How Green Card Holders Living in Israel Can Navigate U.S. Tax Rules, Avoid Double Taxation, and Minimize Estate Tax Risks

For individuals who possess a United States Green Card and reside in Israel, U.S. tax responsibilities do not simply disappear. A Green Card establishes an individual as a lawful permanent resident of the United States for tax purposes, obligating them to comply with comprehensive global income reporting requirements under IRC Section 7701(b)*. This status persists regardless of physical residence and only ends when the Green Card is formally surrendered. The Internal Revenue Service (IRS) retains taxing authority over worldwide income, creating complex compliance challenges for Green Card holders abroad.

While income taxes are a significant concern, they are not the only issue that comes with a Green Card. Other important areas include the U.S. exit tax and the gift and estate tax implications.

Key Takeaways

• Green Card holders in Israel must report worldwide income to the IRS annually, regardless of residence.
• Forms 1040, 8938 (FATCA), and FinCEN 114 may be required for foreign accounts and assets.
• The U.S.-Israel Tax Treaty offers some relief but is limited by the treaty’s “savings clause.”
• Foreign Tax Credits and the Foreign Earned Income Exclusion can help minimize double taxation.
• Long-term Green Card holders may face a U.S. exit tax if they relinquish their status.
• U.S. estate and gift tax rules hinge on domicile, not Green Card status, with significant implications.

U.S. Worldwide Income Taxation for Green Card Holders

For more on the tax return responsibilities of Green Card holders living in Israel, see our overview on tax filing obligations.

Under U.S. law, a Green Card holder is a U.S. tax resident and is required to file Form 1040 annually. This includes disclosing income from all global sources, such as employment wages, investment income, pension distributions, and rental income. In addition to Form 1040, taxpayers may need to submit Form 8938 under the Foreign Account Tax Compliance Act (FATCA) and FinCEN Form 114 if the aggregate value of foreign financial accounts exceeds applicable thresholds. These requirements extend to accounts held jointly or those over which the individual has signature authority per the Bank Secrecy Act and FATCA regulations. For more information, see this FATCA compliance guide.

U.S. Foreign Tax Credit and Exclusion Strategies to Avoid Double Taxation

The U.S. tax system offers mechanisms to mitigate double taxation. The Foreign Tax Credit (FTC), authorized by IRC Sections 901–909, allows a taxpayer to claim a credit for income taxes paid to another country, such as Israel. Alternatively, the Foreign Earned Income Exclusion (FEIE), under IRC Section 911, permits the exclusion of a certain amount of foreign-earned income from U.S. taxation. 

For the 2025 tax year, the exclusion is set at $130,000. To qualify, taxpayers must meet either the Bona Fide Residence Test or the Physical Presence Test. Applying the FTC and the FEIE to the same income source is not permissible, which makes strategic tax planning essential.

The U.S.-Israel Tax Treaty and Its Limits for Green Card Holders

For an in-depth explanation of how the treaty works, see our guide to the U.S.-Israel Tax Treaty.

The U.S.-Israel Tax Treaty attempts to prevent double taxation. It provides provisions for tax credits, residency determination, and treatment of specific income streams. However, a critical component of the treaty is the “savings clause” found in Article 6, Paragraph 3, which allows the United States to tax its citizens and residents as though the treaty did not exist. As a result, while certain treaty benefits, such as those for Social Security (Article 21) or pension income (Article 20), may apply, many protections are nullified for Green Card holders.

Exit Tax Rules for Long-Term Green Card Holders

Green Card holders who qualify as Long-Term Residents (LTRs) under IRC Section 877(e), those who have held Green Card status for at least eight of the past fifteen years, may face additional scrutiny when relinquishing their status. These individuals may be subject to the U.S. exit tax under IRC Section 877A. This tax treats the individual as though they sold all worldwide assets the day before expatriation. 

Any gain over the exclusion amount, $890,000 for 2025, is subject to capital gains tax. Covered expatriates meet one of the following criteria: a net worth over $2 million, average annual income tax liability exceeding $206,000 over the past five years, or failure to certify five years of U.S. tax compliance using Form 8854. They may trigger additional transfer tax consequences, including a 40 percent tax on gifts or bequests to U.S. persons under IRC Section 2801.

Israeli Residency and Taxation Rules for Global Income

To avoid common errors in cross-border compliance, consider reading our article on tax errors dual citizens should avoid.

Israeli tax residency is determined through both objective and subjective criteria. The objective test is based on days present in Israel: at least 183 days during the current year or 425 days cumulatively over three years. 

The subjective test evaluates the individual’s “center of life,” including family, economic, and social ties. Israeli residents are taxed on their worldwide income. However, new immigrants and returning residents who have lived abroad for at least ten years may qualify for a ten-year exemption on foreign-source income and the related reporting obligations under Israeli domestic tax law.

Assuming your center of life is in Israel, though, there may be a possibility of filing your U.S. tax return with a treaty position to report as if you did not hold the green card. However, this can be complex and tricky, so we suggest reaching out for assistance.

U.S. Gift and Estate Tax for Green Card Holders – The Role of Domicile

Transfer tax treatment in the United States depends on domicile, not immigration status. Domicile, under Treasury Regulations Sections 20.0-1(b)(1) and 25.2501-1(b), is defined by both physical presence and intent to remain indefinitely. 

A Green Card is not conclusive evidence of domicile. A Green Card holder domiciled in Israel may be treated as a nonresident alien (NRA) for transfer tax purposes. NRAs are subject to U.S. estate and gift tax only on U.S.-situs assets, with an estate tax exemption of $60,000 under IRC Section 2102(b)(1). 

U.S. domiciliaries, in contrast, are taxed on their worldwide assets but receive a much higher exemption—$13.99 million for 2025. Transfers to non-citizen spouses do not qualify for the unlimited marital deduction unless held in a Qualified Domestic Trust (QDOT), pursuant to IRC Section 2056(d). The annual exclusion for gifts to non-U.S. citizen spouses is $190,000 in 2025, per IRC Section 2523(I)

Cross-Border Tax Planning and Documentation

The divergence between U.S. tax residency for income tax purposes and domicile for estate tax purposes creates a dual-status framework requiring clear documentation and careful planning. Individuals seeking to establish domicile in Israel should retain records such as Israeli real estate titles, voter registrations, and legal declarations stating their intent not to return to the United States. This evidence strengthens the case against being considered a U.S. domiciliary for estate and gift tax purposes.

Final Thoughts for Green Card Holders in Israel

Green Card holders residing in Israel face an intricate tax environment governed by two systems with overlapping and sometimes conflicting rules. Navigating U.S. income tax obligations, Israeli residency laws, bilateral treaty provisions, and the expatriation and transfer tax regimes requires deep expertise and proactive compliance. 

For students and practitioners in the field of international taxation, this scenario highlights the practical challenges of global mobility and national tax sovereignty. With the right strategy, recordkeeping, and professional guidance, cross-border taxpayers can significantly reduce risk and preserve their long-term financial position.

If you need help with your return, reach out to see how we can help.

*26 CFR § 301.7701(b)-1 – Resident alien. (n.d.). LII / Legal Information Institute. https://www.law.cornell.edu/cfr/text/26/301.7701(b)-1