Dec 4, 2023 Ultimate 2023 Year-End U.S. Tax Planning Guide for Hi-Tech Employees
5 things you must do before year end to reduce your 2023 taxes and make your filing easier next year.
As 2023 steadily approaches its conclusion, hi-tech employees in Israel, particularly those holding U.S. citizenship, find themselves at a critical juncture for managing their financial and tax obligations. The unique interplay of Israeli and U.S. tax systems presents a complex landscape that requires careful navigation. This comprehensive guide delves into essential strategies and proactive steps to significantly streamline your tax filing process and potentially reduce your tax liabilities.
For U.S. citizens working in Israel’s vibrant tech sector, understanding and leveraging these strategies is not just a matter of compliance but an intelligent approach to financial planning. Whether making informed decisions about your Restricted Stock Units (RSUs), strategically offsetting capital gains, or ensuring your family’s newest members are duly registered, each action you take now can profoundly impact your financial health in the upcoming tax season.
Our focus here is to guide you through the labyrinth of tax regulations and empower you with knowledge and practical tips. This guide, tailored specifically for the hi-tech community in Israel with U.S. citizenship, will walk you through five key actions to take before the curtain falls on 2023. These steps are designed to put you in the best possible position as you prepare for the tax season, ensuring you meet your obligations while optimizing your financial outcomes.
Item 1: Evaluate Your RSUs: To Sell or Not to Sell?
Restricted Stock Units (RSUs) are a significant form of compensation for high-tech employees. Understanding the intricacies of RSUs and the differences between U.S. and Israeli taxes is vital for effective financial planning and tax management. So pay attention if you work in Google, Meta, Microsoft, Nvidia, Apple, Amazon, or any of the other big public companies hundreds of our clients work at.
RSUs represent a company’s commitment to grant an employee shares or the cash equivalent at a future date. They differ from actual stock grants as they are not immediate equity but a promise of future shares, subject to conditions like vesting schedules.
Tax Implications in Israel:
Under the 102 plan, RSUs are not taxed upon grant or vesting in Israel. The actual tax obligation arises when you sell the shares. If sold after a two-year holding period from the grant date, taxes are split between ordinary income tax and capital gains tax. Selling before this period results in the entire sale being classified as ordinary income.
U.S. Tax Considerations for U.S. Citizens in Israel:
RSUs are taxed upon vesting as ordinary income, with the fair market value on the vesting date being the taxable amount. Upon selling, capital gains or losses are determined by the difference between the sale price and the fair market value at vesting. The holding period post-vesting influences whether gains are taxed as short-term or long-term capital gains.
Planning for Blackout Periods and Relocation:
Employees must be aware of blackout periods when they are prohibited from selling stocks. These periods, typically around financial reporting times, can impact the timing of sales and tax strategies. Additionally, relocation between Israel and the U.S. adds complexity to RSU taxation, potentially leading to double taxation scenarios.
The Risk of Double Taxation:
U.S. citizens face the unique challenge of potentially being taxed in both countries. While tax treaties exist to prevent double taxation, timing discrepancies can lead to being taxed in the U.S. at vesting and in Israel at sale, resulting in double taxation. Strategies to mitigate this include selling RSUs to create a taxable event in Israel to offset those U.S. taxes. However, you want to be careful not to sell more than necessary and keep the Israeli tax benefits to a maximum. Be in touch if you need help knowing exactly how much needs to be sold before year end!
Item 2: Apply for Social Security Numbers for Newborns
For hi-tech employees in Israel, especially those holding U.S. citizenship, ensuring their family’s affairs are in order is as crucial as managing their own tax and financial matters. One key aspect is obtaining Social Security numbers for any newborns from 2023 or prior.
The Importance of a Social Security Number for Your Child:
A Social Security number (SSN) is essential in the U.S. to claim the child on your return as a dependent and get a child tax credit refund.
Applying for an SSN: A Step-by-Step Guide
- Gathering Required Documents: Birth certificate translated into English and proof of the child’s U.S. citizenship eligibility via their parents or grandparents. Additionally, you will need U.S. documentation of the parents.
- Completing the Application: Form SS-5, the application for a Social Security card, must be filled out.
