The taxation systems of the United States and Israel are distinct, each with unique structures and regulations. Understanding these differences is essential for individuals with dual citizenship, those investing across borders, or anyone navigating the tax landscapes of both countries. Below is an updated comparison of key tax aspects as of 2025.
Key Differences
Income Tax Reporting Obligations
In the United States, tax reporting is comprehensive, applying to all citizens and residents, including those living abroad. This obligation extends to both self-employed individuals and employees, necessitating the filing of annual tax returns. The U.S. tax system distinguishes between various filing statuses, each affecting tax rates and obligations. In contrast, Israel’s tax reporting primarily targets self-employed individuals, with specific requirements for employees, such as reporting additional income beyond their salary.
Income Tax Rates for Individuals
Both countries implement progressive tax systems, taxing higher incomes at higher rates. However, their tax brackets, rates, and structures differ.
United States:
For the 2025 tax year, the IRS has adjusted tax brackets for inflation. The federal income tax rates are as follows:
- 10%: Up to $11,925
- 12%: $11,926 to $44,725
- 22%: $44,726 to $95,375
- 24%: $95,376 to $182,100
- 32%: $182,101 to $231,250
- 35%: $231,251 to $626,350
- 37%: Over $626,350
Israel:
As of 2025, Israel’s income tax brackets are structured as follows:
- 10%: Up to ₪7,010
- 14%: ₪7,011 to ₪10,060
- 20%: ₪10,061 to ₪16,150
- 31%: ₪16,151 to ₪22,870
- 35%: ₪22,871 to ₪54,300
- 47%: ₪54,301 to ₪75,480
- 50%: Above ₪75,480
It’s important to note that from 2025 to 2027, adjustments to income tax brackets and allowances in Israel, previously indexed to the Consumer Price Index, will be suspended. Consequently, tax brackets and allowances for these years will remain at 2024 levels.
Corporate Tax Rates
Both countries utilize a two-tier corporate tax system:
- Corporate Income Tax: Applied to the company’s earnings.
- Dividend Tax: Applied when profits are distributed to shareholders.
United States:
The corporate tax rate is 21%. Dividend taxation depends on the recipient’s marginal tax rate, with qualified dividends generally taxed at 0%, 15%, or 20%, depending on income level.
Israel:
The corporate tax rate is 23%. Dividend tax rates are 25% for standard dividends and 30% for dividends paid to controlling shareholders.
Interest Tax Rates
United States:
Interest income is generally taxable and taxed at the individual’s marginal tax rate.
Israel:
Interest income is considered taxable and subject to a 15% flat tax. However, as of 2025, an additional 2% surtax applies to annual income from capital sources exceeding ₪721,560.
Pensions, Training Funds, and Provident Funds
United States:
Withdrawals from pension plans (e.g., 401(k)s) are generally subject to income tax at the individual’s marginal rate. Employer contributions are typically tax-deferred until withdrawal.
Israel:
Withdrawals from pension and provident funds may be partially or fully tax-exempt, depending on specific conditions. Employer contributions to pensions and provident funds are generally not taxed as income.
Real Estate Transactions
United States:
Capital gains from real estate are taxed at preferential rates if the property is held for more than one year. The depreciation component is taxed at 25%, while the capital gain is taxed at rates up to 20%, depending on income.
Israel:
Capital gains tax on real estate does not depend on the holding period. However, as of 2025, an individual’s annual income from capital sources exceeding ₪721,560 is subject to an additional 2% surtax.
Rental Income
United States:
Rental income is taxed at the individual’s marginal rate or at corporate tax rates if owned by a company.
Israel:
Rental income up to ₪5,070 per month is tax-exempt. Income above this threshold is subject to tax, with rates depending on total income.
Summary
As we have seen, the Israeli and American tax systems, while sharing some general principles, are vastly different in their specifics. Understanding these differences is essential for effective tax planning and informed financial decision-making.
The MasAmerica team of US tax advisors in Israel is well-versed in both tax systems and is available to assist with any questions you may have.
