Tax Planning
Tax Planning in Japan: Making the Most of the 2026 Reform’s Basic Exemption and Defense Tax
Japan’s FY2026 tax reform brings key changes to basic exemptions, deductions, and introduces a new Defense Special Income Tax — critical adjustments for high earners and middle-income households.
By NomadicTax Research Team • 5-8 min read • September 5, 2026
## Overview of FY2026 Changes Affecting Individual Taxpayers
Japan’s Ministry of Finance announced its **令和8年度税制改正の大綱** (FY2026 Tax Reform Outline) on **December 26, 2025**, with many major changes taking effect for **income earned in 2026 and later**, especially relevant for **令和8年分以後の所得税 (i.e. tax years starting January 1, 2026 onward)**.([mof.go.jp](https://www.mof.go.jp/tax_policy/tax_reform/outline/fy2026/20251226taikou.pdf?utm_source=openai))
Here are some of the biggest shifts for tax planning purposes:
- **Basic Exemption Increase**: For individuals with aggregate income **¥23,500,000 or less**, the basic deduction is raised by **¥40,000**.([mof.go.jp](https://www.mof.go.jp/tax_policy/tax_reform/outline/fy2026/08taikou_gaiyou.htm?utm_source=openai))
- **Minimum Salary Deduction Raised**: The lowest guaranteed salary income deduction will be raised from **¥650,000 to ¥690,000**.([mof.go.jp](https://www.mof.go.jp/tax_policy/tax_reform/outline/fy2026/08taikou_gaiyou.htm?utm_source=openai))
- **“Minimum Taxable Income” Threshold**: There’s a special threshold raising the income below which individuals may pay no income tax, effectively aligning with rising prices; targeted to make the tax burden fairer in times of inflation.([mof.go.jp](https://www.mof.go.jp/tax_policy/tax_reform/outline/fy2026/08taikou_gaiyou.htm?utm_source=openai))
- **New “Defense Special Income Tax”**: A new addition of approx **1% on top of base income tax** starting for tax years after **令和9年 (i.e. Jan 1, 2027 onward)** to secure funding for defense.([mof.go.jp](https://www.mof.go.jp/tax_policy/tax_reform/outline/fy2026/08taikou_06.htm?utm_source=openai))
## Who is Most Affected
| Segment | Impact |
|---|---|
| **High-income earners** (especially those over **¥165 million** baseline income threshold) | They face **higher rates on “special high-income taxpayers”**, including raising the tax rate to **30%** (from 22.5%) for those whose “基準所得金額” exceeds ¥165,000,000.([mof.go.jp](https://www.mof.go.jp/tax_policy/tax_reform/outline/fy2026/08taikou_01.htm?utm_source=openai))|
| **Middle/lower-income households** | Benefit from larger basic deductions, increased salary income deductions, special reliefs enacted in recognition of “物価上昇 (price inflation)”.([mof.go.jp](https://www.mof.go.jp/tax_policy/tax_reform/outline/fy2026/08taikou_gaiyou.htm?utm_source=openai))|
| **Taxpayers with Global Income or Assets** | The new tax plus special treatment of deductions may change net effective tax — careful planning needed especially with foreign income or investment income. |
## Actionable Tax Planning Strategies
1. **Shift Income or Expenses Across Fiscal Years**
- If possible, defer income to **2027** where the new Defense Special Income Tax applies, so you can anticipate impact.
- Accelerate deductions (e.g., business expenses, charitable giving) into 2026 to maximize benefits under older thresholds.
2. **Maximize Deductions and Exemptions**
- Ensure you meet conditions for the new **salary income deduction minimums**.
- Use **life insurance, dependents, and one-parent deductions** (ひとり親控除) more aggressively — their amounts have increased.([mof.go.jp](https://www.mof.go.jp/tax_policy/tax_reform/outline/fy2026/08taikou_gaiyou.htm?utm_source=openai))
3. **Compute ‘Special High-Income’ liability**
- If you expect income over the critical “基準所得金額” threshold **¥165 million**, calculate your liability under the new rate (30%) to determine marginal tax exposure.
4. **Plan for Defense Special Income Tax**
- Though only **1%**, this acts like an extra layer of tax. Negotiate compensation structures, consider tax-exempt benefits when designing employee contracts or personal remuneration.
5. **Use NISA and Investment Shelter Vehicles**
- For younger investors, the **NISA account rules** have expanded (lower age limit removed; more non-taxed distributions) to encourage investment while sheltered from taxes.([mof.go.jp](https://www.mof.go.jp/tax_policy/tax_reform/outline/fy2026/08taikou_gaiyou.htm?utm_source=openai))
## Example Scenario
- **Person A**, a salaried individual earning ¥3,000,000:
- Will benefit from increased basic deduction and salary income deduction.
- The tax burden will go down slightly due to the new deductions, especially if an individual has dependents or utilizes one-parent deductions.
- **Person B**, entrepreneur or freelancer earning over ¥200,000,000:
- Must plan for the 30% rate on excess (over the ¥165 million threshold).
- Also must prepare for the Defense Special Income Tax starting 2027, meaning every 1% of base rate adds noticeable cumulative tax cost.
## Practical Advice for Implementation
- Use updated tax calculators or consult with certified tax professionals to simulate both scenarios (pre- and post-reform).
- Keep receipts and records for deductions: with new requirements for electronic record-keeping (e.g., for blue-form special deductions and expense records) likely to see stricter audit attention.([mof.go.jp](https://www.mof.go.jp/tax_policy/tax_reform/outline/fy2026/08taikou_01.htm?utm_source=openai))
- Monitor government guidance (NTA notices) once related laws and regulation specifics are published.
By proactively adjusting financial and expense timing, and understanding new thresholds and rates, both individuals and businesses can minimize effective tax burden under Japan’s evolving tax regime.