What Americans in Israel Need To Know About US Expat Tax Filing

Expat Living In Israel

The State of Israel is a narrow strip of land in Western Asia on the shore of the Mediterranean Sea. Arab countries border this country on the north (Lebanon), northeast (Syria), east (Jordan), south and the southwest (Egypt). This land is the only Jewish-majority country in the world, one of only a few representative democracies operating under a parliamentary system in this western part of Asia, and creator of the highest standard of living for its citizens and residents in the Middle East of the 21st century. Stepping back in time, a modern yet “ancient city” of Jerusalem, the capital of Israel, has been one of the most significant and common setting for many historical and biblical stories in the Jewish, Christian, and Islamic traditions. This country, born in 1948, has roots that reach back to times marking the formal beginnings of western history.

Below is our top 10 list of cities in Israel for expats (in no particular order):

• Jerusalem
• Haifa
• Tel Aviv
• Ashdod
• Rishon LeZion
• Ashkelon
• Petah Tikva
• Petah Tikva
• Bat Yam
• Herzliya
• Netanya
• Holon

The Israeli legal system is based on English common law and civil law. Personal areas from food to marriage and divorce however, fall under religious jurisdiction that incorporates Jewish, Muslim, Druze, and Christian traditions. Israeli food for example is typically prepared according to Jewish dietary laws called Halakha and shares common ingredients and cooking techniques with other Arab and Middle Eastern cuisines. Regardless of the differences in culture and tradition, expats choose this country for its western life style, its archeological treasures, and economic opportunities despite dangers from surrounding geo-political conflicts in the region.

People who visit or live in Israel enjoy a diversity of both geological features and botanical species distributed across the land from southern desert sands in the Negev to northern mountains in Golan. While coastal cities like Tel Aviv enjoy Mediterranean seasons, weather and temperatures vary from semi-arid to desert climate depending on one’s elevation above sea level in different parts of the country. Nine public universities and over 40 private colleges support education, research, and development in many fields. Since water is as scarce as sunlight is plentiful, Israelis lead the world, for example, in the use of solar energy and resource conservation.

Guide To US Expat Tax In Israel

The Tax Samaritan country guide to US expat tax in Israel is intended to provide a general review of expat tax in Israel and how that will impact your U.S. expatriate tax return as a U.S. Expat In Israel.

As a U.S. taxpayer, all worldwide income is subject to taxation and reporting and for most expatriates you are required to file a U.S. tax return on an annual basis due on April 15 each year (June 15 if you are residing overseas on the April 15 deadline). The tax treatment for different classes of income can vary greatly from Israel and the U.S. For example, certain benefits may be tax free or excluded from taxable income in the Israel, but in the U.S. these benefits are likely to be non-qualified benefits that are subject to being included as taxable income in U.S. As such, there are a number of considerations related to US expat tax in Israel and this brief article will address a few of those considerations.

Israel Expat Income Taxes

Who Is Liable For Income Taxes In Israel

The worldwide income and capital gains of an Israeli resident are subject to income tax. Nonresidents are taxed on their Israeli-source income. This country defines residency as where a person resides, the location of a permanent home, the location of assets or investments, or their place of business or employment. A person is presumed a resident if they are present in the country for at least 183 days during the calendar year ending December 31. Alternatively, a person is considered an Israeli resident if, during the current tax year, they are present for at least 30 days and have a cumulative physical presence over the last three years (current year plus two preceding years) of 425 days. There are special rules for an expat that can affect taxes whether or not Israel and the foreign country have a tax treaty. Israel also applies an exit tax on residents who decide to permanently leave the country.

A good source for more detailed information regarding Israeli income tax and foreign source income is Nefesh B’Nefesh. There are special rules for expats who do not have recourse to foreign country tax treaty exemptions.

Tax Year In Israel And Tax Filing And Payment Rules

Taxable income is defined as salary, cash, any form of benefits, or allowances paid to an employee. Social benefits, education-related benefits, and even the use of an employer-provided cellphone may be considered taxable income! Whether you are an Israeli resident or non-resident, income from an Israeli-source business or a one-time transaction is taxable. Similarly, directors’ fees are considered self-employment and subject to taxation. Residents are taxed on any foreign-source income. Both resident and non-resident tax payers may be subject to capital gains depending on income source and existing tax treaties with foreign countries.

What You Need To Know About US Expat Tax In Israel

When dealing with US expat tax in Israel, there are a number of preferential expat tax treatments that may benefit your U.S. expatriate tax return. In fact, for many U.S. expats, the Foreign Earned Income Exclusion (IRS Form 2555) and other deductions will reduce your U.S. taxes to zero.

Some of these preferential tax treatments or benefits for US expat tax in Israel include:

• If you are a U.S. citizen or a resident alien of the United States and you live in Israel, your US expat tax in Israel is based on your worldwide income and as such you must file a U.S. return for all the years that you are residing in Israel. However, as a U.S. expat you may qualify to reduce your U.S. taxable income up to an amount of your foreign earnings that is adjusted annually for inflation ($99,200 for 2014). In addition, you can exclude or deduct certain foreign housing amounts. This is known as the Foreign Earned Income Exclusion and foreign housing exclusion .
• When it comes to your US expat tax in Israel, most US expatriates worry about “double taxation” – paying taxes to two different countries – the U.S. and Israel. A U.S. taxpayer working overseas in Israel may be able to reduce U.S. taxable income and “double taxation” by claiming the Foreign Tax Credit on Form 1116. Should any foreign income not be fully offset by the foreign earned income exclusion, housing exclusion or housing deduction, the foreign tax credit paid or accrued may be used as a deduction or credit on the U.S. tax return. Taxpayers can elect to either deduct the taxes as an itemized deduction on Schedule A or claim a credit against tax. In most cases, it is to your advantage to take foreign income taxes as a tax credit.

