Jul 17, 2023 “10 Common Misconceptions U.S. Citizens In Israel Have About Taxes.”
Welcome to the world of U.S. taxes for U.S. citizens living in Israel, where the misconceptions are many, and the facts can sometimes be…less than welcome. But fear not! We’re here to debunk these common myths.
- “I didn’t file for child tax credit refunds when my kids were young, so the IRS shouldn’t be asking me for money now.”
That makes sense, but not to the IRS. They look at you like you threw away free money. And worse yet, you still owe them now. If you have the chance, file those returns now for up to 3 years back and get that stimulus and child tax credit refund money.
2. “There is a tax treaty in place, so I shouldn’t pay taxes in both locations.”
If only tax laws were that simple. Yes, there is a tax treaty, but it doesn’t exempt you from filing U.S. taxes. It’s there to prevent double taxation, not to keep Uncle Sam entirely out of your wallet. If you are not paying enough tax in Israel on each type of income, then the U.S. will still tax it. Alternatively, if the timing of the tax event is different in each country, you may be double-taxed. You can read more on this specific topic in our previous blog here.
3. “All of my income is in Israel; why does the U.S. need to know about it?”
Ah, the good ol’ “none of your business” argument. Unfortunately, the U.S. tax system is one of only two countries to operate based on citizenship, not just residency. You can be a U.S. citizen from your parents and never have stepped foot in the U.S., You will still need to report your worldwide income and maybe even pay tax!
4. “How will they find out if I don’t report my income?”
But what if they do? Believe that they can. Anyone who has dealt with their bank recently asking them to sign papers knows that the IRS has its tentacles in everything. And you see how fast AI (Artificial Intelligence) is developing. Do you think they aren’t utilizing it to help them better analyze numbers and balances?
5. “I already filed FATCA (Foreign Account Tax Compliance Act) at my bank.”
Filing FATCA at your bank is like telling your friend about your diet plan. That’s great, but you must also inform your personal trainer (in this case, the IRS)! This misconception makes so much sense, though. In Israel, your banks and employers tell the ITA (Israel Tax Authority) what your income is and what the tax is. You often don’t need to file taxes. The IRS does not function this way, however. Even though the banks give them information, you must also tell them. Then they match one against the other and check if you got it wrong. It’s like a comic that reads as follows:
Taxpayer: So, I just enter how much I made this year?
Taxpayer: And if it’s wrong, I go to jail?
IRS: That’s right.
Taxpayer: But you know how much I made.
Taxpayer: So why don’t you just tell me, and I’ll confirm if it’s correct?
IRS: Because that’s not how it works.
6. “There’s an exclusion on the first $112k of income, and my income is less than that, so I don’t need to file.”
Sorry, friends, while there is an exclusion of $120K (for 2023) on salary earned overseas, it only applies if you actually file. It’s not a get-out-of-jail-free card. It also doesn’t apply to income that isn’t “earned” overseas, and you must ensure you qualify.
7. “I gave my tzedakah receipts to my Israeli accountant, so I can’t also give them to you.”
Contrary to widespread belief, charitable receipts can simultaneously help with your U.S. and Israeli taxes! Check out our blog post here for more tips.
8. “I won’t claim depreciation from my rentals, so I don’t need to pick up the recapture when I sell it.”
This a classic case of trying to outsmart the system, but the IRS is way ahead on this one. If you could have claimed it, they would assume you did. Even if you sell it later, they will calculate that depreciation recapture. So, don’t miss out!
9. “Israel says it’s not taxable, so it shouldn’t be taxable in the U.S.”
Ah, to live in such an ideal world! Unfortunately, the U.S. and Israel have different tax codes, and what is exempt in one might not be in the other. A good example is any rental income below 5,500 NIS a month. The U.S. taxes that still.
10. “Can I travel to the U.S., or will they revoke my passport since I haven’t filed yet?”
No need to cancel your summer vacation plans just yet. The IRS can indeed recommend revoking passports for some tax delinquencies. However, this is usually a last resort for extreme cases where you owe over $50,000, and they have notified you of this multiple times already. If you haven’t gotten anything in the mail, chances are your passport is secure. However, if you’re worried about it, it might be a good sign that it’s time to get caught up on your filings!
If any of these misconceptions ring true, check out your filing requirements and contact us.