- Submitting the Application: This can be done with an appointment at the embassy in either Jerusalem or Tel Aviv. It can be difficult to schedule an appointment, so try as early as possible. If you’d rather pay a little to speed up the timing, several side hustlers sell appointments to people.
Additionally, if the child only qualifies via the grandparents’ clause, they may be required to apply from the U.S. itself, which will require a trip.
Why Timing Matters:
Obtaining an SSN can take several months, so starting as early as possible is crucial. The current challenges in scheduling appointments due to pandemic-related backlogs further emphasize the need for early application. To receive the child tax credit refund, you need the card issued by the extended due date of the tax return. This means that to claim a child born in 2023 on your 2023 tax return, you need to start the process for them to get the SSN as soon as possible!
Child Tax Credit Refund:
A valid SSN for your child is a prerequisite for claiming the Child Tax Credit on your U.S. tax return. This credit can significantly reduce your overall tax due, offering substantial financial benefits. For 2023, the non-refundable credit can be as high as $2,000 per child, with the refundable portion as high as $1,600 per child.
For more information and to schedule an appointment at the embassies, see here.
Item 3: Capital Loss Harvesting to Offset Your Gains
Capital loss harvesting is an essential strategy for hi-tech employees in Israel, especially those with U.S. citizenship, to effectively reduce tax liabilities on RSU gains and other portfolio investments.
Understanding Capital Loss Harvesting:
Capital loss harvesting involves selling investments at a loss to offset capital gains from other investments, like stocks or RSUs. This tactic can reduce your taxable income and lower your overall tax burden.
Why It Matters for Hi-Tech Employees:
The tech sector can experience significant market fluctuations. Capital loss harvesting allows you to take advantage of these market movements to optimize your tax situation. This also goes hand in hand with section 1 above. If you sell your RSUs, it allows you to diversify with other companies and other types of investments.
By regularly reviewing and rebalancing your portfolio through loss harvesting, you can maintain a diversified investment strategy, which is crucial in the fast-paced tech industry.
Properly implemented, loss harvesting can enhance the tax efficiency of your investment strategy, leaving more funds available for reinvestment or other financial goals.
Implementing Capital Loss Harvesting:
The process involves:
- Identifying Underperforming Investments: Review your portfolio to identify stocks or other investments that have lost value and assess whether it makes sense to sell them.
- Offsetting Gains and Losses: Match the realized losses from the sale of these investments against any capital gains you have incurred during the year.
- Understanding the ‘Wash Sale’ Rule: In the U.S., the IRS prohibits claiming a loss on a security if you repurchase a “substantially identical” security within 30 days before or after the sale. Navigating this rule carefully ensures your loss harvesting is effective and compliant.
Tax Considerations for U.S. Citizens in Israel:
For U.S. citizens, it’s important to understand how capital gains and losses are treated under both U.S. and Israeli tax laws. The ability to offset gains with losses can be a powerful tool, but it requires careful consideration of the tax implications in both jurisdictions. Luckily, for the most part, the countries are aligned. The most significant discrepancy is that Israel sometimes allows you to offset other passive income like dividends and interest income with capital losses, while the U.S. won’t, except with minimal exceptions.
Capital loss harvesting isn’t just a year-end tactic; it should be part of a broader, long-term investment strategy. Regularly reviewing your portfolio and being proactive about realizing losses can significantly impact your overall financial health.
Selling Non-U.S. ETFs:
If you are invested in Israeli ETFs or similarly foreign funds that don’t originate in the U.S., it is even more crucial to unload them before year-end. This is potentially the case if they are in a gain, but certainly if they are in a loss position.
These investments can include kranot neemanut, kranot sal, kupot gemel l’hashka’a, and many others. They all potentially count as Passive Foreign Investment Companies or PFICs for U.S. tax purposes and can be a reporting and tax nightmare. If they are currently in a loss position, selling them before the end of the year is highly suggested to help your future reporting and tax reporting.
You can read more on PFICs on our website here.
Item 4: Prepare for I.D.Me Registration
For high-tech employees in Israel, particularly those with U.S. citizenship, staying ahead in the digital age involves more than being tech-savvy. It also means being proactive with tools and platforms that streamline financial and tax processes. A key step in this regard is preparing for I.D.Me registration.
