What U.S. citizens in Israel Need to Know About President Biden’s New Budget

President Biden speaking

What U.S. citizens in Israel Need to Know About President Biden’s New Budget

On March 11th, the White House released Biden’s budget proposal for the 2025 Fiscal Year. Delving into President Biden’s proposed budget offers a glimpse into potential shifts in policy and priorities. While it’s unlikely that the budget will pass through all government branches unaltered, given the complex nature of budgetary negotiations and the current climate of republican and democratic control, the proposed changes could significantly impact U.S. citizens residing in Israel, should they come into effect. 

Here are the main items that will affect U.S. citizens living in Israel and abroad:

Individual Tax Rate Increase to 39.6%

The U.S. income tax rate for individuals would increase from the 37% highest rate to 39.6%. While this doesn’t meet the highest rate of Israeli income tax, namely 50%, it does mean that many will have to pay higher U.S. taxes—particularly those in the hi-tech realm with RSUs or options and those investing in PFICs. Additionally, in many other situations where Israeli taxes allow lower tax rates, there will be more U.S. tax to pay.

Corporate Tax Rate Increase to 28%

The current U.S. corporate tax rate is 21%, which is below Israel’s corporate tax rate of 23%. The proposed increase from 21% to 28% could have ripple effects on U.S. corporations operating internationally, affecting dividends and investment returns.

This change could also complicate the tax situation for U.S. citizens in Israel due to the discrepancy with Israel’s corporate tax rate, potentially leading to increased tax liabilities under the Global Intangible Low Tax Income (GILTI) provisions. Many in Israel are not subject to the GILTI tax because of the High Tax Exception, which requires Israel to have a tax of at least 90% of the highest U.S. corporate tax. When the U.S. corporate tax is 21%, the exception starts for Israeli corporations that pay at least 18.9%. However, if the U.S. corporate tax is raised to 28%, practically every Israeli corporation will be below the 90% threshold. The impact to the GILTI tax doesn’t stop here, though…

GILTI Tax Reforms

The increase in the GILTI tax rate from 10.5% to 21% for corporate taxpayers would impose higher taxes on foreign companies owned by U.S. entities and individuals. This change could particularly impact U.S. entrepreneurs in Israel, potentially eliminating certain tax strategies and increasing individual taxpayer liabilities. Sec. 962, used by many currently paying lower corporate tax rates in Israel, will no longer be as beneficial, and U.S. taxes will increase.

Capital Gains at Ordinary Tax Rates up to 39.6% for Ultra High Earners:

Increasing capital gains tax rates for individuals earning over $1 million could heavily impact U.S. citizens in Israel. Especially those with significant investment income or founders of hi-tech companies.

For years, when a founder of a successful hi-tech company sold his shares, they would have capital gains in Israel at a rate of 33% while the U.S. long-term capital tax rate was only 20%, meaning that they owed the U.S. no income tax once credits were taken into account. This new tax rate would minimize that benefit, and a U.S. citizen would owe up to 39.6% in U.S. taxes on the sale of his company. After factoring in Israeli taxes, it comes to an additional 6.6% to the U.S.

We haven’t yet mentioned the Net Investment Income Tax (NIIT), also known as the Obama-care tax of 3.8%. But don’t worry, that is also being increased 😊.

Medicare Tax Reforms

The proposed increase in the Net Investment Income tax (NIIT) rate from 3.8% to 5% for individuals earning over $400,000 could affect U.S. citizens abroad with pass-through entities, further increasing tax burdens on capital gains and investment income. All those with passive income may be paying high Israeli taxes, but those taxes don’t currently offset the NIIT. 

Closing Tax Loopholes Including Carried Interest

Various tax loopholes that benefit wealthy individuals and certain investment strategies, such as the 1031 exchange and carried interest, are targeted for closure. These changes could increase the tax liabilities for U.S. citizens in Israel engaged in high-tech investments, real estate, and venture capital.

Another change will occur for those earning over $400K and receiving carried interest. This change will affect many in the venture capital world as they manage the funds and get beneficial U.S. tax treatment. This change would eliminate the benefits they currently enjoy and force them to pay ordinary rates of up to 39.6%, which can be way more than the 28% they often pay in Israel.

Ending on a potentially good note – maybe

The proposed expansion of the Child Tax Credit to be fully refundable and at higher amounts may offer some financial relief for families. However, the applicability of these benefits to U.S. citizens living abroad remains to be seen, as past similar changes primarily benefited residents within the U.S.  Only time will tell if those living abroad will enjoy this increase if it ever passes.

Implications for U.S. Citizens in Israel

Should any portion of this budget pass, the tax implications for many U.S. citizens living in Israel will become more challenging. The potential for increased tax liabilities across various income sources underscores the need for careful financial planning and consultation with tax professionals.

As this budgetary proposal moves through the legislative process, U.S. citizens abroad should stay informed and prepared to adjust their financial strategies in response to any enacted changes. We will keep you posted should any of this pass, so stay tuned.

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