Top 10 Tax Topics for Israelis Moving to the U.S. This Summer

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Top 10 Tax Topics for Israelis Moving to the U.S. This Summer

Many Israelis moving to the U.S. do so without thorough planning, often falling victim to double taxation issues. They aren’t at fault, though. Many don’t even know what to ask about or plan for before the move.

These are the top 10 topics we make sure our clients clarify before they move, helping them avoid a failed relocation to the U.S.

Understanding these key areas lets you know what to consider and why they are essential for your move.

Understanding Your Take-Home Salary

When moving from Israel to the U.S., one of the most critical aspects to understand is your take-home salary. Many individuals receive attractive salary offers without fully grasping how much will end up in their bank account. How can you possibly budget your expenses without knowing how much net income you will actually be making? Federal, state, and sometimes local taxes will significantly reduce your take-home pay.

In addition to your base salary, you might be offered bonuses, living arrangements covered by your employer, or other fringe benefits. While these perks are excellent and should not be turned down, they are typically considered taxable income in the United States. This means that the value of these benefits will be added to your gross income, reducing your net take-home pay.

Lastly, the first and second years of relocating to the U.S. may be treated differently regarding taxation, resulting in two very different take-home figures. Understanding these distinctions and planning accordingly is critical to avoiding surprises and managing your finances effectively during your transition.

State Taxes

Understanding state taxes is the next important topic to consider when moving from Israel to the U.S. Many focus on other factors when choosing where to live, such as the quality of schools, housing costs, and community amenities. They often don’t understand the different state tax implications that come into play.

Different states have varying tax rates and regulations, so it’s essential to consider your destination’s specific taxes. The state you move to will significantly impact your net income, as state taxes can vary widely from one location to another.

Another important consideration is that you don’t necessarily need to live in the state where you work. For example, many people working in New York choose to live in neighboring New Jersey. The Israeli community in Tenafly is excellent for our N.J. crowd, but don’t worry; you can also move to Hoboken or Fair Lawn without feeling bad about it 😉. However, living in N.J. and working in N.Y. often involves tax implications in both states. In such cases, New York will tax your salary earned there.

In contrast, New Jersey will tax you on your entire income, including salary and other income streams. Fortunately, New Jersey provides a credit for taxes paid to New York, which helps mitigate double taxation. Still, it adds complexity to your tax situation.

Filing Your First Year in the U.S.

The next area to consider properly is how you plan to file your taxes in the first year after moving from Israel to the U.S. One key factor is the duration of your stay in the U.S. During that first year, if you will be in the U.S. for less than 183 days, which is typical for those moving in the summer, you might have different filing requirements than those who stay longer.

Another important consideration is how you plan to file your taxes in Israel. Whether you intend to perform a “nituk toshavut” (severing residency) immediately, at the beginning of the following year, or not at all, aligning your U.S. and Israeli tax filings is essential. 

You cannot claim to have stopped being a resident in Israel if you have not yet established residency in the United States. This alignment ensures you comply with tax authorities and helps avoid double taxation or other legal issues.

Additionally, suppose you are in the U.S. for less than 183 days in the first year. In that case, you will likely need to file as “married filing separately,” even if both spouses are working and you have children. Figuring out how to file that first year can greatly impact your taxes and significantly affect your overall tax liability. Proper planning and consultation with tax professionals familiar with U.S. and Israeli tax systems can save you from significant headaches and double taxes.

Filling Out the Form W-4

Filling out Form W-4 is an important step that is typically completed once you are in the U.S., but it’s beneficial to understand its implications before your move. The U.S. tax withholding system operates quite differently from the Israeli system. In Israel, taxes on salary are usually exact and very accurate. In contrast, in the U.S., the withholding is often a best-guess estimate that may not align precisely with your actual tax liability.

Form W-4 informs your employer how much tax they should withhold from your paycheck. It’s common for people to fill out this form incorrectly, leading to unpleasant surprises when filing taxes the following year. If the withholding is too low, you could owe a significant amount of tax, which can be stressful and financially burdensome. Knowing how to fill out Form W-4 accurately is crucial to avoid unwanted surprises.

Time Horizon – How Long Are You Planning to Stay in the U.S.?

When moving to the U.S., understanding your time horizon—or how long you plan to stay—is crucial for effective tax planning. While no one can predict the future with certainty, having a general idea of your intended duration can significantly influence your preparation and decisions.

