2020 was a year when everybody was swayed by the new coronavirus (COVID-19).
Even if you are not infected with the virus, there are many people who are in financial difficulty because they cannot do their jobs as they wish, and their income is reduced.
Perhaps because of this, the number of inquiries regarding “dependent deduction” has increased recently.
Since he extended financial aid to his siblings, uncle, and nephew who are in a crisis, he believes he should be entitled to a dependent deduction for 2020 tax filing or year-end tax adjustment. Is it all right?
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The outline of the dependent deduction system and the range of relatives are summarized in the past blog of mine “Dependent deduction for foreign relatives“. Please refer to it.
Dependent relatives are relatives who “share the same livelihood” with a taxpayer and whose total income is 480,000 yen or less (The income Tax Law (hereinafter referred to as the “ITL”), Article 2, Paragraph 1, Item 34 of the Law).
Therefore, there are two requirements for becoming a dependent relative:
(1) to share the same livelihood, and
(2) the total income amount for the year is 480,000 yen or less.
Of these, regarding (1), there is only a general interpretation guideline (Income Tax Basic Circular 2-47) that “the case where remittances are habitually made for living expenses, tuitions, medical expenses, etc.”.
So, there is no clear-cut monetary threshold for how much remittances should be made to be qualified for the dependent deduction.
In addition, there is no standard as to how long and how often “habitually” mentioned here should be.
Therefore, even if you support the living expenses, tuition, etc. of a relative who is in financial difficulty, there would be an argument whether the relative is sharing the livelihood with you, in another word, whether he/she is always relying on you in terms of financial support.
According to the general tax interpretation guideline (Income Tax Basic Circular 2-47), even if you temporarily gift money to a relative as a “consolation” for an injury or illness, it does not necessarily mean you and the relative are sharing the same livelihood.
Therefore, even when you extend financial support to a relative who is in financial difficulty due to the COVID-19, as long as it is temporary support and the amount is just for consolation, it would not be able to meet the condition for the dependent deduction.
As of now, there are no signs that the COVID-19 will disappear.
It is expected that more and more people will face financial difficulties even though they are still employed.
When there is any such a person among relatives, you may occasionally send money as needed.
For example, when a relative’s child starts attending school, or when a family member is injured or sick and the burden of medical expenses increases, you may think about financial support taking such occasion into consideration.
Even in such cases, you should first consider if such support can be differentiated from mere “celebration” or “consolation.”
In that sense, it may be hard to demonstrate the fact that you are supporting the dependent, i.e, sharing the same livelihood.
Some people believe that the dependent deduction can be claimed regardless of the amount of remittance since no minimum amount is stipulated by law.
In addition, some people argue that the amount of money should not be the issue as it is benevolent support.
Both may be correct, however, when the amount of remittance is much less than the tax burden reduced by claiming the dependent deduction, I would say, it is an abuse of the deduction.
I am not the only one who thinks of this issue. As a matter of fact, the dependent deduction system has been under continuous discussion.
Actually, total income amount of 480,000 yen or less”, which is the other requirement of dependent relatives under the current law, is judged only by the amount of income earned in Japan (domestic source income).
Under this rule, as for foreign relatives who have no Japanese source income, they are able to be qualified as dependent relatives as long as any money is remitted to them. Accordingly, technically speaking, it was possible to increase deduction by remitting the nominal amount to a large number of foreign relatives.
This loophole was detected in the inspection by the Board of Audit, which then lead to the 2014 tax reform that legislated stringent procedure for claiming the dependent deduction for foreign relatives (to provide the tax office with a resident certificate of foreign relatives and evidence of remittance).
The report of the Board of Audit can be viewed from the URL below.
Furthermore, in the 2020 tax reform, the condition for the dependent deduction became more stringent to exclude foreign relatives between the ages of 30 and 70 from the scope of dependent relatives but exceptionally leave them in the scope only when certain conditions are met.
Specifically, after 2023, none of your foreign relatives between 30 and 70 years old will be eligible for the dependent deduction unless they meet any of the following conditions.
These amendments aim only for foreign relatives and do not directly affect the deduction for dependents living in the country.
However, the issue behind this reform is the abuse of the dependent deduction system. In that sense, the above condition 3, the “380,000-yen threshold” is likely to be considered for domestic relatives too when judging the condition of “to share the same livelihood” (this is also my personal opinion).
As discussed above, I am afraid that temporary financial support to relatives cannot meet the requirements for dependent deductions, even under special circumstances such as the COVID-19 pandemic (although it may become normal and not special in the future …).
Special tax measures for COVID-19 including tax payment grace and permanent tax measures including the dependent deduction are legislated for different aims each other.
As the dependent deduction does not anticipate a special situation, I believe, it makes sense to judge the conditions for the deduction for simply whether or not ” remittances are habitually made for living expenses, tuitions, medical expenses, etc.”
Also, in order to support one “ordinary adult” between the ages of 30 and 70, isn’t it reasonable to assume that around 380,000 yen per year is necessary, as in the case of an overseas resident relative?
Here are a bit old statistics, but according to the inspection report of the Board of Audit, which triggered the tax reform in 2014 980,000 out of taxpayers of the declared income tax in 2012 (those who filed final tax returns with income tax payable amount) had claimed the dependent deductions.
The number of dependent relatives eligible for deduction per one filing was 1.34, and the declared amount of dependent deduction was about 650,000 yen.