Jan 16, 2023 What do the IRS Inflation Adjustments Mean For Those Living in Israel?
As a U.S. citizen living in Israel, changes to the IRS tax code can have a significant impact on your financial situation. Recently, the IRS announced inflation adjustments for the 2023 tax year, affecting rates and deductions for U.S. citizens living abroad.
In this post, we’ll look closely at the key changes and how they may affect you. While some may see lower taxes, it’s important to understand the specifics of the adjustments and how they apply to your individual situation.
One of the biggest changes for 2023 is an increase in the Foreign Income Exclusion or Form 2555. This exclusion allows U.S. citizens living and working abroad to deduct a certain amount of their foreign-earned income from their U.S. tax return. For the 2023 tax year, the exclusion is increasing from $112,000 to $120,000. This means that if you live and work in Israel, you’ll be able to deduct an additional $8,000 from your U.S. return. However, it’s important to note that for those earning higher amounts, the Israeli tax rate is generally high enough to wipe out any U.S. tax due.
Another positive change for 2023 is the increase in annual gifting limits. Starting in 2023, you’ll be able to gift up to $17,000 per person per year, and the lifetime exclusion jumps to $12.92 million. This means that those who have maxed out on gifting to trusts and other vehicles can now take advantage of the increased limits.
On the other hand, some changes may result in higher taxes for certain individuals. For example, those with significant passive income may see an increase in their tax burden. Inflation has increased the dollar amount of passive income that may be earned, but the threshold for the Net Investment Income Tax (NIIT), or Obamacare tax, remains unchanged. This means that even if you pay high taxes to Israel if your passive income exceeds the threshold of $200,000 for single filers or $250,000 for joint filers, you’ll still be subject to the 3.8% tax in the U.S.
Thresholds to note
Another important change to note is that the filing threshold for forms such as FBAR Form 114 and FATCA Form 8938 has not been adjusted for inflation. This means that more people living abroad will be required to file these forms. Similarly, those who need to file the PFIC form 8621 because they hold more than $25,000 in non-U.S. mutual funds will still have to comply with the same threshold. This increase in compliance needs may make it more challenging for U.S. citizens living in Israel to navigate the U.S. tax system.
In addition to the changes discussed above, there are also some other adjustments, such as increases in marginal tax rates and higher standard deductions. However, for most people living and paying taxes in Israel, since the Israeli tax rates are higher than the U.S. rates, this means more credits and less help than U.S. residents.
Navigating the complexities of U.S. taxes for those living abroad can be challenging. For more information on the IRS inflation adjustments for 2023 and how they may affect U.S. citizens living in Israel, visit our website at www.pstein.com. Our expert team is dedicated to providing detailed information and guidance to help you make the most of the changes to the tax code and stay compliant with U.S. tax laws.