Thank you to Avraham Deutsch’s office for authoring this article.

U.S. and Israel Tax Compliance-General Guidelines (filing for tax year 2023)

U.S. citizens and residents living in Israel or another country outside of the U.S. are still liable to file U.S. tax returns and report worldwide income. In addition, all U.S. citizens and residents are liable to report their foreign bank and financial account balances via an annual FBAR (Foreign Bank Account Report).

Highlights of New Provisions

  • 2024 is an election year in the U.S. As such, tax policy will be at the center of many presidential debates. Our office will keep you informed of any major developments.
  • The Child Tax Credit for 2023 is $2000. The refundable additional child tax credit has increased to $1,600 per child under age 17.  Adjustments may be made to these numbers based on your adjusted gross income.
  • The IRS has issued additional crypto guidelines & plans to continue examining cryptocurrency transactions in search of under-reporters.
  • The IRS is allowing U.S. citizens to sign up for an IRS online account via ID.me (an online company that allows people to provide proof of their identity online) to access individual account information including; balances, payments, refund history, ID verification and more.

A U.S. Taxpayer identification number (SSN) is now required by the due date of your tax return. If you have a Social Security Number (SSN) for your dependent by the due date of your 2023 return (including extensions), you may be able to claim the child tax credit (CTC), and the additional child tax credit (ACTC).  This applies to your original or amended 2023 tax return, even if you obtain the SSN later (i.e., a child born in March 2023 has until December 15, 2024, to receive a Social Security Number and still be eligible to claim the child credit with extensions.) Taxpayers who exclude earned income, currently up to $120,000 (per taxpayer) on their 2023 joint tax returns will not be eligible to receive an additional child credit (ACTC) even if only one taxpayer uses the exclusion. Please be advised that credit may not be claimed retroactively.  If you claim the CTC or ACTC, but you are not eligible for either credit and it is later determined that your error was due to reckless or intentional disregard of the CTC or ACTC rules, you will not be allowed to claim either credit for 2 years. If it is determined that your error was due to fraud, you will not be allowed to claim either credit for 10 years. You may also have to pay interest and penalties to the IRS. We recommend applying for Social Security numbers immediately after your U.S. child is born, to avoid missing a year of child tax credit.  For a child born in 2022, you may have time to apply since the extension date, due to the war, has been extended to October 7, 2024.

The child tax credit was revamped and now follows the 2020 rules with one modification, the refundable portion of the credit is now $1,600 per child.

If applicable, the credit per eligible child may be available to offset any potential U.S. income tax liability or be partially refunded. Taxpayers must have reportable earned income from wages (via Israeli Form 106 or similar foreign wage slip) or self-employment income. The earned income of both husband and wife can be combined even if one spouse is NOT a U.S. citizen. The non-citizen spouse requires a U.S. tax identification number (ITIN), which can be acquired by filing U.S. Tax Form W-7 (our office can assist with this filing) – see below. Children must be U.S. citizens aged 18 and below and must possess a valid U.S. Social Security number by the tax return due date (including extensions). Please note that maximizing the child’s credit can be quite complicated since there are many factors to consider. In addition, the IRS can conduct income tax audits which may require verification of income and other pertinent information.

Under the Intergovernmental Agreement (IGA) signed between Israel and the United States, an exchange of tax information between the two countries has been in effect since 2016. As such, Israeli banks are required to issue Form 1099 to their customers who are U.S. citizens and transmit these forms directly to the IRS. Reciprocally, since 2017, Israel has the right to receive U.S. tax information on its citizens directly from the U.S. Israel has an Amnesty Program for Israeli citizens who have not reported their income earned outside of Israel.  Please contact our office for further details regarding filing under the Israeli Amnesty Program.

For tax year 2023, the reporting threshold for third-party processing payments is still $20,000 or 200 transactions as in prior years. A more aggressive IRS position was supposed to go into effect for 2023 but the minimum $600 tax reporting requirement has been delayed.

FATCA is an Intergovernmental Agreement (IGA) that the U.S. Department of Justice has signed with more than 120 partner countries. The purpose of the IGA is to provide the U.S. with knowledge about the financial income and account balances of its citizens around the world.  In essence, these agreements create a two-way transfer of information between the foreign country and the U.S. and from the U.S. to the partner country.  In effect, the U.S. could demand income tax returns from delinquent taxpayers or non-filers based upon information received from a partner country since the U.S. taxes the worldwide income of its citizens.  FATCA requires filing IRS Form 8938 under certain circumstances primarily when a taxpayer has large financial balances (see below).

The IRS is continuing to flag certain tax returns that require Identity Verification. In their attempt to ease the verification process, domestic residents can identify themselves online after having registered with ID.me, a trusted technology partner of the IRS.  To register with ID.me both a U.S. address and a U.S. cell phone in your name are required. Taxpayers living outside of the U.S. can register by scheduling an appointment with ID.me for a video interview.  After successfully completing the ID.me registration process, taxpayers can respond to ID verification requests, can obtain IP PINs (Identity Protection Personal Identification Numbers) online, and can view their tax return transcripts online. This registration is moving the IRS technologically forward.  For all domestic residents, registration with ID.me can make dealing with the IRS easier and avoid the backlog facing IRS representatives on the phone.

For 2018, the Global Intangible Low-taxed Income (GILTI) regime was created under section 951A of the IRS Code. GILTI involves complicated calculations and huge additional compliance burdens for corporations, and for certain types of shareholders in foreign corporations (CFCs), can dramatically increase taxes.  In 2020, the IRS issued regulations that eased the tax burden for taxpayers who are shareholders of foreign corporations in high-tax countries (Israel’s corporate tax is 23% vs. 21% in the US) and in most situations, do not have to pay the GILTI tax.

