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Tax guide for Americans in Israel

Tax guide for Americans in Israel

Navigating the tax landscape in Israel requires an understanding of the fundamental differences between the tax obligations of residents and non-residents.

This guide aims to clarify these distinctions and help individuals determine their status and understand the corresponding tax implications in Israel.

Resident vs. non-resident of Israel
Who can be considered to be a resident of Israel?
Types of taxes in Israel
Income tax filing in Israel
Types of income in Israel
Social security in Israel
Israel's pension system
Tax deductions for expats in Israel
Tax credits for expats in Israel
US-Israel tax treaty
US-Israel totalization agreement
Most popular tax forms for US expats
Israel tax forms for US expats

Resident vs. non-resident of Israel

In Israel, an individual's tax liability depends largely on his or her residency status. The main difference lies in the scope of taxable income:

Israeli residents are taxed on their worldwide income. This includes income earned both inside and outside of Israel.
Non-residents, on the other hand, are taxed only on income earned within Israel. Income earned outside of Israel is not subject to Israeli tax.

Who can be considered to be a resident of Israel?

The criteria for determining residency status in Israel are varied. First and foremost is the "center of life" of the individual. This concept includes several elements:

Spending more than 183 days in Israel during a tax year generally qualifies an individual as a resident. In addition, spending a total of 425 days or more in Israel over three years may also lead to residency status.
Where an individual's immediate family (spouse and children) reside plays a significant role in determining his or her center of life. Strong social ties within Israel, such as membership in local organizations, may also indicate residency.
Property ownership, business activities, and employment in Israel are strong indicators of residency. Financial interests, such as bank accounts and investments in Israel, also contribute to this assessment.
Actual physical presence in Israel and intent to remain in Israel are critical. Declarations of residency, possession of an Israeli identity card, and other formal ties to the country are considered.
For individuals who may be considered tax residents of more than one country, the tie-breaker rule in applicable tax treaties may determine in which country they are considered tax residents.

NOTE

These criteria are not exhaustive and the Israeli tax authorities may consider other factors on a case-by-case basis. Individuals with complex circumstances, such as those who divide their time between several countries, should seek professional advice to accurately determine their tax residency status.

Types of taxes in Israel

Israel's tax system is multifaceted and includes various forms of taxation that take into account the different economic activities and social needs of its residents.

Personal income tax rates

Personal income tax in Israel is characterized by a progressive rate structure. This means that the tax rate increases as an individual's income increases.

The system is designed to ensure equitable tax contributions, with higher earners paying a larger percentage of their income in taxes. The specific tax rates are as follows (2024):

Taxable income (ILS)	Tax rate
0-81,480	10%
81,480-116,760	8,148, plus 14% of the excess over 81,480
116,760-187,440	13,087, plus 20% of the excess over 116,760
187,440-260,520	27,223, plus 31% of the excess over 187,440
260,520-542,160	49,877, plus 35% of the excess over 260,520
542,160-698,280	148,451, plus 47% of the excess over 542,160
698,280 and above	221,827, plus 50% of the excess over 698,280

These tiers and rates are subject to annual adjustments based on inflation and other economic factors.

Tax on health insurance

The Health Insurance Tax in Israel is a mandatory contribution that is an integral part of the national insurance system. This tax is essential for funding the country's health services and ensuring that all residents have access to necessary medical care.

The health insurance tax rate is calculated as a percentage of an individual's income to ensure that contributions are fair and in proportion to the individual's ability to pay.

For employees, the health insurance tax rate is generally around 3.1% for incomes up to ILS 6,331 and 5% for any amount above this threshold.
For the self-employed, the rate is slightly higher, reflecting the different nature of their income and employment status.

Contributions to this tax are used to fund various health services, including hospitalization, medical treatment, and prescription drugs.

Land Appreciation Tax

In Israel, the LAT is a crucial aspect of the real estate tax framework, which is aimed at the gains made on the sale of real estate. This tax is calculated based on the increase in the value of the land from the time of purchase to the time of sale.

For properties purchased after November 7, 2001, the LAT rate is generally set at 25% of the real gain. However, for properties purchased before that date, the rate is determined by a blended approach, taking into account the period of ownership before and after November 7, 2001.

