US Expat Taxes Explained: Filing Taxes as an American Living in Israel
Israel is among the most popular destinations for American expats, but how will living there affect their US expat taxes? It is important to understand both how your US expat taxes will change with a move to Israel and how Israel will tax you on income earned while you live there.
US Expat Taxes in Israel
If you are a citizen or permanent resident of the United States then you are obligated to file US taxes, in this case US expat taxes, with the IRS each year regardless of the country in which you reside.
In addition to the regular income tax return, you could also be required to file an informational return on your assets held in foreign bank accounts with Foreign Bank and Other Account Reporting (FBAR) Form 114, in addition to Form 8938 Statement of Specified Foreign Financial Assets.
While the US is one of the few governments that tax the international income of their citizens and permanent residents who reside overseas, it does have special provisions to help protect them from double taxation including:
- The foreign earned income exclusion allows you to decrease your taxable income on US expat taxes by the first $108,700 for 2021 ($107,600 for 2020) earned as a result of your labors while a resident of a foreign country.
- The foreign tax credit, which allows you to offset the taxes you paid in your host country with your US expat taxes dollar for dollar, and
- The foreign housing exclusion, which allows you to exclude certain household expenses that occur as a result of living abroad.
With proper planning and quality tax preparation, you should be able to take advantage of these and other strategies to minimize or even eliminate your US expat taxes. Please note that even if you do not believe that you owe any US income taxes, you will more than likely still be required to file a return. For more information, see US Expat Taxes Explained.
Who is a Resident of Israel?
For tax purposes, individuals are a resident of Israel if their “center of vital interest” is Israel. Factors that go into determining where an individual’s center of vital interest is include place of work, permanent home or residence, business connections, location of assets, and location of personal and social connections.
There is also a test of residency based on days spent in Israel. Individuals are considered a resident for tax purposes if they meet either of the following criteria:
- Spend more than 183 days in Israel
- Spend 30 or more days in Israel for the current tax year. To qualify for residency under this provision, an expat must have a total stay time of 425 days between the current tax year and the two previous tax years.
Israel Income Tax Rates
If you are a taxable resident of Israel, your worldwide income will be subject to personal income tax at a progressive rate that peaks at 45%. There is a special expatriate tax regime that allows for non-tax residents to be taxed at a beneficial reduced or flat rate (for “specialists” in certain fields), but the rates vary depending on the field of employment. If you are a non-resident and only temporarily working in Israel, you will only be taxed on income derived in Israel.
For residents paying tax on worldwide income, the tax rates from the Israeli Tax Authority are as follows:
|Earnings in Israeli Shekel (NIS)||Rate Applicable to Income Level (%)|
|60,841 – 103,920||14%|
|103,921 – 168,840||23%|
|168,841 – 254,480||30%|
|254,481 – 482,760||33%|
|482,761 and above||45%|
Capital gains are taxed between 15% and 25%. For non-residents of Israel, the capital gains are only subject to taxation if the gains are sourced in Israel.
Note that taxable income includes fringe benefits and non-cash allowances. Tax deductions are allowed for pension fund contributions and individuals are entitled to certain personal allowances if they qualify.
US – Israel Tax Treaty
The US and Israel have a tax treaty in place which is helpful when determining which country should be paid specific taxes and at what point those taxes should be paid. The US – Israel tax treaty is an expat’s guide to ensuring that taxes are paid to the right country. If you are unsure of the language in the treaty or have any other questions, be sure to talk to a tax advisor to ensure the correct taxes are paid to the correct country.
Israel Tax Due Date
Like the tax year in United States, the tax year in Israel is from January 1st to December 31st. Returns must be filed with the Ministry of Finance – Israeli Tax Authority by the 30th of April. Extensions are offered to eligible taxpayers, but they must be applied for.
You are required to file a return in Israel if your taxes are not withheld at the source. If your taxes are withheld at the source and you have no other taxable income, you are not required to file a return. In the event you receive a refund from the Israeli Tax Authority, you must maintain an Israeli bank account in order to enable the transaction.
Social Security in Israel
Israel requires by law that foreign workers to pay into national insurance. Your employer may pay part or all of your national insurance contributions. There is currently no Totalization Agreement between the US and Israel.
Is Foreign Income Taxed Within Israel?
If you are not a tax resident in Israel, you are only taxed on income from Israeli sources. However, if you are an Israel tax resident, you are required to report and pay taxes on worldwide income.
Other Taxes in Israel
In addition to income tax, there are other forms of taxation in Israel.
To start, there is a 16% value added tax (VAT) applied to consumer goods. There are certain goods that are tax exempt, such as exported goods, intangible goods, certain services to nonresidents, purchases from the tourism industry, and fruit and vegetables.
Israel does not have wealth or inheritance taxes.
Property taxes are applicable to the sale of tangible property. Real estate is taxed at a marginal tax rate that is capped at 20% for gains on property sale. Purchasers may also be required to pay a purchasing tax at rates ranging up to 5%.
Saving on US Expat Taxes
One of the biggest reasons Israel is appealing to expatriates is the relatively simple tax structure. And although it is relatively straight forward, it is good to be aware of filing requirements, deadlines, and additional taxes you will need to pay as an American living in Israel. If you have any questions about your US expat taxes, please contact our expat tax experts.