3 Important Facts (Regarding Taxes) for US Expats in Israel
Israel is known as the cradle or place of origin for the 3 most popular religions in the world. For this and other reasons, the country enjoys a long history and rich culture.
If you are planning to become a U.S. expat in Israel, or have been one for a while, it’s important to know the tax laws of the country and the potential impact on your U.S. tax return. Expat taxes can get complicated. Fortunately, we have outlined the key points below.
Photo by: David King
1. How Living in Israel Impacts US Taxes
As a U.S. citizen or permanent resident (Greencard), you are required to file U.S. taxes even if you live in Israel. Plus, if you have assets in foreign financial accounts (e.g., foreign banks), there are informational reports you may be required to file. For example, U.S. Expats Living in Israel with $10,000 or more in foreign banks must file the FBAR (now known as FinCen 114).
Fortunately, the U.S. government provides various forms of tax relief that can lower or eliminate U.S. tax obligations
- The Foreign Earned Income Exclusion – It allows you to exclude a certain amount of income earned outside the U.S.
- The Foreign Housing Exclusion/Deduction – This one relates to additional income that can be excluded for household-related expenses tied to living abroad.
- The Foreign Tax Credit – It allows you to offset foreign taxes paid against U.S. tax obligations.
In most cases, the foreign earned income exclusion is preferable to the foreign tax credit if you live in a country with a lower tax rate than the U.S. (assuming your income is not above the applicable threshold). However, it’s a good idea to speak with an expat tax specialist to discuss the best application of these tax reliefs.
2. Taxation in Israel
Let’s start by understanding who is required to pay taxes in Israel. You are considered a resident for tax purposes if you fall into either of the following categories:
- Anyone whose center of living is in Israel, taking into account family and economic/social links; or
- Foreigners present in Israel for over 183 days during a tax year, or total of 425 days in the current year and the previous two years.
Residents are taxed on worldwide income, while non-residents are taxed on Israel-source income only. Employment income is taxed at a progressive rate ranging from 10% – 45%.
Israel and the U.S. have an income tax treaty in-place. International tax treaties clarify tax jurisdiction. These treaties can provide U.S. citizens and residents with reductions in foreign income taxes. However, a reduction in U.S. taxes is generally not available under these treaties as a result of “tax saving” clauses that allow the U.S. government to impose taxes on U.S. expats as if there were no treaty.
Note that Israel and the U.S. do not have a social security tax agreement in-place. This means that certain U.S. expats will be required to pay into both social security programs.
3. FATCA and Israel
The U.S. government is increasingly interested in knowing about the foreign assets held by its citizens and residents. As a result, it has been busy inking deals with other countries whereby foreign financial institutions (FFIs) will be required to:
- Identify accounts of U.S. persons;
- Report certain information to the IRS regarding those accounts;
- Withhold a 30% tax on certain payments to non-participating FFIs and account holders unwilling to provide the required information
As of the publication of this article, roughly 80 countries have either signed intergovernmental agreements with the United States or are in discussions. It is important to know that Israel does have a FATCA agreement in-place with the U.S.
If you have any questions regarding your U.S. expat taxes, contact us today. We are here to help.