The LAT system also includes various exemptions, in particular for a single residential property owned for a certain period.

The taxable gain under the LAT is the sales price less the inflation-adjusted cost and related expenses.

Value-Added Tax

VAT in Israel is a comprehensive consumption tax that applies to most goods and services. As an indirect tax, it is included in the price of goods and services and is collected by businesses on behalf of the government.

The standard VAT rate is 17%, but this can be adjusted according to government policy. VAT exemptions apply to certain goods and services, including essential food items, financial services, and residential rentals.

Businesses above a certain turnover threshold are required to register for VAT and file regular returns, making VAT an important consideration for both consumers and businesses in Israel.

Property tax

Property tax, or "Arnona", is a municipal tax in Israel levied on the owner or occupant of real estate. It varies according to the location, type, and size of the property and is calculated per square meter.

The tax rate is set by local municipalities and contributes significantly to their revenues. Property tax in Israel covers a range of properties, with exemptions for certain categories such as places of worship and diplomatic properties.

Property tax discounts are offered to various groups, including senior citizens, the disabled, and low-income families. Property tax payments are typically made in bimonthly or annual installments, and noncompliance can result in penalties and interest charges.

Luxury and excise taxes

Israel's tax system includes special provisions for luxury and excise taxes, which are primarily aimed at high-end goods and services.

The luxury tax in Israel is particularly notable for its application to items such as expensive cars and yachts. This tax is not a flat rate but is calculated as a percentage of the value of the item, often resulting in a significant increase in the final price. The rationale behind this tax is twofold: to regulate the consumption of luxury goods and to generate additional revenue for the government.

Excise taxes in Israel cover a range of products, with tobacco, alcohol, and certain fuels being the most prominent examples. The rates of these taxes are set according to the nature of the product and the intended regulatory outcome.

For example, the high excise tax rates on tobacco and alcohol are part of a public health policy aimed at curbing the consumption of these products. Similarly, fuel taxes are driven by environmental policy to encourage the use of cleaner energy sources.

Exit tax

The exit tax in Israel is a critical consideration for individuals who terminate their tax residency in the country. This tax treats individuals as if they had sold all of their taxable assets on the last day of their residency and calculates the tax on the unrealized gains on those assets.

The exit tax primarily targets assets that are subject to capital gains tax, such as corporate stock or real estate investments. Individuals subject to this tax are required to report these deemed gains and meet their tax obligations.

While there are provisions for deferring the payment of this tax, they often come with requirements for interest payments and collateral.

Inheritance, estate, wealth, and gift taxes

Unlike many countries where inheritance, estate, and gift taxes are a significant part of the tax system, Israel stands out for the absence of these taxes.

There is no inheritance or estate tax, which means that individuals who inherit property or assets in Israel are not subject to tax on those inheritances. This policy removes a potential financial burden on beneficiaries and simplifies the transfer of assets upon death.

Similarly, Israel does not impose a wealth tax. Individuals are not taxed on the total value of their accumulated assets or net worth.

Income tax filing in Israel

Filing income tax returns in Israel is an annual obligation for both residents and certain non-residents, including expatriates.

When to file tax returns in Israel

The procedure and deadlines for filing income tax returns in Israel are clearly defined by the Israel Tax Authority.

Here are the most important details:

Tax year: The Israeli tax year is based on the calendar year, beginning on January 1 and ending on December 31.
Standard filing deadline: For most individuals, the deadline for filing the income tax return is April 30 of the year following the reported tax year. For example, for income earned in the 2024 tax year, the return should be filed by April 30, 2025.
Possibility of extension: Taxpayers in Israel may apply for an extension of time to file their tax returns. If approved, this extension provides additional time beyond the standard April 30 deadline. It's important to note that this extension must be requested before the original due date and is subject to approval by the tax authorities.
Electronic filing: The Israel Tax Authority encourages the electronic filing of tax returns through its online portal. This method is efficient and ensures faster processing of returns and refunds.
Special cases for expatriates: Expatriates working or living in Israel may have special considerations when filing tax returns, especially if they have sources of income or tax liabilities in other countries.

