According to American tax laws, Israeli citizens who are residing in Israel but are also green card holders or have an American passport, are required to file tax reports to the American tax authorities.
Even though Israel and the United States have signed a mutual treaty whose purpose is to prevent double taxation, there might still be situations where an Israeli citizen would be required to pay taxes in the United States after they have paid taxes in Israel as well.
In order to protect your interests and your rights in this context, it is important to familiarize yourself with the differences between the Israeli and the American tax authorities and different tax laws, which is exactly the purpose of the following guide.
The difference between the American and the Israeli tax laws that might lead to a double taxation requirement
According to the American tax laws, Israelis living in Israel and having an American passport / American green card are required to submit tax reports to the United States tax authority (the IRS), and within them, they must report on their income in Israel and outside it.
As mentioned above, Israel and the United States indeed have a shared tax treaty intended to prevent double taxation in both countries, but in actuality, there are scenarios that require the tax–payer to pay taxes in the United States on top of the taxes that were paid in Israel.
Taxation differences in different types and sources of income – between Israel and the United States
Listed below are a number of examples of differences between the tax authorities in the United States and Israel, that any person who is considering relocation from Israel to the United States or from the United States to Israel should know. These taxation differences are relevant also to those who have an American passport as well as an Israeli one:
Taxation on withdrawing money from a training fund, pension fund, or provident fund
The tax laws in Israel allow a full or partial exemption from tax payments when withdrawing training, pension, or provident funds, while there are different aspects that affect the right to an exemption.
On the opposite side, in the United States, any income from a training fund, a provident fund, or a pension fund, is considered income in every sense of the word, and as such requires taxes to be paid on it.
Taxation on income generated from rent payments
There is no shortage of landlords, houses, and commercial real–estate in Israel and in the United States, that generate steady income from the rental payments.
The taxes rate on this type of income depends on the amount in the United States, while in Israel, income tax is imposed on income from rent starting at the amount of 5,070 shekalim, while income under that amount entitles the land owner to a tax exemption, and over that amount – the amount of taxes owed is decided by law.
This is unlike the taxation on rent in the United States where such a limit does not exist, but rather any amount earned by the property owner from rent payment by renters requires taxes to be paid – right from the first dollar earned.
Taxation on income above a certain amount set by law
In Israel, those who make high incomes are not required to report to the tax authority when it comes to income from training funds and provident funds, besides allocations by employers (if they are employed workers) into these funds.
Alternatively, in the United States, any person earning a yearly salary exceeding 120 thousand dollars, is required to report on earnings from their training fund and/or provident fund as well.
Taxation on real estate sales
Nowadays there are many real estate entrepreneurs in Israel who enjoy tax exemptions or lowered tax rates, like in the case of landlords who are interested in selling their property.
On the other hand, in the United States, only those people who live in the property that they own until they sell it will enjoy the benefits of a lowered tax rate, and any other person who does not live in their property until selling it will have to pay full capital gains tax on the sale of the property.
Taxation of income from self–occupation
In Israel, self–employed business owners are required to pay national insurance, income tax, as well as value-added tax. In the United States, there is an additional tax called employer taxation.
This tax is a tax payable to social security at a rate of 15 percent of the business profits (net), and even if taxes were already paid to the Israeli tax authority in Israel, there is no option to deduct the tax in the United States but rather it must be paid in addition to the rest.
Taxation on income from dividends
Every person in Israel who makes profits from dividends is required to pay taxes for them. The meaning of this is that a person with a financial portfolio/dividend profit from any source at all will be required to pay a tax for them that is pre-set and is not rated.
Contrastingly, in the United States, the income from dividends is taxed according to the marginal tax rate. This means that if the marginal tax rate of the taxpayer is higher than the set tax rate in Israel, they will be required to pay the difference in the United States.
Taxation on investments
The Israeli tax authority does not discriminate between long-term investments and short-term investments. This means that a person who had purchased a property and decided to sell it after 18 months, has the same tax obligation as a person purchasing a property for investment and deciding to sell it after a few years.
In the United States, unlike in Israel, short–term capital gains are taxed according to marginal tax rates.
The tax treaty is a tool for bridging the differences between the tax authorities in Israel and in the United States
The tax treaty between the United States and Israel was, as mentioned, intended to prevent over-taxing people with dual citizenship, an American green card in addition to Israeli citizenship, or Israelis earning income from within the United States. To that end, there are different articles cemented in the treaty that lay out the taxing method in different scenarios.
Following are the main point that is important to be familiar with in this topic:
- Taxation on income from real estate – the tax treaty dictates that all income sourced from real estate properties counts as taxable income according to the tax laws of the country where the property is physically located.
- Taxation on business profits – according to the tax treaty, business-related profits will be taxed by the tax laws of the country where the owner of the business profits is registered as a resident.
- Taxation on dividends – the tax treaty enforces a tax on dividends in accordance with the place of residence or business of the dividend payer.
- Taxation on income from royalties – this applies in accordance to the location of the royalty rights are, as in – the place where the royalties were issued.
- Taxation on the sales of personal assets – decided according to the location where the sale deal was made.
- Taxation on income from services provided – the tax treaty states that any person providing services of any kind is required to pay taxes according to the location where those services were provided.
Tax issues that Israelis with income coming from the United States need to examine
The popular assumption is that the tax brackets in Israel as well as the tax rates being paid in Israel are higher than those in the United States and that refunds for taxes that were paid in Israel would allow the tax assessment that applies to the same taxpayer in the United States to even out.
Even so, it is important to know that there are cases in which income that was generated in Israel will owe tax payments in the United States even after the tax owed was already paid in Israel.
For this reason, if you are individuals who are required to submit tax returns to the American tax authority, you should examine the manner in which you are being taxed in the United States, and execute professional tax planning. This could be relevant and profitable in regards to issues such as:
- Implementation of real estate investment and lowering capital gains tax requirements.
- Avoidance of tax requirements in employer tax for Israelis who have business activities in the United States.
- Planning the dates of pension fund withdrawals, compensation funds, and training funds.
Who can advise me on the subject of differences between the Israeli tax authority and the American one and the taxation repercussions they cause?
The differences between the Israeli and American tax authorities tend to confuse many Israelis who have American citizenship or an American green card, as well as Israelis who run business activities within the borders of the United States.
As a result, many find themselves owing taxes that they were not prepared for. This is why it is very important to address this issue early and turn to professional tax consulting before starting any action with an economical meaning in the United States.
