A tax treaty between the U.S. and Israel has been in place since 1995, in order to prevent double taxation for U.S. citizens residing in Israel, and vice versa. Israel has also tried to attract new olim (immigrants) and has passed several laws with respect to non Israeli sourced income. Below are some important points to consider in regard to taxation issues.
The tax treaty delineates which country has precedent in claiming particular types of income. The income is then declared in both countries and a foreign tax credit is taken to offset the taxes due. In this case, the taxpayer always pays the higher amount.
However, under new Israeli legislation, olim who have become residents of Israel after January 1, 2007 are eligible for a ten year exemption from Israeli taxes on specific types of foreign income. Passive income earned from accounts outside of Israel is eligible for the exemption. This includes interest, dividends, capital gains, rentals, pensions and royalties.
In addition, Social Security benefits are not taxable in either the US or Israel for the entire period in which the benefits are received.
Active income from outside of Israel which includes employment, business profits and services is also eligible for the exemption. Therefore, any income earned for work done outside of Israel during the first ten years is subject to US taxes only and is not required to be reported in Israel.
A US citizen who has self-employment income in Israel, in addition to paying Israeli tax is obligated to pay Bituach Leumi and US Self-Employment tax. Self- employment tax for US purposes is approximately 15.3% on the first $106,800 of income and 2.9% Medicare tax on any amount over that. One solution some may consider to avoid be double taxed is incorporating ones business in Israel. Accounting fees are deductible.
It is important for taxpayers to consider the tax effects of renting and/or selling their US residence since potential savings are available. No tax is due if there is no gain from the sale and the home was not rented out. If the house is sold at a gain, married taxpayers who are filing jointly are eligible for an exclusion of up to $500,000 ($250,000 if single.)
Certain conditions must be met in order to qualify for this exclusion. The taxpayer must sell the house within three years after his move, and the home must have been the residence for the two years preceding their move. Any rental period reduces the exclusion available. In addition, allowable depreciation for the rental period is taxable income. Leaving the house empty preserves the exemption. For further details on the sale of a personal residence please click here.
Please be sure to contact one of our associates who have vast experience in assisting new olim to ensure that you make full use of the tax savings available to you and help you get familiarized with the tax systems of both Israel and the US.
For more clarification of tax status for olim earning income from abroad, click here.
For more information on tax issues when making Aliya, click here.