How to file a tax return in Israel

Filing a tax return in Israel involves a series of steps that taxpayers must follow carefully to ensure accuracy and compliance. Here's a general guide to the process:

Before filing, gather all relevant financial documents. This includes income statements, bank statements, receipts for deductible expenses, and any other relevant financial records.
Understand whether you are filing as a resident or nonresident, as this will affect your tax liability and the type of income that must be reported.
The Israel Tax Authority provides an online tax filing platform known as "Masav". Register or log on to this platform to access the electronic filing system.
Fill out the tax return form provided online. This form requires detailed financial information, so be sure it is accurate to avoid errors that could result in penalties.
If you qualify, claim all deductions and credits. This may include expenses related to self-employment, education, or contributions to retirement accounts.
Before filing, review the return for any errors or omissions. Once you are satisfied, submit the return electronically through the Masav system.
After filing, keep a copy of the return and all supporting documentation for your records. They may be needed for future reference or in the event of an audit.

Penalties for late or incorrect filing

Failure to file a tax return on time or filing an incorrect return may result in penalties enforced by the Israel Tax Authority:

If you miss the filing deadline without obtaining an extension, you may be subject to a late filing penalty. The amount of the penalty depends on the length of the delay and the circumstances of the late filing.
If your return is incorrect and results in an underpayment of tax, you may be charged interest on the unpaid amount. In addition, penalties may be assessed for substantial understatements of tax liability.
Noncompliance, such as failing to report certain types of income or intentionally filing a false return, can result in more severe penalties, including criminal prosecution.

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Types of income in Israel

In Israel's diverse economic landscape, the tax system recognizes different types of income, each with different characteristics and tax implications.

Employment income

Compensation of employees in Israel includes all income received by an individual in return for his or her work or services. This includes not only basic wages and salaries, which are regular payments from employers, but also bonuses, which are additional payments often linked to performance or company profitability.

In addition, the concept of earned income in Israel is broad enough to include non-monetary benefits provided by employers. These benefits, often referred to as fringe benefits, may include the use of a company car, housing allowances, or health insurance, all of which are considered taxable income.

Another important component of employment income in Israel is income from stock options. These stock options, which are particularly common in the technology and start-up sectors, represent a potential for significant income and are subject to special tax rules.

The taxation of earned income in Israel follows a progressive rate structure, with the tax rate escalating with the level of income. In addition, such income is also subject to deductions for social security and health insurance contributions, which are typically made through payroll deduction by the employer.

Dividend income

Dividend income, another key category, refers to the income that shareholders receive from a company's profits. In Israel, this type of income is most common among investors and business owners.

Dividends are usually distributed in the form of cash payments, representing a portion of the company's profits allocated to each shareholder. However, dividends may also be distributed as additional shares of the company, known as stock dividends, which have their tax considerations.

The taxation of dividend income in Israel is different from that of earned income. Dividends are subject to withholding tax at the source, i.e. the company paying the dividends deducts the tax before paying the dividends to the shareholders.

The standard rate for this withholding tax is typically around 25%, although it can vary in certain situations, such as for shareholders who hold a substantial portion of the company's shares.

Interest income

Interest income in Israel, an important component of taxable income, is particularly relevant for individuals with investments in savings accounts, bonds, or other interest-bearing instruments. This category includes:

Income from bank savings or deposit accounts.
Income from government or corporate bonds.
Interest earned on personal loans taken out by an individual.

In Israel, interest income is generally subject to withholding tax, which is deducted by the paying institution or entity before the payment is made.

The tax rate on interest income is variable, depending on the source of the income and the total income of the individual. However, special rules may apply to interest from certain types of bonds or savings plans. Generally, interest income is taxed at a rate of 25%.

Interest from financial institutions or traded securities that are not linked to the Consumer Price Index (CPI) may qualify for a reduced rate of 15%.

For non-residents, this rate may be further reduced under relevant tax treaties. In particular, interest paid to non-residents on foreign currency deposits in Israeli banks is exempt from tax, provided that certain criteria are met.

In addition, a 3% withholding tax may apply in certain cases.

Rental income

In Israel, rental income includes income from the rental of property, including residential property such as apartments, houses, or rooms, and commercial property such as office space and retail premises.