A common but dangerous mistake is the assumption that if there are zero taxes owed with these tax benefits that a return for US expat tax in Israel does not need to be filed. That is not true. If you are working overseas, it is likely that you meet the filing requirements to file a tax return and must do so. It is important to note that the preferential tax treatments, such as the foreign earned income exclusion and foreign tax credit are not applicable to the outcome of your tax liability until they are claimed on a filed tax return.

When faced with US expat tax in Israel there are many tax items to consider, but the above are by far the most common preferential tax benefits. With top-notch experienced and knowledgeable expat tax preparation from Tax Samaritan, you can be assured that you are paying the minimal amount of U.S. taxes that you are legally obligated for.

Israel Foreign Bank Account Reporting – The FBAR (FinCen Form 114)

Another important tax deadline that frequently applies to US expat tax in Israel is in regards to the disclosure of foreign assets on the FBAR (Foreign Bank Account Report – Form 114 – formerly known as TD F 90-22.1).

The FBAR filing deadline is June 30th (or the preceding business day if June 30th falls on a weekend). Unfortunately, requesting an extension on your individual return does not extend the FBAR due date – there is no extension available for the FBAR deadline. Any reports filed after this date are considered a delinquent FBAR. In addition, the FBAR is different than many other tax forms in that it must be received by the deadline date (and not postmarked by the deadline date).

The FBAR must be filed with the Treasury Department (it is not filed with your federal income tax return) whenever you meet the FBAR filing requirements, which in a nutshell is whenever a U.S. person has a financial interest in, or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust or other type of foreign financial account (including an insurance policy with a cash value such as a whole life insurance policy) maintained with a financial institution, with an aggregate value of over $10,000 at any time during the calendar year based on the highest value of each foreign account during the tax year.

If you have bank accounts at Bank Hapoalim, Bank Leumi, Israel Discount Bank, First International Bank of Israel, Bank Mizrahi-Tefahot, Bank Otsar Ha-Hayal, Union Bank of Israel or at another bank in Israel or any other foreign country, you may meet the filing requirement to disclosure your foreign accounts on the FBAR. Please don’t hesitate to contact Tax Samaritan to learn more about your filing requirements.

U.S. – Israel Social Security Totalization Agreement

The United States has entered into agreements, called Totalization Agreements, with several nations for the purpose of avoiding double taxation of income with respect to social security taxes. These agreements must be taken into account when determining whether any alien is subject to the U.S. Social Security/Medicare tax, or whether any U.S. citizen or resident alien is subject to the social security taxes of a foreign country. As of this time, Israel has not entered into a Totalization Agreement with the United States thus there is no opportunity to avoid double taxation of social security income for US expat tax in Israel.

U.S.- Israel Tax Treaty And Tax Relief For US Expat Tax In Israel

The United States has a separate tax treaty with Israel. The US Internal Revenue Code offers tax credits against any Israel income tax. See our Tax Samaritan Takeaways below for other valuable references.

Request A Tax Preparation Quote

Our goal at Tax Samaritan is to provide the best counsel, advocacy and personal service for our US expat tax in Israel. We are not only tax preparation and representation experts, but strive to become valued business partners to American expatriates in Israel. Tax Samaritan is committed to understanding our client’s unique needs; every tax situation is different and requires a personal approach in providing realistic and effective solutions.

Click the button below to request a Tax Preparation Quote today to get started with the preparation of your return for US expat tax in Israel or to request a free 30-minute tax consultation.

Tax Samaritan Takeaways

Please click on the hyperlinks below for additional takeaways for your expat tax in Israel:

Tax Samaritan Expat Tax Services

2014 IRS Publication 54, Tax Guide for US Citizens and Resident Aliens Abroad

Embassy of Israel to the United States, Washington, DC

Ministry of Foreign Affairs – Israel

Tax Samaritan is a team of Enrolled Agents with over 25 years of experience focusing on US expat tax in Israel and throughout the world. We maintain this tax blog where all articles are written by Enrolled Agents. Our main objective is to educate US taxpayers on their tax responsibilities and the selection of a tax professional. Our articles are also designed to help taxpayers looking to self prepare, providing specific tips and pitfalls to avoid.

When looking for a tax professional, choose carefully. We recommend that you hire a credentialed tax professional such as Tax Samaritan that is an Enrolled Agent (America’s Tax Experts) that is experienced and knowledgeable about US expat tax in Israel. If you are a US taxpayer overseas, we further recommend that you seek a professional who is experienced in expat tax preparation, like Tax Samaritan (most tax professionals have limited to no experience with the unique tax issues of expat taxpayers).

Randall Brody is an enrolled agent, licensed by the US Department of the Treasury to represent taxpayers before the IRS for audits, collections and appeals and experienced with US expat tax in Israel. To attain the enrolled agent designation, candidates must demonstrate expertise in taxation, fulfill continuing education credits and adhere to a stringent code of ethics.

Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional US expat tax in Israel advice based on your individual needs.