Understanding ID.Me and Its Importance:
I.D.Me is a digital identity network increasingly used for various tax-related and governmental processes in the U.S. It is a secure, online identity verification platform, ensuring safe and efficient access to personal and sensitive information. Additionally, in today’s age where identity fraud abroad is a very real issue, if the IRS flags your account for potential identity fraud, they will issue you a unique PIN needed to file your tax return each year. While you cannot receive that PIN over the phone, you can access it if you have an I.D.Me account.
Steps to Prepare for I.D.Me Registration:
- Gather Necessary Documentation: This includes personal identification documents like U.S. & Israeli passports, birth certificates, original social security numbers, and some proof of address in English.
- Starting the Process: Familiarize yourself with the I.D.Me platform and its registration process. Although the system may undergo maintenance, blocking you from getting accepted before year-end, you can start the application and prepare everything necessary to make it smooth.
- Get Over the Hurdles That Exist for International Citizens: Living abroad makes the application much more complicated since they need documents in English. Many accepted forms may be stored with parents or grandparents and not readily available. It likely won’t go as smoothly as you hope, so expect complications.
Why Early Preparation Matters:
While new applications might not be processed during maintenance periods, having your account set up and ready can save significant time and hassle later. This early preparation can be even more crucial for U.S. citizens abroad, including those in Israel, who are dealing with time zone differences and limited access to U.S. government services. Additionally, if you need to ask parents to send over the necessary documents, it is important to start asking now.
I.D.Me and Tax Filings:
For U.S. citizens, I.D.Me is becoming an essential tool for accessing various tax services, including the IRS records. Having an I.D.Me account can streamline accessing tax records and communicating with tax authorities.
While the process might seem straightforward, international citizens might face unique challenges, such as differences in document requirements or verification processes. Awareness of these potential hurdles and preparing accordingly can help smooth the registration process.
You can find more information and start an I.D.Me application here.
Item 5: Document Your Finances: A Snapshot of Your Accounts
For hi-tech employees in Israel, especially those with U.S. citizenship, end-of-year financial documentation is critical to tax planning. This process involves taking a detailed snapshot of all financial accounts, which is essential for various U.S. and Israeli tax filings.
Importance of Year-End Financial Documentation:
- FBAR Requirements: U.S. citizens must report foreign bank and financial accounts if they exceed $10,000 when combined together at any point during the year. Accurate year-end balances are essential for the Foreign Bank and Financial Accounts Report (FBAR).
- Informational Forms: Other forms, like FATCA (Foreign Account Tax Compliance Act) Form 8938 compliance, also require detailed financial information. Gathering the information now can help streamline things later.
Timing and Planning:
While banks and pension companies don’t send this information out until months later, taking a snapshot of your account balances at year-end may save you months of aggravation waiting for official forms.
Given the potential delays in receiving statements and the time required for thorough documentation, starting this process early is advised. Waiting until the last minute can lead to rushed filings and potential oversights.
Maximum Balances vs. End of Year Snapshot:
While the actual FBAR and Form 8938 report use the highest balance of the year, having the end-of-year balance can often help, especially for pension accounts where either the beginning or end of the year tends to be the highest balance. For bank accounts, it is also appropriate to have periodic statements and not go through a deep, thorough analysis of each charge or deposit into an account. The exception to this rule would be if you have a significant fluctuation that you know took place that year, like selling a property or a bunch of shares and immediately transferring them into a different account. Then, you should certainly report the highest value the account hit, even if it was just for a moment.
Conclusion: Navigating the Year-End Financial Labyrinth
As we usher in a new year, we must recognize that the above steps are more than mere tasks; they are integral components of a holistic approach to financial well-being. By taking proactive measures now, you simplify your immediate tax obligations and lay the groundwork for sustained financial growth and stability.
In this financial and tax planning journey, remember that the complexities inherent in managing finances across borders often warrant professional advice. Consulting with experts in U.S.-Israeli tax matters can provide tailored guidance, ensuring that your plans align with your personal ambitions and the regulatory landscape. In closing, let this year-end be not just a time of reflection but also a springboard for proactive financial planning. Embrace the opportunities and challenges it presents, and step confidently into the new year with your financial affairs in order, ready to seize the opportunities that lie ahead. And as you do, know that Philip Stein & Associates are here to help assist and guide you however possible. Don’t hesitate to reach out.