Is Israel About to Axe The 10-Year Aliyah Holiday to Pay for the War?

Is Israel About to Axe The 10-Year Aliyah Holiday to Pay for the War?

 

As Israel tries to recoup some of the war expenses, there’s growing speculation about the future of the 10-year tax exemption for new Olim. The 10-year holiday was first introduced in 2007 for those coming on Aliyah or returning from 10 years overseas (called toshav chozer vatik). You can read about the full benefits on the Israeli tax authority page here.

While this is a significant financial benefit to those coming on Aliyah, its removal is often discussed in the Knesset. This is certainly not the first time that the idea of striking it from law has come up, and it likely won’t be the last, either. While such discussions can create a sense of uncertainty and unease, it’s crucial to point out that while it is often discussed, it seems to stick around in the end.  Israel will likely not get rid of the benefit too quickly, even if they feel like it can solve the war spending. 

Assuming it does stick around, there are some misconceptions about what is and what isn’t included, so let’s clarify this a bit.

 

Understanding the Scope of the Exemption

 

The exemption broadly covers two types of income: passive income and active income earned overseas. Passive income includes earnings from foreign investments, such as stock portfolios or rental income from properties abroad. Active income refers to professional services rendered outside of Israel or pension distributions from IRAs, 401Ks, and similar plans. For example, if you go back to the States for a month or two during the year, the salary you earn for that time is exempt from Israeli taxes for the first ten years.

 

What Is Not Included

However, the exemption does not extend to all forms of income. Notably, it does not include W-2 or business earnings from sitting and working within Israel. People often think that the main factor is where the client or employer is seated. This is untrue. The focus is where you, as the employee or business owner, are working from. If the answer is that you are working from Israel, then Israel has the right to tax it regardless of the Aliyah holiday or not.

 

Two Home-Run Scenarios

 

Working Overseas During the First 10 Years: For Olim who find opportunities to work outside of Israel and the U.S. during their initial decade in Israel, the income from such endeavors could doubly benefit. This income would be exempt under Israel’s 10-year holiday and qualify for exclusion on the U.S. Form 2555, minimizing the tax impact in both jurisdictions and optimizing financial outcomes. I know that most of us aren’t looking to travel for extended periods during the war, but here is the permission you have been waiting for to go on that second honeymoon in Europe and claim there are tax incentives to do it!

 

First year of Aliyah: While it isn’t directly connected to the 10-year holiday, there are significant benefits to making Aliyah in the second half of the year, filing for what’s called shnat histaglut, and claiming the foreign income exclusion in the U.S. The net outcome is not paying in Israel or the U.S. for a substantial part of your salary that year.

 

Strategic Considerations

 

In light of the potential changes to Israel’s tax exemption policy, it’s more important than ever for Olim and prospective immigrants to engage in thorough financial planning. Understanding the specifics of what is included and excluded under the current exemption can make a significant difference in maximizing the benefits of this tax holiday.

As discussions about the future of this policy continue, staying informed and consulting with tax experts will be key to adapting to any changes while ensuring compliance and optimal tax positioning. Those looking to make the most of their new beginnings in Israel and explore these home-run scenarios should get in touch.

 




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