The differences between Israel and United States tax rates

Despite popular belief, the taxation system in each country is very different. Thus, the American and Israeli taxation systems are also distinct from each other. For many people, it is important to know these differences – whether they have dual citizenship or are considering investing in the United States. In this article, we will present the differences between tax rates in Israel versus tax rates in the United States.

 

Key differences

Income Tax Reporting Obligation

While the duty of reporting in the United States is widespread and applies to both American citizens who do not reside in the United States, and foreign citizens who invest in the United States – without distinguishing between self-employed and employees, the Israeli reporting obligation is reserved for the self-employed (who do not meet an exemption, and with the exception of employees who meet specific conditions). However, while the duty of reporting in the United States is almost mandatory to all, the duty of reporting in Israel applies only to certain citizens.

The imposition of a comprehensive reporting obligation is significant, if only because of the costs associated with bureaucracy  filling out the report and submitting it.

 

Income tax rate applied to individuals

Both in Israel and in the United States, the tax system is progressive – a mechanism that taxes the individual according to income, those with a low-income will be taxed at a lower rate while those with higher incomes are taxed at a higher rate. Thus, in both taxation methods there are tax brackets according to income. However, tax rates vary.

First, while tax rates in Israel are fixed and unrelated to the taxpayer’s personal status, tax rates in the United States are directly related to this status. The U.S. tax system distinguishes several personal statuses.

 

Personal statuses according to the American tax system

  • Single (single or divorced / widower without children)
  • Married reporting together
  • Married reporting separately
  • Head of Household
  • Known widower

 

For each status, the U.S. tax system sets different tax rates that depend on the income of the individuals. The rates vary taking into account the meaning of the personal status, for example the tax rate applied to an individual will be higher than that applied to the head of a household, taking into account the fact that the head of the household supports those who live with him.

In general, while marginal tax rates in the United States range from 10-37%, marginal tax rates in Israel range from 10-47%.

 

Corporate tax rates

In both the United States and Israel, the method of taxing companies has two-stages: taxing the company’s income at a corporate tax rate, and taxing the income of the shareholder when distributing a dividend.

However, while the income tax rate in Israel on companies is 23% and dividend distribution is 25% (dividend distribution to a controlling shareholder – 30%), the corporate tax rate in the United States is lower and stands at only 21%. Similarly, the dividend tax will be done according to the marginal tax rate that applies to the individual receiving the dividend.

 

Interest tax rates

Most of the interest repayments in the United States are tax-exempt, while in Israel interest repayments are considered income for all intents and purposes and are taxed at a fixed rate of 15%. Non-tax-exempt interest refunds at the rate of marginal tax applicable to the individual.

 

Pensions, training fees and provident funds

In the United States, withdrawing pension or provident fund contributions is considered income for all intents and purposes and is taxed according to the marginal tax rate applicable to the taxpayer. On the other hand, in Israel, withdrawal of pension or provident funds is usually exempt from the majority or partially. It should be estimated that employer deposits for training fees, pensions or provident funds in Israel are not taxed, unlike in the United States, where these incomes are also taxed.

 

Real estate transactions

When selling real estate, the taxpayer in the United States can benefit from the taxation of capital gains at low rates in accordance with the appropriate marginal tax. Moreover, to the extent that the sale was carried out after a full year in which the taxpayer held the property, the depreciation component is taxed at a rate of 25%, while the capital gain component is taxed at a rate of about 15%. In Israel, the above distinction does not exist, and it does not matter how long the property was held.

Periodic real estate income, i.e., rental income, which will be classified as business income will be taxed according to the marginal tax rate applicable to the taxpayer or according to corporate tax rates (as far as the company is concerned). The taxation will apply to the entire rental amount. In Israel, on the other hand, rent up to the amount of 5,070 will be tax-exempt, and tax will apply to any amount above this amount.

 

Passive income taxation

American citizens with significant incomes as set out in the law will be taxed an investment income tax of 3.8% on their income from passive investments (dividend income, interest income, free interest income, royalties, rental income, etc.) This is in addition to the income tax applied to them.

 

Conceptual taxation

Other unique taxes to the U.S. taxation system are conceptual taxes imposed as part of the 2018 tax reform. The taxes are imposed on American corporations that hold foreign companies with a holding of more than 10%, and are applied to the profits of these foreign companies:

 

Tax on excess profits

A one-time tax on excess profits of approximately 15.5% cash and tax of 8% from other profits.

 

Additional tax on income and property

An additional tax of 10.5% of the value of the foreign company’s income net of expenses and 10% of the fixed value of the asset.

 

Estate tax rates

Estate tax rates in the United States are among the highest in the world. Estates of American citizens are exempt from paying estate tax up to $11.2 million. In contrast, the estates of foreign citizens located in the United States are exempt from paying tax up to only $60,000, and the tax rate that will apply to them is 35%. In Israel, there is no estate tax except in unique cases.

 

Summary

As we saw in the previous segments, the Israeli tax system and the American tax system, despite similarities in certain principles, are very different. Therefore, it is of the upmost importance to thoroughly recognize both methods, in a way that will enable optimal tax planning and informed decisions to be made.

The Team of Experts of MasAmerica is familiar with the tax rules of both methods and will be happy to be at your service and answer any questions.

The aforesaid should not be regarded as legal advice. It is advisable to consult with the MasAmarika team before any action. The service is provided by a professional team, fluent in English and Hebrew, and includes attorneys and accountants with American licenses.

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