Key Issues For Relocation-Part 2


Key Issues For Relocation-Part 2

In my previous blog post I discussed the issue of residency that must be addressed upon relocation from Israel to the U.S. Depending on the number of days someone spends in the U.S. in their first year of relocation they could have the ability to file a Form 1040 and report to the U.S. on their worldwide income from the date of their relocation or a Form 1040NR and only report their U.S. source income in the first year. However, by the second year, they will certainly be required to file a Form 1040 and report their worldwide income to the U.S. In this article I would like to raise six important issues to beware of as this transition occurs. I will discuss the first three in this blog and continue in my next blog.

  1. Beware of Federal taxes
  2. Beware of investments in foreign (non-U.S.) mutual funds- PFIC’s
  3. Beware of state taxes
  4. Beware of reporting requirements for your Israeli assets
  5. Beware of estate tax
  6. Beware of becoming a long term green card holder
  1. Beware of Federal taxes– The U.S. taxes distributions from pensions, kupot gemel, karnot hishtalmut and pitzuim accounts very differently than Israel does. In many cases, the U.S. Federal tax can be much higher than what you would have paid in Israel. If you are relocating and think you may need to access these funds while on relocation to purchase a house or for any other need, beware of the additional Federal tax for these items. We recommend that clients strongly consider taking these distributions before they become U.S residents to avoid being exposed to additional Federal taxes on this income.
  1. Beware of PFICs– The U.S. considers non-U.S. mutual funds to be Passive Foreign Investment Companies (PFIC’s). The U.S. has reporting requirements for those holding these investments. The U.S. also taxes PFICs upon sale at the highest U.S. tax rate charged over the holding period of the investment (currently 37%) in addition to charging an interest fee on this tax. This tax is higher than the 25% tax Israel charges for these investments. Therefore, if you hold these investments, you should consider selling them before relocating and investing in something with more favorable U.S. taxation, unless you are comfortable holding these investments until your return to Israel. Please note that Israeli banks can impose restrictions on clients’ ability to manage their Israeli portfolio when they move to the U.S. and may force you to sell them.
  1. Beware of State tax– if you are a resident of Israel you are certainly familiar with the federal government’s ability to tax its citizens and residents. The U.S. not only has federal taxation it also has something called state taxation. This means that in addition to federal taxation, each state has the ability to tax its residents for income earned while they were residents of the state or from income earned from sources in the state. Additionally, although the U.S. and Israel have a tax treaty to avoid double taxation and allocate income between the two taxing authorities, the different states are not bound by this treaty. Therefore, when you are a resident of any state in the U.S. and earn income from outside that state, you are still obligated to pay full tax at the state level on this income. You will pay full state tax on this income and will not receive a credit in the state for taxes paid in Israel on this income. This applies to Israeli assets that appreciated in value prior to your becoming a resident of the state. If at the time of the sale of such an asset, you were a resident of the state, you are obligated to pay state tax on the entire gain. Therefore, if you plan on selling an investment property or stock or on taking a large dividend, beware of state tax. It can be as high as 13.3% (Yes- you guessed it- this is for California) and will be in addition to the federal tax due. Consider possible sales of these assets before moving and consider doing so before you become a resident of a state in the US. Please note that 7 out of the 50 states do not impose state tax on individuals so if you will be residing in one of those states then you do not need to worry about this.

The key lesson from these issues is the importance of proper planning before relocation. A small investment in time devoted to proper tax planning before relocation can pay big dividends in the future. Stay tuned for my next blog where I will continue with more tax savings tips that will help make your relocation a success.

The writer is a partner at Philip Stein & Associates and head of the Individual and Partnership Tax Department

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