Revision of Income Deductions

As part of the 2025 tax reform, revisions have been introduced to reduce the tax burden amid rising wages and to aid flexible employment arrangements. The reform includes an increase in the basic exemption and the minimum amount of the employment income deduction, as well as the introduction of a new special exemption for specific dependents. [1]

1.  Basic Exemption ^[2]

Regarding income tax, the fixed amount of the basic exemption leads to an increased real tax burden when inflation rises. As Japan experienced a prolonged period of deflation, this problem did not become apparent. However, with prices now on an upward trend, the maximum amount of the basic exemption has been raised.

Furthermore, considering the need to alleviate the tax burden on low-income earners and the fact that wage increases have not kept pace with inflation, a special provision for the basic deduction has been introduced. This aims to reduce the tax burden not only for low-income individuals but also for middle-income earners.

2.  Employment Income Deduction ^[3]

The amount of employment income is calculated by deducting the employment income deduction shown in the table below from the total amount of salary, bonuses, and other employment-related payments.

The employment income deduction is calculated based on a percentage of salary income, so the deduction amount generally increases as wages rise along with inflation. However, for taxpayers whose income falls under the minimum guaranteed amount, the deduction does not increase even if their income rises. To address both the impact of inflation and issues related to employment adjustment, the minimum guaranteed amount will be increased by JPY100,000, from JPY550,000 to JPY650,000.

Note that for individuals whose total employment income, etc. does not exceed JPY6,600,000, the amount of employment income, etc. should be determined by applying the total salary amount to the table provided in Appended Table 5 of the Income Tax Act, rather than by using the table above.

3.  Special Exemption for Specific Dependents ^[4]

In the current severe labor shortage, it has been pointed out that the tax system is one of the factors restricting flexibility for employers and employees, particularly for university students working part-time.

Therefore, a new special exemption for specific dependents has been introduced. Under this system, parents can claim an income deduction equivalent to the amount of exemption for special dependents qualified for exemption (JPY630,000) for university-aged children between 19 and 22 years old whose total income is up to JPY850,000 (equivalent to approximately JPY1,500,000 in salary income).

Furthermore, even if the total income of these university-aged children exceeds JPY850,000, the exemption available to parents, etc. will gradually decrease on a sliding scale.

[1] Kazutaka Shimatani et al. Reiwa 7-nen ban Kaiseizeihonosubete (2025) at 77.
[2] Id. at 78-79.
[3] Id. at 84.
[4] Id. at 85.

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