Threshold of Tax Credit Settled at a Minor Change

The Liberal Democratic Party (LDP) and Komeito concluded their idea on annual tax reform for FY 2025. On the review of threshold for imposing income tax, the leading coalition determined that it should be set at 1.23 million yen of annual income of each household, raising by 200 thousand yen from current level. It did not fulfill the demand of the Democratic Party for the People (DPP). Those three parties agreed on continuing their discussion on the issue next year.

In the current system of income tax, every household are eligible for 480 thousand yen of basic tax credit. Another tax credit is applied to a salary worker, which is set at 550 thousand yen. The sum of both, 1.03 million yen, is deducted from the annual income of each salary worker, when the government calculates the amount for imposing income tax. If one has annual income less than 1.03 million yen, he or she will not have to pay for income tax.

 

The DPP requested the leading coalition to raise the threshold from 1.03 million yen to 1.78. The LDP and Komeito have been reluctant to accept it, considering the concern of Ministry of Finance (MOF) which did not like decline of tax revenue caused by expanding the income tax credit. Not reaching the request from DPP, they decided to raise the threshold by 100 thousand yen from 480 thousand yen for all tax payers, and also by 100 thousand yen from 550 thousand yen for salary workers. 1.23 million yen becomes new threshold for income tax.

 

The leading coalition and the DPP have agreed on seeking achievement of the goal of 1.78 million yen after FY 2025. Hours before announcement of FY 2025 tax reform, the secretary generals of those three parties reached a new agreement that they would continue sincere discussion on the issue. The LDP could maintain that trilateral framework of policy discussion, while the DPP remained on the table for participating in the policy-making of the leading parties.

 

The discussion over tax reform has always been a struggle between MOF and parties. The proposal of raising threshold of income tax to 1.78 million yen by the DPP causes loss of 7 or 8 trillion yen of tax revenue, to which the ministry is extremely reluctant. If the threshold stays at 1.23 million yen, the cost for it will be as low as 600 to 700 billion yen. The winner of the negotiation over the tax can be the MOF.

 

The leading parties also raised another threshold of tax credit for a family with child in the age of college student, age between 19 and 22. While the tax credit is applied to a family with 1.03 million yen of annual income or less, the threshold will be 1.5 million yen from FY 2025. If a college student annually earned 1.03 million yen or more in part time job, the family cannot be applied to the tax credit. That is why college students stop working just before earning 1.03 million yen. From FY 2025, the student can work to earn as much as 1.5 million yen.

 

For a family with a high school student, age between 16 and 18, the tax credit for dependent family will be maintained. Although the government was planning to shrink the tax credit, it decided to maintain current threshold to support the families, following discussion of the parties for encouraging families in raising child. Basically, there is a political trend which is supportive for families.