Each year there is an increasing number of Americans who decide to live and work in Israel. These expats contact our firm often with questions on how the tax system is structured there, the social security benefits, and ways in which they might minimize US expat taxes. There is also question regarding our availability as a tax advisor while living abroad. Below, our expert expat tax advisors address these questions and many more.
Guide to Filing US Expat Taxes for Americans Living in Israel
Does Your Firm Provide US Expat Tax Services to Americans Living in Israel?
Yes, our firm is able to provide US expats with the full range of expat tax services needed while living abroad in Israel.
Are American Expats Living in Israel Required to File US Expatriate Tax Returns?
While living overseas in Israel, an American expat is still under obligation to file a tax return and pay taxes to the Internal Revenue Service (IRS) each year. Income gained from foreign employment will have to be included in the return, regardless of whether it had been taxed by the Israeli government. An expat may be able to reduce the tax amount by using certain tax credits and deductions towards the money earned in Israel.
How Can Americans Living in Israel Minimize US Expat Taxes to Avoid Double Taxation?
American expats do have some provisions available to them that can assist in avoiding being double taxed on their income that was earned through employment in a foreign country. These include:
• Foreign Earned Income Exclusion (FEIE)
• Foreign Housing Exclusion or Deduction
• Foreign Tax Credit
While living in Israel, the FEIE may allow for an American expat to decrease the amount of their foreign earnings by the first $101,300 for the 2016 tax year and $100,800 for the 2015 tax year. In order to qualify for this income exclusion, the US expat living in Israel must be able to meet the physical presence test or the bona fide residence test. The physical presence test requires that an expat spends at least 330 days in a 365 day period in a foreign country and earn a foreign income. The bona fide residence test is for expats who have been living overseas for over a year and have no plans to return to the US.
Housing expenses like rent and utilities may be excluded from the foreign earned income, but only if the American expat also qualifies for FEIE.
The foreign tax credit or deduction is used towards the income taxes that a US expat pays in Israel. As with other tax credits offered by the IRS, the foreign tax credit reduces the US tax debt dollar for dollar. The foreign tax credit is limited only to those Israel taxes which were paid on earnings that are taxable by the US. Any tax that was paid on earnings in Israel that have been excluded or deducted, such as with FEIE, the foreign housing exclusion or Israel tax laws, cannot be included as a part of the US foreign tax credit.
Who is Considered a Resident of Israel for Tax Purposes?
For the purpose of taxation, the test for being considered an individual Israeli resident is the center of life, taking into account all of the connections associated with Israel including, family, finances, and social connections.
A presumption of this center of life is made when an individual has been present in the country for at least 183 days during the tax year, or was present for at least 30 days in Israel during the previous year while over 425 days were spent in Israel in the preceding two years. An individual or the tax authorities may challenge this presumption.
A foreigner who is living in Israel with the use of a B-1 visa for a specified amount of time will not be treated as a resident for tax purposes, but will still be obligated to pay income tax as a non-resident.
Is Foreign Income Subject to Taxation in Israel?
A non-resident of Israel is typically not taxed on earnings made from employment abroad.
Residents of Israel on the other hand are taxed on a personal basis for these types of earnings. There are special tax rates that are applied to the salary of an Israeli resident who is earning money by living abroad for an Israeli employer for a consecutive period of over four months. The employee may be eligible in this case to certain deductions and exemptions.
A new immigrant and a returning veteran are allowed a 10 year exemption for any income that was derived abroad.
What are Personal Income Tax Rates in Israel?
Israeli residents are taxed at a progressive rate. Different rates are applied for income that is derived from personal exertion and for income that is derived from any other source in the state of Israel.
Income tax is calculated by applying a progressive tax rate schedule to taxable income.
The tax rates for person exertion income are as follows:
Income Tax Table for 2014 Tax Year starts at 10% and goes up to 50% on the income over 811,000.
These rates also apply to all income that is earned by an individual aged 60 or over, with the exception of income for which a specific rate has been provided. The tax rates for income of an individual under the age of 60 from any source besides those with specific tax rates are as follows:
Non-Residents are taxed in a progressive manner in the same way as residents. The only difference being special rules that may apply to eligible non-residents which will lower their tax liability in Israel. These rules will enable them to have deductions on some of their personal expenses and other items.
When are Tax Returns Due in Israel?
Individual tax payers must file their tax returns with the Ministry of Finance – Israeli Tax Authority by no later than April 30th. An extension may be given to eligible taxpayers when applied for.
US expats are required to file a tax return in Israeli if taxes are not being withheld at the source of income. In the event that taxes are being withheld at the source, and no other taxable income is received, there is no requirement to file a tax return. In the event that a refund is due an American expat, they must hold a Israeli Bank Account in order for the transaction to be completed.
What is the Tax Year-End for Taxpayers Living in Israel?
Like in the United States, the tax year in Israel begins on the 1st of January and ends on the 31st of December.
What Income is Considered Taxable Income in Israel?
Taxable income includes all compensation received by an employee including amounts that have been earned either directly or indirectly from work performed for an employer.
Are Investment Income and Capital Gains Taxed in Israel?
A native Israeli resident is subject to tax on a capital gain that was derived or produced in Israel and outside of the nation. A foreign resident, subject to the provisions outlined in the relevant tax treaty, is obligated to pay tax on a capital gain that was derived or produced in Israel but may qualify for certain exemptions.
What is the Social Security System in Israel?
Israel has a national insurance which US expat workers are required to pay into. Employers may pay a portion or all of the necessary contribution.
Is There a Social Security Agreement or Tax Treaty Between the USA and Israel?
There is no current totalization agreement between the US and Israel, but there is a tax treaty that helps in determining to which country taxes should be paid and at what point. The US-Israel tax treaty is used by the US expat as a guide, ensuring that taxes are being paid in the right country. Those who are unsure of the language of the treaty should seek assistance from a qualified expat tax advisor to ensure that all tax obligations are being met and at the right time.
Are There Other Taxes Assessed on Expats Living in Israel?
Besides personal income taxes, there are other forms of taxes in Israel.
This includes a 18% value added tax (VAT) that is applied to consumer goods. Some goods, such as those which are exported, are tax exempt. This will also include intangible goods, certain services to non-residents, purchases from the tourism industry and fruits and vegetables.
There are no wealth or inheritance taxes imposed in Israel.
Israel does have land appreciation taxation and purchase tax when buying and selling real estate.
What are the FBAR and FATCA Requirements for Americans in Israel?
An American citizen is required by law to report to the IRS any balance that is held in a foreign bank or financial account. This is in disregard to where they reside. The rules of the Foreign Bank Accounts Report (FBAR) state that American expats must file FinCEN form 114 if that foreign bank account balance is in excess of $10,000. If this form is not filed before the deadline of June 30th, large fines may be levied. It is important to note that no extensions are allowed.
As a way in which to uncover American expats who attempt to evade their tax obligation, the Foreign Account Tax Compliance Act (FATCA) was enacted. Under this law, US expats and banks in countries around the world must report balances of over $200,000 at the end of the year, or $300,000 at any point during the year. Married expats have a higher threshold to meet before being obligated to report under FATCA. Those expats that do qualify must file a completed form 8938 along with their US tax return.
Do You Have Additional Questions About Filing US Expat Taxes?
Americans planning to move to Israel should familiarize themselves with the key tax issues that will affect their income. For those requiring additional assistance, an expert in expat taxes will be happy to provide it.