Taxes In Israel: A Complete Guide For US Expats
- Living as an Expat in Israel
- Israel at a Glance
- What Are Israeli Taxes Like for US Expats?
- Who Needs to File Taxes in Israel?
- Who Qualifies as an Israeli Resident for Tax Purposes?
- What Types of Taxation Does Israel Have?
- What Tax Credits and Deductions Are Available for Expats Living in Israel?
- What Tax Returns Must Be Filed in Israel?
- What is the Israeli Tax Filing Deadline?
- Does the US Have a Tax Treaty with Israel?
- Does the US Have a Totalization Agreement with Israel?
- Navigating Tax Compliance for US Expats in Israel
Living as an Expat in Israel
Living as an expat in Israel offers a unique and enriching experience for individuals from all walks of life. One of the most significant reasons why American Jews choose to relocate to Israel is because of their strong religious connection with the country. Apart from this, Israel offers a plethora of benefits that attract expats from around the world, such as a warm climate, exceptional healthcare facilities, and a diverse and delicious food scene.
However, before making the big move, it’s essential to understand how taxation works in Israel. As an American expat living in Israel, you may be subject to taxes in both Israel and the United States. It’s crucial to familiarize yourself with the tax laws of both countries to avoid any potential legal or financial issues.
Let’s review what an American expat needs to know about taxation in Israel.
Israel at a Glance
- Primary Tax Form: Form 1301
- Tax Year: January 1 – December 31
- Tax Deadline: April 30
- Currency: New shekel (ILS)
- Population: Approximately 9.6 million
- Number of US Expats: Estimated over 180,000
- Capital City: Jerusalem
- Primary Language: Hebrew
- Tax Treaty: Yes
- Totalization Agreement: No
What Are Israeli Taxes Like for US Expats?
US expats in Israel need to be aware that they can be subject to taxation in two different countries.
First, virtually all US citizens are required to file an annual US Federal tax return, regardless of where they live.
Second, by living abroad in Israel, American expats also can be subject to taxation by Israel.
Being subject to tax liabilities in two different countries can cause confusion for US expats in Israel. Here’s an overview of how taxation in Israel can affect American expats living abroad in Israel.
Who Needs to File Taxes in Israel?
For US expats living in Israel, one of the fundamental issues to address is whether they qualify as Israeli tax residents. Generally speaking, if an individual spends more than 183 days in Israel in a calendar year or has a “center of life” in Israel, they will be considered an Israeli tax resident and will be subject to Israeli taxation on their worldwide income.
On the other hand, non-residents of Israel, for tax purposes, are only required to pay taxes on their Israeli source income, such as income earned from working in Israel or from Israeli investments. This can be a significant advantage for expats who may still have income sources in the United States or other countries.
In addition, non-residents of Israel, for tax purposes, are exempt from capital gains taxes on the sale of shares of an Israeli company traded on the Israeli stock exchange. This can be a significant benefit for individuals who invest in the Israeli stock market.
It’s important to note that determining one’s residency status for tax purposes can be complex, and individuals should consult with an expat tax professional service like Greenback to ensure that they are in compliance with all relevant tax laws and regulations.
Who Qualifies as an Israeli Resident for Tax Purposes?
The key test to determine who is an Israeli resident for tax purposes is the “center of life” test. The “center of life” test selects the place that is the center of a person’s life as the person’s residence, taking into account the totality of the person’s family, economic and social ties, including:
- The place of the person’s permanent home;
- The person’s and the person’s family’s place of residence;
- The person’s regular or permanent place of business or the place of the person’s permanent employment;
- The place of the person’s active and substantive economic interests; and
- The place of the person’s activity in organizations, societies, and various institutions.
There is a rebuttable presumption (which can be rebutted by the taxpayer or by Israeli tax officials) that the center of a person’s life during a tax year is in Israel (and thus, the person would be an Israeli resident for tax purposes) if:
- During the tax year, the person spent 183 or more days in Israel; or
- During the tax year, the person spent 30 or more days in Israel, and the total period of the person’s stay in Israel in the tax year and in the two years before it was 425 days or more.
What Types of Taxation Does Israel Have?
Personal Income Tax
Israel taxes individuals on their income at graduated rates (with a maximum income tax rate of 50%), generally in accordance with the following schedule
|Taxable Income (ILS)||Tax (ILS)|
|Up to 77,400||10%|
|77,400 – 110,880||7,740, plus 14% of excess above 77,400|
|110,880– 178,080||12,427, plus 20% of excess above 110,880|
|178,080 – 247,440||25,867, plus 31% of excess above 178,080|
|247,440 – 514,920||47,369, plus 35% of excess above 247,440|
|514,920 – 663,240||140,987, plus 47% of excess above 514,920|
|Over 663,240||210,697 plus 50% of excess above 663,240|
Capital gains can be subject to lower tax rates, generally ranging from 15% to 30% based on the nature of the asset subject to capital gains taxation. Israel also generally segregates the inflationary portion of a capital gain (related to the percentage increase in the Israeli consumer price index from the date of acquisition of the asset to the date of its sale), which is exempt from tax to the extent it accrued after January 1, 1994.
