (excluding those for prevention or health promotion).
  • Hospitalization fees and surgical fees.
  • Treatment fees by acupuncturists, moxibustion practitioners, massage therapists, and judo therapists (for therapeutic purposes).
  • Midwife fees for childbirth assistance.
  • Transportation costs for hospital visits (public transportation fares are generally the rule).
  • Medical-related services under long-term care insurance and associated expenses.
  • Self-paid amounts for specific health guidance (under certain conditions).

Health check-up fees and vaccination costs are generally not eligible, but they may become eligible if a serious illness is discovered and directly leads to treatment. Also, cosmetic expenses and private car commuting expenses (gasoline, parking fees) are not eligible.

Comparison of Calculation Methods

US Calculation Method

Total qualified medical expenses – (Adjusted Gross Income (AGI) × 0.075) = Deductible amount

This deductible amount is then added to other itemized deductions (state and local taxes, home mortgage interest, charitable contributions, etc.). Only if the total itemized deductions exceed the standard deduction amount can a taxpayer claim itemized deductions. In most cases, the standard deduction is higher, meaning that only a limited number of taxpayers can benefit from the medical expense deduction.

Japan Calculation Method

Total medical expenses actually paid – Amount reimbursed by insurance, etc. – (the lower of 100,000 yen or 5% of total income amount) = Deductible amount

The maximum deductible amount is 2 million yen. A distinctive feature of the Japanese system is that it first subtracts any amounts reimbursed by insurance.

Self-Medication Tax System (Japan)

Japan also offers a special provision called the ‘Self-Medication Tax System.’ This deduction applies to individuals who purchase specific over-the-counter (OTC) drugs (known as ‘switch OTC drugs’) as part of their efforts to maintain health and prevent illness. This system is an alternative to the regular medical expense deduction, meaning you can only use one or the other. It allows for a deduction of expenses exceeding 12,000 yen annually, up to a maximum of 88,000 yen. This system has the advantage of being applicable even for relatively small medical expenses.

Case Studies / Examples

Let’s illustrate the differences between the two systems with a hypothetical taxpayer.

Taxpayer Information:

  • Gross Income: $80,000 (approx. 12 million yen)
  • Adjusted Gross Income (AGI): $75,000 (approx. 11.25 million yen)
  • Annual Medical Expenses: $7,000 (approx. 1.05 million yen)
  • Insurance Reimbursements: $0

Scenario in the United States

The AGI threshold of 7.5% is calculated as $75,000 × 0.075 = $5,625.
Since the taxpayer’s annual medical expenses are $7,000, they exceed this threshold.
The deductible amount would be $7,000 – $5,625 = $1,375.

This $1,375 would then be added to other itemized deductions (state and local taxes, home mortgage interest, charitable contributions, etc.). For this to impact tax calculations, the total itemized deductions must exceed the standard deduction. For instance, the 2023 standard deduction for a single individual is $13,850. With only $1,375 from medical expenses, the total itemized deductions would likely fall significantly short of the standard deduction. Therefore, this taxpayer would most likely choose the standard deduction, effectively receiving no benefit from the medical expense deduction.

Scenario in Japan

The 5% of total income threshold is 11.25 million yen × 0.05 = 562,500 yen.
The other threshold is 100,000 yen.
The lower of these two amounts is 100,000 yen.

The taxpayer’s annual medical expenses are 1,050,000 yen, which exceeds the 100,000 yen threshold.
The deductible amount would be 1,050,000 yen – 100,000 yen = 950,000 yen.

This 950,000 yen would be deducted from income, reducing taxable income. This example clearly demonstrates that it is significantly easier to benefit from the medical expense deduction under the Japanese system compared to the U.S.

Pros and Cons

United States Itemized Deduction (Medical Expenses)

Pros

  • Potential for large deductions for very high medical costs: If extremely high medical expenses are incurred and AGI is relatively low, there is a possibility of a substantial deduction.
  • Broader range of eligible expenses: Some expenses, such as health insurance premiums, may have a broader scope than in Japan.

Cons

  • High AGI threshold: The 7.5% AGI threshold makes it difficult for many taxpayers to qualify for the deduction.
  • Standard deduction often superior: For most taxpayers, the standard deduction amount exceeds the total itemized deductions, often nullifying the benefit of the medical expense deduction.
  • Complexity of record-keeping: Requires meticulous record-keeping, which can be burdensome.

Japan’s Medical Expense Deduction

Pros

  • Lower eligibility threshold: The 100,000 yen or 5% of total income standard makes it much easier for more taxpayers to benefit from the deduction compared to the U.S.
  • Self-Medication Tax System option: Provides an alternative for smaller pharmaceutical purchases.