Individuals who receive rental income in Israel must report it in their annual tax returns. The taxation of this income follows a progressive rate structure based on the individual's total income.

However, the tax system allows for certain exemptions and deductions that may reduce the taxable amount, particularly expenses related to the maintenance and upkeep of the property.

For individual landlords of residential property, the Israeli tax system offers a choice between two taxation alternatives, subject to certain conditions:

Landlords may enjoy a complete exemption from income tax on rental income from Israeli homes, provided that it does not exceed a certain monthly amount (ILS 5,196 in 2024). No special permit is required for this exemption. If the rental income exceeds this threshold, the excess amount is taxed at the landlord's marginal tax rate.
Landlords have the option of paying a flat tax rate of 10% on their gross rental income from Israeli residential property, without allowing any deductions. For rental income from residential property located abroad, the tax rate is set at 15%.

In addition, landlords may claim a straight-line depreciation allowance for buildings (excluding land). This allowance is subject to detailed rules and regulations.

The treatment of rental income losses also follows specific guidelines:

Losses from the rental of a building can only be used to offset future rental income from the same building or land appreciation realized upon the sale of the building.
Losses from an active real estate rental business may be used to offset other taxable income in the same year from any source, or against future active business income and certain capital gains.

Capital Gains

Capital gains in Israel are profits from the sale of assets or investments.
This includes:

Gains from the sale of real estate, whether residential or commercial.
Gains from the sale of stocks, bonds, or other securities.
Gains from the sale of business-related assets or shares in a business.

Capital gains are subject to taxation in Israel, the rate of which depends on the type of asset and the period of ownership. Real estate is subject to the Land Appreciation Tax (LAT), with varying rates and exemptions depending on factors such as the date of purchase and length of ownership.

For stocks and other securities, capital gains are generally taxed at a flat rate, with certain exemptions for long-term investments.

Capital losses

In the Israeli tax system, capital losses occur when the sale of an asset results in a financial loss, i.e. the sale price is less than the purchase price.

Often associated with stock market investments or real estate transactions, these losses play an important role in tax calculations.

Taxpayers in Israel may use capital losses to offset capital gains, thereby reducing their overall tax liability. For example, if an individual suffers a loss in the stock market, that loss can be deducted from any gain realized on the sale of real estate within the same tax year.

If the losses exceed the gains, the excess can be carried forward to subsequent years, providing a form of tax relief over time. However, there are specific rules governing the application of capital losses to ensure that they are legitimately incurred and accurately reported.

Cash withdrawals or personal use of company assets

For business owners and employees in Israel, the personal use of business assets or cash withdrawals from a business is considered a taxable benefit.

For example, using a company car for personal travel or living in a company-owned apartment constitutes additional taxable income to the individual.

The value of these benefits is added to your regular income and taxed accordingly. Similarly, cash withdrawals by business owners, unless classified as salary or dividends, are treated as taxable income.

These withdrawals and personal use of company assets must be carefully documented and reported to the Israel Tax Authority to ensure compliance and accurate tax reporting.

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Social security in Israel is a fundamental aspect of the country's welfare system, providing various benefits to its citizens and residents.

Central to this system are national insurance contributions, which fund a range of social security benefits.

National Insurance сontributions

National Insurance contributions in Israel are mandatory payments made by individuals and employers to the National Insurance Institute (Bituach Leumi).

These contributions are essential for funding various social welfare programs, including pensions, disability benefits, and unemployment insurance.

Resident employees

In Israel, employees who are residents are subject to National Insurance contributions as a mandatory part of their employment. These contributions are deducted directly from their salaries by their employers and are structured to reflect a progressive system based on income levels.

For resident employees, the National Insurance contribution rate is 0.4% on the first ILS 7,122 of monthly earnings. Above this amount, up to a maximum monthly salary of ILS 47,465, the contribution rate increases to 7%.

Employers also pay social security contributions for each resident employee. This contribution is 3.55% of the first ILS 7,122 of the employee's monthly income. For the portion of income above ILS 7,122 and up to the maximum monthly salary of ILS 47,465, the employer's contribution rate is 7.6%.

This tiered contribution structure ensures that contributions are proportional to income levels, with higher earners paying a greater percentage of their income towards social security.

