Japan's furusato nozei, the hometown tax program that lets residents redirect part of their local taxes to a municipality of their choice, took in a record 1,331.4 billion yen in fiscal 2025, up 4.6% from a year earlier, according to Jiji Press. With under eight weeks left in 2026, the calendar-year cutoff of Dec. 31 is now the date that matters for donors.

For salaried professionals, Japanese and foreign, the program is one of the few tax tools open to ordinary earners. It is also changing. New rules for municipalities took effect in October, and a cap on the credit for very high earners is planned for donations made from 2027.

How furusato nozei works

A donor gives money to a prefecture or municipality and receives a thank-you gift, often local food or goods. The donation minus 2,000 yen is then deducted from income and residential taxes, up to a limit that rises with income and depends on family circumstances. In practice, a donor within the limit pays 2,000 yen out of pocket and receives the gift.

Donations count toward the calendar year in which they are made, so gifts meant to reduce taxes on 2026 income must be completed by Dec. 31. The residential tax portion of the benefit shows up in the following year's local tax bills.

Salaried workers who do not otherwise need to file a tax return can skip filing by using the one-stop exception, provided they gave to five or fewer local governments in the year. Several donations to the same municipality count as one, according to the City of Nagoya. The application must reach each municipality by Jan. 10 of the following year; anyone who misses it has to file a return instead to claim the deduction. Donors who file a return for other reasons, such as medical expense claims or side income, cannot use the exception and must list their donations on the return.

Demand has kept rising. Jiji reported a record 59,630,027 donations in fiscal 2025. Izumisano in Osaka Prefecture received the most, 23.04 billion yen, followed by Shiranuka in Hokkaido at 22.33 billion yen and Miyakonojo in Miyazaki Prefecture at 21.65 billion yen. Residential tax deductions tied to the program are expected to total 952.4 billion yen in fiscal 2026, Jiji said.

What changed in October 2025 and October 2026

Since October 2025, a rule has effectively barred portal sites from giving donors reward points. A ministry official told Jiji the ban had not reduced donations.

A second set of rules took effect in October 2026, aimed at municipalities rather than donors. Local governments must now use at least 52.5% of donations for their own programs, up from 50%, which caps solicitation costs, including gifts, shipping and portal fees, at 47.5%, according to a Sept. 19 report by Impress Watch. The minimum is scheduled to rise to 55% in October 2027, 57.5% in October 2028 and 60% in October 2029.

The rules also tighten what counts as a local product. Items whose only local link is a town logo face stricter tests, producers must certify that most of a product's value was created in the area, and municipalities must publish the general retail price of gifts. Impress Watch said some gifts could change or be withdrawn as a result, so the catalog donors see this year-end may be thinner than last year's in some categories.

The proposed cap for top earners

The bigger change for wealthy donors comes later. Japan's fiscal 2026 tax reform outline would limit the special residential tax credit to the lower of 20% of the residential income levy or a fixed 1.93 million yen in total, according to an analysis by tax firm Yamada & Partners. Jiji reported in December that the plan targets people with annual income of 100 million yen or more, with a maximum donation of about 4.38 million yen still eligible for the residential tax credit.

The cap would apply to residential tax from fiscal 2028, which is based on 2027 income, so donations made from 2027 are the first affected. Yamada & Partners noted that the legislation had not yet been submitted to the Diet when it wrote its analysis and that the final law could differ.

The firm's examples show who is affected. For a single salaried filer on 100 million yen, the donation limit with only a 2,000 yen cost would fall slightly, to about 4.38 million yen from about 4.45 million yen. For a filer on 200 million yen, it would roughly halve, to about 4.38 million yen from about 8.99 million yen. Most salaried donors, including most expatriates, would see no change, and 2026 donations fall under current rules.

The next dates to watch are Dec. 31 for 2026 donations and Jan. 10 for one-stop exception forms.

This article is general information, not financial or tax advice.