You don’t need to have your plans set in stone, but having some notion of your stay’s length will guide the steps you take beforehand. If you know you will never return to Israel, your financial and tax strategies will differ considerably from those if you plan on returning in three years, with the possibility of extending to five. Discussing your plans with your partner and ensuring alignment on the potential time horizons is essential. It will help you make informed decisions and avoid misunderstandings or conflicts about your long-term plans.

Being clear about your time horizon can help you better manage your financial and tax obligations in the U.S. and Israel and ensure that you are prepared for various scenarios that may arise during your stay.

Pensions and Keren Hishtalmut

When you move to the U.S., it’s important to understand how your old Israeli pensions and keren hishtalmut will be taxed. You may be subject to federal and state taxes on any distributions from your keren hishtalmut or future pension distributions, which can significantly impact your financial planning and overall tax liability.

We have seen cases where individuals moved to the United States and, a year later, withdrew funds from their keren hishtalmut to invest in U.S. real estate. Unfortunately, they later discovered they owed a substantial tax on the withdrawal. You don’t want to be in that position. Proper planning is essential to avoid unexpected tax bills.

Israeli Investments

When moving from Israel to the U.S., you should plan what to do with your investments held through Israeli bank accounts and kupot gemel. As an Israeli resident, these investments are typically not problematic. However, once you move to the U.S., they may be considered Passive Foreign Investment Companies (PFICs), which lead to negative tax implications. To better understand why PFICs are not ideal for holding, you can read our article here

Even if your investments are not classified as PFICs, it’s essential to understand the U.S. and Israeli tax implications of liquidating these stocks before or after your move. Going back to the idea of the time horizon above, if you intend to return to Israel within the next few years and may not need to liquidate these investments, leaving them until you return might be beneficial. Conversely, if you plan to stay in the U.S. long-term, you may need to adjust your investment strategy accordingly.

Properly managing your Israeli investments with a clear understanding of the tax implications in both countries will help you make informed decisions and avoid unexpected tax burdens.

RSUs and Founder Shares

Navigating the taxation of RSUs and founder shares is another critical area for Israelis moving to the United States: the U.S. taxes RSUs and the vesting of shares very differently from Israel. Not planning for this can result in double taxation. Even if your company is considerate enough to cancel unvested RSUs and regrant them in the U.S., there are still tax implications regarding the previously vested RSUs. For more detailed information on RSUs, you can read our dedicated article here.

Founder shares also present the potential for significant double taxation if not planned out carefully. The tax treatment can vary greatly depending on factors such as the percentage of the company you hold and whether it is an Israeli parent with a U.S. subsidiary or a U.S. parent with an Israeli subsidiary. The structure of your holdings and the jurisdictional complexities can lead to heavy tax burdens if not adequately planned for.

Stock Options

If you hold stock options instead of RSUs or founder shares, there are additional complexities to consider. Many will advise you to simply exercise all your options before moving to the U.S., but each situation has unique tax implications that must be carefully analyzed. Exercising your stock options before moving could result in higher taxes on future gains, as the U.S. may not account for Israeli taxes paid. Conversely, not exercising your options might lead to a higher portion of your stock option income being taxed by the United States. Careful planning is essential to develop a well-informed and strategic approach.

Additionally, you might have unvested options that your company is willing to cancel and reissue once you are in the United States. This can introduce new challenges, such as differences in the exercise price, which could affect your tax liability. Understanding these implications before proceeding is crucial to avoid unexpected tax burdens and protect your financial interests.

Israeli Rental Properties and Selling Real Estate in Israel

For many Israelis moving to the U.S., renting out their Israeli home becomes a common supplemental income strategy. However, it’s important to understand that rental income is taxed differently in the two countries.

While double taxation can often be avoided, additional U.S. tax liabilities may still exist.

Selling real estate in Israel can also trigger U.S. tax obligations. While there are some exceptions and specific situations where gains can be excluded, it’s essential to time the sale properly and understand the necessary steps to mitigate future tax events.

Relocate Successfully

Relocating from Israel to the U.S. involves navigating a complex web of tax regulations from two countries. By understanding and planning for these key tax topics, you can avoid common pitfalls and ensure a smoother transition.

Our accounting firm, Philip Stein & Associates, has extensive experience helping individuals and families effectively plan their relocation to the U.S. We’ve assisted many clients in aligning their U.S. and Israeli tax obligations. If you have any questions or need assistance with your move, we would be happy to help. Contact us to schedule a meeting.

For more information, read our blog: Moving from Israel to the U.S.? Avoid a Big First-Year Tax Bill!

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