Non-resident employees

Non-resident employees in Israel are required to contribute to the National Insurance, although the rules and rates are different from those for resident employees. These contributions play a crucial role in granting non-residents access to certain social security benefits during their stay in Israel.

For non-resident employees, the National Insurance contribution rate is significantly lower, set at 0.04% for the first ILS 7,122 of monthly income. For income above ILS 7,122 and up to the maximum monthly salary limit of ILS 47,465, the rate is adjusted to 0.87%. This reduced rate structure reflects the limited access of non-residents to the full range of social security benefits available to residents.

Similarly, employers contribute to National Insurance on behalf of their non-resident employees at reduced rates. The employer's contribution is 0.59% of the first ILS 7,122 of the employee's monthly income. For the portion of the income above ILS 7,122 up to ILS 47,465, the employer contribution rate increases to 2.65%.

Special rules and rates

The Israeli social security system includes special rules and rates for different categories of contributors.

For example, self-employed individuals are subject to different contribution rates than employees. In addition, there are special provisions for individuals with low incomes, where reduced rates or exemptions may apply.

Special consideration is also given to certain groups, such as new immigrants or returning residents, who may be entitled to reduced rates or exemptions during their first years in Israel.

Israel's pension system

The pension system in Israel is a key component of the country's social security framework, designed to provide financial stability to individuals in their retirement years. This system is a mix of mandatory and voluntary pension schemes.

In Israel, both employees and employers are required to contribute to pension funds. This mandatory pension system ensures that employees accumulate savings for retirement. The contribution rate is a percentage of the employee's salary, with specific portions earmarked for retirement, disability, and survivor benefits.

In addition to mandatory pensions, individuals in Israel may contribute to voluntary pension funds. These contributions are often incentivized with tax benefits to encourage additional savings for retirement.

Tax deductions for expats in Israel

Expatriates working in Israel can benefit from various tax deductions that can significantly reduce their taxable income.

Employment expenses

Expats may deduct certain expenses related to their employment in Israel. This includes expenses such as travel to and from work, professional training, and the purchase of work-related equipment or uniforms.

For expats working remotely or from home, a portion of their home office expenses may be deductible. This can include a portion of rent, utilities, and internet charges, provided these expenses are directly related to their work.

Contributions to foreign social security systems, which are often mandatory for expats, may also be deductible under certain conditions. This helps to avoid double social security taxation for expatriates.

Business deductions

In Israel, individuals who own businesses or are self-employed can take advantage of various business deductions that can significantly reduce their taxable income. These deductions are designed to reflect the costs incurred in generating business income:

Business owners can deduct a variety of business expenses, including rent for business space, utilities, and office supplies. These expenses must be directly related to the operation of the business.
Wages and salaries paid to employees are deductible business expenses. This includes contributions to employee pension funds and other employee benefits.
Business owners can deduct depreciation on assets such as machinery, equipment, and vehicles used for business purposes. Depreciation rates vary depending on the type of asset.
Fees paid for professional services, including legal, accounting, and consulting services, are also deductible.
Expenses incurred in marketing and advertising the business are deductible, including both traditional and digital marketing expenses.

Tax advantages for new immigrants and returning residents

Israel offers several tax incentives for new immigrants (olim) and returning residents to ease their financial transition and encourage their integration into the Israeli economy:

New immigrants and returning residents are entitled to a 10-year tax holiday on income earned outside of Israel. This includes income from employment, business, and investments.
For the same 10-year period, they are also exempt from the obligation to report foreign income and assets on their Israeli tax returns.
In some cases, new immigrants and returning residents may qualify for reduced tax rates on income earned in Israel during their first years in the country.

Special deductions for qualified expatriates

Expatriates working in Israel may, under certain conditions, qualify for special tax deductions designed to ease the financial burden of working away from home:

Expatriates can often deduct housing expenses, including rent and utilities, as well as expenses related to relocating to Israel.
Expenses incurred in traveling between Israel and their home country, especially for business purposes, may be deductible.
Expenses for cultural adaptation and language training necessary for integration into the Israeli work environment may also be deductible.

Tax credits for expats in Israel

Expatriates in Israel can benefit from various tax credits that serve as an important mechanism for reducing their overall tax burden.

