Entering Chapter 4 of FP Level 3: 'Tax Planning'. I had no idea income tax was this deep.
Hello, this is Kou!
After finishing the Career Consultant exam, I kept the momentum going and started studying for the FP Level 3. Having finished Chapter 3 on Financial Asset Management, I have finally entered Chapter 4, 'Tax Planning'.
Once again, it's a topic about taxes. Honestly, for someone like me who has never properly faced 'taxes' in my life, every part is a series of new discoveries, but this time in particular, there were so many things I thought, 'I didn't know that...', so I'm leaving this as a record.
Income is classified into 10 types
First, what surprised me was that the 'income' we earn is classified into 10 types depending on its nature.
Employment income, business income, real estate income, interest income, dividend income, capital gains, occasional income, miscellaneous income, retirement income, and forestry income—when you list them like this, it's clear that things I usually lump together as 'income' are actually categorized into these specific types. I've been going through my days without much thought, but I had never considered that my salary, side hustle income, and investment profits were each treated as different 'types' of income.
Comprehensive taxation, separate taxation, and progressive tax rates
Another new discovery was that the way taxes are applied differs depending on the type of income.
Most income is subject to 'comprehensive taxation.' This is a method where income is added to other income to calculate the total tax amount. On the other hand, some income (such as retirement income or parts of capital gains) is subject to 'separate taxation,' where the tax amount is calculated independently without being added to other income. It seems this system exists because forcibly adding together income of different natures could disrupt the balance of the tax burden.
Furthermore, a 'progressive tax rate' system is used for the income tax on comprehensive taxation. This is a mechanism where the tax rate increases in stages as income rises, and the key point is that 'the higher tax rate only applies to the increased portion.' This was also the first time I correctly understood that a high tax rate is not applied uniformly to the entire income.
The flow of calculating comprehensive taxation is quietly important
And what I felt was the most 'I have to memorize this or I'm in trouble' part of this chapter is the flow of calculating comprehensive taxation. To summarize, it looks like this:
Classify each income into its respective 'income type'
Total the income subject to comprehensive taxation
Perform profit and loss offset (a system that allows offsetting deficits against surpluses) to determine the total income amount
Subtract income deductions (basic deduction, social insurance premium deduction, spouse deduction, dependent deduction, medical expense deduction, etc.) to determine the taxable total income amount
Multiply the taxable total income amount by the progressive tax rate to determine the income tax amount
Subtract tax credits (such as the housing loan deduction) and withholding tax amounts to determine the final amount to be paid
It's long when written out, but this flow itself seems to be a crucial axis for both the exam and real life. That said, honestly, my true feeling is that it's still 'difficult.' It seems I'll need to repeat it many times to really let it sink in.
The misunderstanding that 'revenue' and 'income' are the same thing
This was, quietly, my biggest takeaway this time.
Income ≠ Earnings and Income = Earnings - Necessary Expenses, etc. is the reality.
Until now, I had been using the terms 'earnings' and 'income' almost interchangeably. But in reality, income is what remains after subtracting various expenses and deductions from earnings. Embarrassingly, this is the first time I've realized I didn't understand this difference. I reflect on the fact that even when I heard the word 'income' in the news, I hadn't been grasping its precise meaning.
A slight sense of discomfort regarding the employment income deduction
And this time, the topic that personally made me think 'Wait, really?' was employment income.
Employment income is calculated by subtracting the 'employment income deduction' from earnings such as salary. This deduction amount increases as earnings rise (though the deduction rate itself seems to decrease), but once earnings exceed 8.5 million yen, the deduction amount caps out at 1.95 million yen. In other words, no matter how much you earn, the deduction amount stays at 1.95 million yen and does not increase.
While many other taxes are structured so that the burden increases as earnings rise, the employment income deduction amount remains unchanged even when earnings are high—this might just be a bit of complaining, but I honestly found myself wondering, 'Why is that?'
That said, I have sincere respect for those who are knowledgeable enough to properly understand and skillfully utilize these systems. I find myself regretting, now that it's too late, that if I had possessed this knowledge back in my previous job, I might have been able to manage my money better. That is exactly why I want to learn it thoroughly now.
Points to remember along with this section
In addition to the above, I will add a few points that I felt were important to grasp in this chapter.
Income that can be aggregated for profit and loss is limited: Only losses from real estate income, business income, forestry income, and transfer income are eligible for profit and loss aggregation. It is important to note that losses from other types of income cannot be included here, so it is not the case that 'everything can be offset'.
Retirement income is taxed separately and is even given preferential treatment: Because retirement money has a compensatory nature for many years of service, it is calculated separately from other income, and a retirement income deduction based on the number of years of service is provided. I felt that this is a consideration precisely because it is income directly linked to life in retirement.
The contents of real estate income: This is income from apartment management or land leasing, etc., and while it is easy to confuse with business income, the classification is different. This is an especially important classification for those considering real estate investment as a side business.
The difference between year-end adjustment and tax return filing: For many company employees, income tax settlement is completed with the year-end adjustment, but if salary income exceeds 20 million yen, or if one receives medical expense deductions or housing loan deductions (in the first year), one must file a tax return personally. I think this is a part that is often asked about in practice, so I want to make sure I have a firm grasp on it.
Income deductions are divided into 'personal deductions' and 'material deductions': There are 'personal deductions' such as the basic deduction, spousal deduction, and dependent deduction, and 'material deductions' such as the social insurance premium deduction, medical expense deduction, and life insurance premium deduction. When I thought about it in terms of my own situation and that of my family, it suddenly felt like very relatable content.
I felt that this chapter was more 'directly linked to daily life' than any other section so far. As a career consultant, correctly understanding the tax system seems like it will be a major weapon when thinking about the life design and life plans of those seeking advice.
The study materials I am using this time
I am continuing to rely on these materials this time as well.
Textbook: Torisetsu Series FP Level 3 Textbook (Kindle version). There are many illustrations, and the flow of complex calculations like those in this chapter is organized visually, so it is very useful for re-reading on Kindle during spare time. If you haven't tried it yet, please check it out.
Problem Workbook: Also the Torisetsu series workbook (paper version). It is essential for repeating 'income classification' and 'calculation flow' while working through the problems by hand.
YouTube: 'Honda-san / Todai-style FP Channel.' For areas like tax planning, which are hard to grasp with text alone, video explanations are incredibly helpful and easy to understand.
And as a way to take a break, I am re-reading the manga 'The Richest Man in Babylon,' which teaches financial knowledge in a story format. It is a book that helps me return to the fundamental way of thinking about money when my brain gets stiff from studying taxes. If you have Kindle Unlimited, you can read it at no extra cost, so please take advantage of it if you are eligible.
Also, during commutes or while doing chores, I recommend learning about money and taxes through your ears with Audible. By inputting the content I learned from the text from a different angle, I feel my understanding deepens significantly. There is a free trial available, so please check it out if you are interested.
The talk about taxes will continue, but while organizing things one by one, I would like to learn the details of income deductions and tax credits next.
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