1. Introduction
The spouse deduction and special spouse deduction systems have been amended in FY2017 Tax Reform. Although this reform does not affect this year’s year-end tax adjustment, companies’ payroll administrators should be aware that the monthly (daily) withholding tax calculation changes from January, 2018, together with the new dependent forms for 2018.
In this News, for a better understanding of new rules and supporting your payroll administration, we will mention the revised spouse deduction and special spouse deduction systems.

2. Background
Under the current system, the so-called “JPY1.03 million wall” is said to be a factor in keeping some women from a full-scale entry into workforce. As a matter of fact, some part-time housewives try to limit their working hours or earnings up to JPY1.03 million so that their husbands can take the full spouse deduction.
In FY2017 Tax Reform, the income threshold for the spouse deduction has been raised to JPY1.5 million. This figure exceeds the assumed annual salary income (about JPY1.40 million) of a part-timer who works six hours a day, five days a week at the Tokyo’s minimum wage of 958 yen an hour.
On the other hand, from the point of maintaining revenue neutrality, a taxpayer with a certain level of high income is not eligible for the spouse deduction even if his/her spouse has no income. In order to alleviate such drastic tax burdens, the new rules has introduced the graded deduction based on a taxpayer’s income.

3. FY2017 Tax Reform
(1) Spouse deduction
Under the current system, if the spouse’s income is less than JPY1.03 million, a taxpayer is eligible for a full spouse deduction irrespective of the amount of his/her own income. In this reform, however, if the taxpayer’s income (goukei-shotoku-kingaku) exceeds JPY10 million (for salary earners, annual salary of JPY12.2 million) per year, he/she is not eligible for the spouse deduction. Also, the spouse deduction amount decreases in three stages (full deduction, 2/3 deduction, 1/3 deduction) based on a taxpayer’s income.

(2) Special spouse deduction
For those who are not eligible for the spouse deduction mentioned in the above, the special spouse deduction is available, in which the graded deduction up to a certain level of a spouse’s income is allowed. In FY2017 Tax Reform, the maximum amount of a spouse’s income eligible for the special spouse deduction has been raised to JPY1.23 million or less (currently less than JPY760,000).

4. Remaining issues
The special spouse deduction could remove the so-called “JPY1.03 million wall.” However, the biggest wall to hamper women’s more participation in to the labor force is said to be the “JPY1.30 million wall”, which is the benchmark whether or not spouses working as part-time workers still qualify for dependents under the social insurance system. Therefore, the tax revision for the spousal deduction system is not only the solution to encourage more women into the labor market, but the wall in the social insurance system should also be taken in to consideration.

5. Enforcement
This amendment will be applied to income tax from 2018 onwards. The amended withholding tax administration will start from salaries, etc. paid from January 1, 2018 by reflecting the new dependent forms.

6. Conclusion
In this News, we have mentioned the spousal deduction system revised in FY2017 Tax Reform.
This amendment is very complicated, so payroll administers are required to understand the new rules very carefully and prepare for the new withholding system.

Please note that this News only introduces general outlines and does not include professional advice. So please make sure not to make any decisions without taking professional advice individually. If you have any questions, please feel free to contact us.

(Reference)
https://www.nta.go.jp/gensen/haigusya/index.htm  (Japanese)
Accessed on 25 October, 2017