Cons

  • Deduction cap: The deduction is capped at 2 million yen. In theory, for extremely high medical expenses, the U.S. system could be more advantageous.
  • Excluded expenses: Certain expenses, such as general health check-ups and preventive vaccinations, are not eligible.
  • Insurance reimbursements reduce deduction: Amounts reimbursed by insurance must be subtracted, reducing the effective deductible amount.

Common Pitfalls and Important Considerations

United States

  • Overlooking the AGI threshold: Even with significant medical expenses, if they do not exceed 7.5% of AGI, the deduction is zero. Many taxpayers mistakenly expect a deduction without meeting this criterion.
  • Failure to compare with standard deduction: Always compare your total itemized deductions with the standard deduction before choosing. The standard deduction is often more advantageous.
  • Inappropriate expense claims: Cosmetic procedures or health-promoting supplements are not eligible.
  • Inadequate record-keeping: The IRS demands strict record-keeping. Always keep receipts and proof of payment.

Japan

  • Misunderstanding the 100,000 yen and 5% rule: While ‘over 100,000 yen’ is a common understanding, remember to compare it with 5% of your total income and choose the lower amount. For lower-income individuals, the 5% rule might be more favorable.
  • Forgetting to subtract insurance reimbursements: Amounts reimbursed by health insurance (e.g., high-cost medical care benefits) or private insurance must be subtracted.
  • Choice between medical expense deduction and self-medication tax system: These two systems cannot be used concurrently. You must calculate which one is more beneficial for your situation.
  • Scope of commuting expenses: Gasoline and parking fees for private cars are not eligible. Public transportation fares are generally the rule.

General Considerations for Both Countries

  • Confirming residency: The eligibility for applying either country’s system depends on the taxpayer’s residency, citizenship, and permanent resident status. For individuals with international movements, consulting a professional is essential.
  • Accurate record-keeping: It is crucial to organize and store all relevant documents, such as medical receipts, statements, and insurance payment notices.

Frequently Asked Questions (FAQ)

Q1: Why is the U.S. medical expense deduction difficult for many people to utilize?
A1: The primary reason is the high deduction threshold of 7.5% of Adjusted Gross Income (AGI). Medical expenses must exceed this percentage to be deductible. Furthermore, in many cases, the total itemized deductions fall short of the standard deduction amount, effectively preventing taxpayers from benefiting from the deduction.
Q2: Are health check-up fees eligible for Japan’s medical expense deduction?
A2: As a general rule, health check-up fees and vaccination costs are for preventive purposes and are therefore not eligible for the medical expense deduction. However, if a serious illness is discovered during a health check-up and directly leads to treatment, the costs may be deemed eligible as expenses directly linked to treatment.
Q3: Can I include medical expenses paid in the U.S. in Japan’s medical expense deduction?
A3: Yes, it is possible. Medical expenses paid overseas by a taxpayer residing in Japan are eligible for Japan’s medical expense deduction. However, these expenses must meet Japan’s eligibility criteria (e.g., for treatment purposes, not for cosmetic purposes). It is important to keep receipts and detailed statements, and be prepared to provide translations into Japanese if required.
Q4: I live in Japan but hold U.S. citizenship. Which country’s medical expense deduction can I apply?
A4: If your primary residence is in Japan, you can apply Japan’s medical expense deduction based on Japanese tax law. U.S. citizens are generally obligated to file U.S. tax returns on their worldwide income, but typically use mechanisms like the Foreign Tax Credit to avoid double taxation. The U.S. medical expense deduction (Itemized Deduction) is an option when filing U.S. taxes, but its applicability can be complex depending on your residency status in Japan and income sources. Consulting a tax professional specializing in international tax is essential.
Q5: Are health insurance premiums eligible for medical expense deductions in both the U.S. and Japan?
A5: In the U.S., self-paid health insurance premiums are generally considered eligible medical expenses. However, premiums paid by an employer are not. In Japan, health insurance premiums (such as National Health Insurance premiums and social insurance premiums) are eligible for the Social Insurance Premium Deduction (社会保険料控除) and are not included in the Medical Expense Deduction. This is a significant difference between the two systems.

Conclusion

While the U.S. medical expense deduction under Itemized Deductions and Japan’s Medical Expense Deduction share a common goal, they differ significantly in their application ‘hurdles,’ calculation methods, and the scope of eligible expenses. The U.S. system imposes a high threshold of 7.5% of AGI, making it practically difficult for many taxpayers to utilize. In contrast, Japan’s system, with its relatively lower threshold of 100,000 yen or 5% of total income, is designed to benefit a broader range of individuals.

For individuals experiencing international relocation or living across borders, understanding which country’s tax system applies to them and the specific calculation methods of each system is crucial for effective tax planning. Inaccurate reporting can lead to additional taxes and penalties. Therefore, if your situation is complex, it is highly recommended to consult a professional tax accountant for appropriate advice and guidance.

#US Tax #Japan Tax #Medical Expenses #Itemized Deduction #医療費控除 #Tax Planning #Cross-border Tax