Last Updated 2 years ago

Aliyah and the big mistake people make

Time and time again, I have seen people coming to live the dream from NY or NJ and make Aliyah to Israel.  They look forward to the dream of lower educational expenses and healthcare costs, assuming their U.S. salary will take them further here in Israel.  They are not wrong, but there’s a critical mistake that many make and that must not be overlooked. In the excitement of making Aliyah, they fail to account for the unexpected tax obligations arising from the ‘Convenience of the Employer’ rule. This rule can unexpectedly tether you to substantial state tax bills despite your move abroad. This is just one of the main aspects of Aliyah financial planning.

Impact of the “Convenience of the Employer” Rule

When you move to Israel but continue working for a company based in New York, you might assume your tax obligations end with your residency, especially if you worked in NJ and commuted to Manhattan each morning. However, under the “Convenience of the Employer” rule, New York can still tax your income if your remote work arrangement is deemed a personal choice rather than an employer’s necessity. This rule was designed to capture tax revenue from nonresidents performing work outside the state that could technically be done within state borders. It was ignored for many years, but the post-COVID-19 era has NY fired up about it and is very aggressive.

At the same time, since the work is being performed in Israel, the Israeli Tax Authority (ITA) will tax the same income. This means that besides paying high Israeli taxes, you also end up paying NY taxes with no hope of getting a refund.

For many, this leads to a burdensome reality since they now live in Israel: paying state income tax to New York and potentially facing double taxation if not correctly managed. This issue is particularly pressing for those who have made Aliyah, as it complicates what could otherwise be a straightforward tax situation under the U.S.-Israel tax treaty provisions.

Taking the US-Israel Treaty into account

Moving to Israel introduces unique tax considerations due to the U.S.-Israel Tax Treaty, which aims to prevent double taxation and reduce tax barriers for U.S. citizens and residents living in Israel. However, the treaty does not automatically exempt you from state taxes under New York’s “Convenience of the Employer” rule. This can result in complexities such as determining tax residency, understanding how your income is sourced, and managing potential dual tax liabilities. For instance, if your work is considered remote by choice rather than necessity, New York may still tax your income, even if you perform your job duties entirely from Israel.

Is New York the only state like this?

Certainly not.  Many states have the same “Convenience of the Employer” rule, including Delaware, Nebraska, Pennsylvania, and others. New Jersey & Connecticut have their own similar rules as well.  However, based on practice and seeing where it is the hardest to fight against this rule in recent years, NY tends to be the most difficult. Unless you can get a letter from your employer saying that they specifically prefer that you work from Israel, it will be hard ever to see those withheld taxes returned.

How to Avoid This Issue

The most crucial point in avoiding these NY taxes is proactively planning before the taxes are withheld. When considering Aliyah from New York or New Jersey while maintaining employment with a company based in these states, strategically structuring how you get paid can be critical in managing your tax liabilities. We assist people with several strategies and see which may work the best for each:

1. Restructuring as an Independent Contractor

Transitioning from an employee to an independent contractor can offer more flexibility in how income is reported and taxed. This change must be genuine and conform to IRS guidelines to ensure it’s not merely nominal. This option can go hand in hand with setting up an LLC.

2. Establishing an Israeli Entity

If your employer agrees, establishing a formal office or business presence in Israel could exempt you from paying NY taxes.

3. Using a Third-Party Payroll Service

Employing a third-party payroll service based in Israel to handle your salary could provide a buffer and redefine your income source, potentially bypassing state tax claims from your original state of employment.

Plan Your Move with Expert Guidance

Navigating the complexities of tax regulations when moving to Israel can be daunting. Don’t let it overshadow the excitement of your new adventure. Contact us to discuss your Aliyah plans. Our team of experts is ready to help you structure your employment and payment methods optimally, ensuring you maximize your tax benefits and minimize liabilities. Let us help you seamlessly transition to your new life in Israel. You can see our blog about leaving the big city for more information on this topic.