Dividend income (from 15% to 30%) and interest income (from 15% to 25%) also can be subject to lower tax rates.
There are various exemptions from personal income tax in Israel for new immigrants and returning residents (who were foreign residents for a continuous period of at least 10 years and then returned to Israel) upon becoming an Israeli tax resident, as follows:
- Exemption from Israeli taxation for 10 years on foreign source passive income (including dividends, interest, and rent);
- Exemption from Israeli taxation for 10 years on income from a business, vocation, or salary that is accrued or derived from outside of Israel; and
- Exemption from Israeli capital gains taxation for 10 years on the sale of assets located outside of Israel.
In addition, “approved specialists” (foreigners appointed by the Ministry of Industry and Trade to perform jobs or provide skills that Israeli residents cannot offer) are subject to a maximum income tax rate of 25% for three years, with a possible extension of up to an additional five years.
Land Appreciation Tax
Israel imposes a land appreciation tax on gains from the sale of Israeli real estate. The tax liability under the land appreciation tax is determined based on capital gains taxation.
Property taxes are generally assessed on the occupier of residential and commercial property. Unoccupied property is generally taxed to the owner of the property. Property taxes are imposed at the municipal level.
Israel assesses a value-added consumption tax at the rate of 17%.
Estate, Inheritance, and Gift Taxes
Israel does not impose any estate, inheritance, or gift taxes.
Corporate Income Taxes
Companies incorporated in Israel and foreign companies that have an Israeli branch presence are both subject to corporate income tax. Israeli-resident entities have a corporate income tax base of worldwide income, while non-resident entities in Israel have a corporate income tax base of only income accrued or derived in Israel. The corporate income tax rate is 23%.
What Tax Credits and Deductions Are Available for Expats Living in Israel?
Israeli tax residents can claim personal tax credits based on “points”. Each “point” has a value of ILS 223 per month. Resident individuals are entitled to a minimum of 2.25 “points”.
There are also tax credits available for charitable contributions.
In addition, a “foreign expert” (generally a non-resident who, while abroad, was invited by an Israeli individual or Israeli resident entity to perform services in an area of expertise and earned more than ILS 13,600 monthly for the performance of the services in Israel) can deduct from Israeli taxable income the following items for a period of up to 12 months of employment in Israel:
- Documented rent and utility costs; and
- Daily living expenses (limited to the lower of ILS 340 or 50% of the employee’s gross remuneration.)
In documenting the deduction for rent and utility costs, it is important for the “foreign expert” to keep copies of leases and utility bills.
For an American expat, it is also important to consider the following under US tax law that can decrease US tax liability while living abroad in Israel:
- Foreign Tax Credit: The foreign tax credit allows you to reduce your US tax bill on a dollar-for-dollar basis by the amount of taxes that you paid to a foreign government (such as taxes paid in Israel).
- Foreign Earned Income Exclusion: The foreign-earned income exclusion lets you exclude a certain amount of foreign-earned income (currently $112,000) from US taxation.
- Foreign Housing Exclusion (Deduction): The foreign housing exclusion (deduction) permits you to decrease your US tax liability based on certain foreign housing expenses.
What Tax Returns Must Be Filed in Israel?
Most income taxation in Israel is based on taxes withheld at source. Thus, tax returns are not always required in Israel.
If a tax return is required, it will be reported on Form 1301. Form 1301 is filed with the Israel Tax Authority. The Israel Tax Authority then sends the taxpayer a tax assessment.
It is important for American expats to remember that in addition to filing Form 1301 in Israel, American expats can have to file tax forms in the United States, including:
- IRS Form 1040 – Individual Income Tax Return.
- IRS Form 8938 – Statement of Specified Foreign Financial Assets.
- FinCEN Form 114 – Report of Foreign Bank and Financial Account (commonly known as “FBAR”).
What is the Israeli Tax Filing Deadline?
If a tax return is required, the filing due date for a tax return in Israel is April 30 (subject to extensions).
Does the US Have a Tax Treaty with Israel?
The United States has a tax treaty with Israel. For US expats living in Israel, the tax treaty between the United States and Israel can be a valuable tool to avoid double taxation on the same income. The treaty provides rules for determining which country has the primary right to tax specific types of income.
Under the tax treaty, US expats living in Israel can claim various exclusions, deductions, and credits on their US tax return to avoid double taxation.
Does the US Have a Totalization Agreement with Israel?
The United States does not currently have a Totalization Agreement with Israel. Totalization agreements, also known as Social Security agreements, are designed to eliminate dual social security coverage and taxation for workers who divide their careers between two countries.
Without a Totalization Agreement in place, US expats living and working in Israel may be subject to dual social security coverage and taxation. However, US citizens or legal residents who have paid into both the US and Israeli social security systems may be eligible to receive benefits from both countries, subject to certain limitations.
Navigating Tax Compliance for US Expats in Israel
Our goal with this guide was to enhance your understanding and knowledge of taxation in Israel and how it affects US expats living there. If you require further information or assistance, our team of experienced expat tax experts is available to assist you.
Contact us, and one of our customer champions will gladly help. If you need very specific advice on your specific tax situation, you can also click below to get a consultation with one of our expat tax experts.