Japan's ruling Liberal Democratic Party and Japan Innovation Party finalized their tax reform outline for fiscal 2026 on December 20. The plan raises the income threshold for income tax from ¥1.6 million to ¥1.78 million and expands mortgage tax deductions. These measures aim to ease the burden on households facing rising prices.
Japan's Liberal Democratic Party (LDP) and Japan Innovation Party (JIP) agreed on a tax system reform outline for fiscal 2026 on December 20, marking the first such plan under their coalition government. Key features include raising the "annual income barrier"—the threshold for income tax liability—from ¥1.6 million to ¥1.78 million. This expands eligibility for the full basic deduction to incomes of ¥6.65 million or less, up from ¥2 million, benefiting about 80% of taxpayers with larger deductions and increased take-home pay.
The outline also extends the mortgage tax deduction, set to expire at the end of 2025, by five years to 2030. For used home buyers, the deduction period rises from 10 to a maximum of 13 years, and the eligible loan cap increases from ¥30 million to ¥45 million. New condominium prices in Tokyo's 23 wards averaged ¥130.64 million in the first half of 2025, a 20% rise from the prior year. In Tokyo and 23 other prefectures, 2024 new condo prices exceeded 10 times the average annual income, prompting efforts to boost the used home market, which accounts for under 20% of annual purchases.
On automobiles, the plan abolishes the environmental performance tax—up to 3% of a new vehicle's price based on fuel efficiency—by the end of fiscal 2025. The eco-car tax break, which reduces weight-based registration taxes, extends two years under stricter conditions. Car ownership has lengthened from about nine years in the 1990s to 13 years in the 2020s, amid rising part costs and advanced features. U.S. President Trump's high-tariff policies threaten Japan's auto sector, including parts makers, so the measures seek to encourage vehicle replacements and support domestic industries.
LDP Tax System Research Commission chair Itsunori Onodera said at a press conference, "This outline will enable us to solidly tackle important issues such as how to respond to price increases and realize a robust economy." The government plans to submit related bills to the regular Diet session convening early next year.