These credits are tailored to individual circumstances and can have a significant impact on the amount of tax owed.

Personal tax credits

The Israeli tax system uses a credit point system, where each point represents a reduction in the taxpayer's liability. This system applies to all taxpayers, including expatriates.

Residents of Israel are entitled to personal tax credits against their liabilities, depending on their status.

Each credit point in this system has a specific value, which is set at ILS 235 per month. Resident taxpayers are guaranteed a minimum entitlement of 2.25 points.

The system is designed to be progressive and accommodating, with additional points available based on various criteria.

These criteria include having dependent children, being a recent immigrant, or being part of a single-parent family. For example, an expatriate living in Israel with children can receive additional points for each child, effectively reducing his or her overall tax burden.

NOTE

However, foreign residents, as opposed to resident expatriates, do not qualify for these personal tax credits. This distinction underscores the tax system's goal of aligning tax breaks with residency status and the societal contributions associated with it.

Charitable contributions

Charitable giving is encouraged in Israel through tax credits for donations made to recognized charities. Expatriates who contribute to eligible non-profit organizations in Israel can claim these contributions as tax credits, effectively reducing their taxable income.

The tax credit for charitable contributions is calculated as a percentage of the amount donated. This rate is set by the Israel Tax Authority and can vary, but typically allows a significant portion of the donation to be credited against the taxpayer's income tax.

To claim this credit, expatriates must ensure that their contributions are made to approved organizations and keep proper documentation, such as receipts or donation certificates.

There are limits to the amount that can be claimed as a tax credit for charitable contributions. Typically, this limit is expressed as a percentage of the taxpayer's annual income, ensuring that the tax benefit is in line with the individual's financial capacity.

US-Israel tax treaty

The tax treaty between the United States and Israel is an important agreement that governs the tax treatment of individuals and corporations with financial activities in both countries.

This treaty is instrumental in preventing double taxation, a scenario in which income is taxed by both countries, and in promoting economic cooperation.

Tax treaty benefits

One of the primary benefits of the US-Israel Tax Treaty is the reduction of double taxation. For American expatriates living in Israel or Israeli citizens working in the US, this treaty provides a framework to ensure that they are not unfairly taxed by both countries on the same income. The treaty accomplishes this through several mechanisms:

The treaty provides for reduced rates of withholding taxes on dividends, interest, and royalties. For example, a US company paying dividends to an Israeli resident may withhold taxes at a reduced rate specified in the treaty rather than at the standard rate under US law.
Individuals who pay taxes in one country may claim a credit for those taxes in their home country. This means that if an Israeli citizen pays income tax to the US government, he can claim a credit for that tax against his Israeli tax liability.
The treaty provides clear definitions for determining tax residency, which helps individuals and businesses understand their tax obligations in each country.
The treaty includes procedures for resolving disputes regarding the interpretation or application of the treaty, thus ensuring fair tax treatment.

US-Israel totalization agreement

In addition to the tax treaty, the US and Israel have a totalization agreement that focuses on social security contributions for individuals working in both countries.

This agreement is critical for those who might otherwise be subject to double social security taxation.

Under the agreement, employees and employers contribute to the social security system of the country in which the work is performed. For example, an American employee working in Israel for a short period would normally pay social security contributions only to the Israeli system, and vice versa.

This allows workers to accumulate social security credits in both countries, which is beneficial when qualifying for retirement or disability benefits. This is particularly important for individuals who have split their careers between the US and Israel and may not meet the minimum contribution requirements in either country alone.

Israel tax forms for US expats

In addition to US tax forms, American expatriates in Israel must also be aware of Israeli tax forms relevant to their financial activities in the country.

Key forms include:

Annual income tax return (Form 1301): This form is used by individuals in Israel, including US expats, to report their annual income. It covers various types of income, including employment, business, and investment income.
Capital Gains tax report (Form 1335): Expats involved in the sale of assets such as real estate or stocks in Israel must report these transactions using Form 1335.
Real estate tax report (Form 1358): For US expats owning real estate in Israel, this form is used to report any rental income or capital gains from property sales.
VAT returns: Expats who operate a business or are self-employed in Israel must file VAT returns if their turnover exceeds the VAT registration threshold.

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