Taxation of US Expats Relocating to Israel

The United States has a system of citizenship-based taxation, meaning that U.S. citizens are subject to taxation on their income, regardless of where they reside. Here are some important considerations for expats moving to Israel:

#1 Reporting Requirements: Expats are required to file a U.S. tax return, even if they don’t owe any taxes! The deadline for most expats is June 15th, with the possibility of an extension until October 15th. It is of upmost importance to be aware of these filing obligations and ensure compliance with the IRS.

#2 Foreign Earned Income Exclusion (FEIE): The FEIE is a valuable provision that allows qualifying expats to exclude a portion of their foreign earned income from U.S. taxes. In 2021 alone, the maximum exclusion amount was $108,700 per qualifying individual! To qualify, one must pass either a physical presence test or a bona fide residence test.

#3 Housing Exclusion: In addition to the FEIE, expats may be eligible for foreign housing exclusions and deductions. This allows for the exclusion or deduction of certain housing-related expenses incurred while living abroad. The amount eligible for exclusion or deduction varies based on location and can further reduce taxable income.

#4 Tax Treaty Benefits: The United States and Israel have a tax treaty in place, which helps prevent double taxation and provides specific provisions for various types of income. The treaty covers topics such as business profits, dividends, interest, royalties, pensions, and more.

#5 Israeli Tax Obligations: While living in Israel, expats are also subject to Israeli tax laws. Israel operates on a territorial basis, meaning residents are taxed on their Israeli-sourced income. It’s important for expats to understand the Israeli tax system, including rates, filing requirements, and any tax credits or deductions available.

#6 Foreign Tax Credit: Expats can typically claim a Foreign Tax Credit (FTC) on their U.S. tax return for taxes paid to Israel. This credit helps offset U.S. tax liability by the amount of taxes already paid abroad. The FTC is particularly beneficial when your tax rates in Israel are higher than corresponding U.S. tax rates.

#7 Retirement Savings: Expats moving to Israel should be aware of the potential tax implications of their retirement savings. U.S. tax-advantaged accounts, such as IRAs (Individual Retirement Accounts) and 401(k)s, may have different tax treatments in Israel. One must consider the tax consequences for such accounts before their move.

#8 Social Security and Medicare: U.S. citizens living and working in Israel are generally subject to Social Security and Medicare taxes unless they are covered under the Israeli social security system. Luckily, Bituch Leumi (the national insurance service in Israel) is a requirement for every resident, even non-citizens, in Israel. Therefore, getting your Bituach Leumi in order is a crucial aspect of relocating to Israel. 

#9 FBAR and FATCA Reporting: Expats in Israel may have reporting obligations for foreign financial accounts under the Foreign Bank Account Report (FBAR) and the Foreign Account Tax Compliance Act (FATCA). FBAR requires reporting if the aggregate value of an account exceeds $10,000 at any point during the year, while FATCA reporting applies to specified foreign financial assets above certain thresholds.

#10 Israeli Tax Benefits for New Immigrants: The Israeli Income Tax Ordinance provides benefits to new immigrants (Olim) and returning citizens, making Aliyah an attractive option. New and returning residents who meet the criteria receive a new tax status, expanding many benefits. For example, owners of foreign companies managed from abroad are not subjected to Israeli taxes, allowing for tax-free revenue outside of Israel. Also, returning residents and Olim are exempt from taxes for ten years on income earned outside Israel! Other benefits include but are not limited to: reduced tax rates on pension income, income tax benefits, and tax exemption on interest from foreign currency deposits for up to 20 years. 

Navigating U.S. taxes as an expat moving to Israel can be complex, and it is recommended to seek guidance from a qualified tax professional specializing in international taxation. They can provide personalized advice based on your specific circumstances, ensure compliance with U.S. tax laws, help you take advantage of available benefits and deductions, and keep you updated on any changes in tax regulations. Such assistance can help you fulfill your tax obligations, and optimize your finances.