If this situation applies to you, please call us to discuss.

This form must be filed with your U.S. income tax return (in addition to your FBAR), if you live in Israel (or abroad) and

  1. The value in your foreign financial accounts exceeds $400,000 (filing joint) or $200,000 (filing single) on the last day of the year, or
  2. Your foreign financial accounts exceed $600,000 (filing joint) or $300,000 (filing single) at any time during the tax year.

If you live in the United States, you have a Form 8938 filing requirement if the following applies:

  1. The value in your foreign financial accounts exceeds $100,000 (filing joint) or $50,000 (filing single) on the last day of the year, or
  2. Your foreign financial accounts exceed $150,000 (filing joint) or $75,000 (filing single) at any time during the tax year.

Under the Bank Secrecy Act, passed in 1970, the Foreign Bank Account Report (FBAR) must be e-filed annually with the U.S. Treasury by April 15th of each tax year (which may be extended to October 15th if you have a valid extension for your current income tax return), if the following criteria apply:

  1. i) The person has a financial interest, signature authority, or other authority that is comparable to a signature authority over one or more accounts in Israel or another foreign country (please note that shareholders who hold more than 50% of a foreign company’s shares are considered as having a financial interest in the company’s accounts) and
  2. ii) The aggregate value of all foreign financial accounts exceeds $10,000 or the equivalent amount in foreign currency (about 34,000 NIS or more during 2023) at any time during the calendar year.

Foreign financial accounts include but are not limited to, both checking and savings accounts, Israeli pension accounts, brokerage accounts, mutual funds, and unit trusts. Paper filings of FBARs (form TD F 90-22.1) are no longer accepted by the U.S. Treasury and have been replaced by online filing of form FINCEN 114.

IRS tax examiners have been seriously auditing FBARs in cases involving international tax fraud.

Israeli banks, as well as some other foreign financial institutions, are requiring customers to sign a U.S. Form W-9 (or Form W8-BEN for non-U.S. citizens) in order for customers to open a new account or continue banking or investing with the financial institution. In many cases, your Israeli bank may require a declaration that your last 3 years of U.S. income tax returns and FBARs have been duly filed.  Not submitting the signed form can result in your Israeli bank freezing your Israeli account(s), as per Bank of Israel rules. Please note, that if your bank has not requested you to sign a W-9, you are still obligated to report your non-U.S. income and assets to the IRS and the U.S. Treasury.

The U.S. Highway Funding legislation calls for potential revocation or denial of U.S. passports for U.S. taxpayers with an outstanding balance of over $59,000 to the IRS. Tax balances due to any State are not part of this legislation. The IRS must notify the taxpayer of this proceeding prior to facilitating a revocation of any U.S. passport. If payment arrangements have been made with the IRS, the taxpayer’s passport would still be considered valid and will generally not be revoked. In addition, there have been reported instances where taxpayers have been stopped and interrogated at Passport Control upon entry to the U.S. regarding their balances due to the IRS.

In recognition that some U.S. citizens living abroad have failed to file annual U.S. Federal income tax returns and foreign bank account reports (FBARs), the IRS has a streamlined procedure to allow taxpayers to reenter the IRS tax filing system and then be considered in “good standing”. Many factors and requirements apply, but primarily this procedure is available for U.S. taxpayers who have resided outside the U.S. since January 1, 2009, have not filed U.S. income tax returns for at least 3 years, and have not been contacted by the IRS to file. Among the strict requirements for being accepted under the IRS streamlined process are a) filing three years of U.S. income tax returns, b) filing six years of FBARs, c) not spending more than 35 days in the U.S. in one of the last 3 years, d) writing a detailed explanation under penalties of perjury, delineating your non-willfulness and delinquency, and attaching it to your filed tax returns. The IRS will expedite the review process and may not assess penalties for taxpayers filing under this procedure; however, interest on overdue balances will be assessed. The Offshore Voluntary Disclosure Program (“OVDI”) has been terminated by the IRS as of 2018.

A non-refundable credit was added by recent legislation. Starting with the 2018 tax filing, if your child has passed age sixteen there is still a $500 tax credit available to offset your tax liability for the tax year. Any dependent on your tax return who does not qualify for the child tax credit may create eligibility for the dependent credit. For 2023, the dependent tax credit applies to dependents above the age of seventeen.

Standard Deduction amounts appear in the table below. Taxpayers with qualifying deductions more than these amounts may generally itemize their deductions. Please note that bank mortgage interest, Israeli income taxes, and certain charitable contributions paid to Israeli sources may also qualify as itemized deductions.

FILING STATUS * DOLLAR AMOUNT
Single $13,850
Single – Age 65 or older $15,700
Head of Household $20,800
Head of Household – Age 65 or older $22,650
Qualifying Widow(er) $27,700
Married Filing Jointly $27,700
Married Filing Jointly – One Aged 65 or older $29,200
Married Filing Jointly – Both Age 65 or older $30,700
Married Filing Separately (MFS)* $13,850

*The standard deduction for MFS is $13,850. When filing MFS, an income tax filing requirement applies for income above $5 as opposed to the other filing status options that have a filing requirement if their income exceeds their standard deduction.

The U.S. income tax rates for the current tax year are 10%, 12%, 22%, 24%, 32%, 35%, & 37%. Under the “stacking rule”, to determine your income tax bracket, income excluded on Form 2555 (Foreign Earned Income Exclusion) will be added back to your adjusted gross income. As a result, investment income may potentially be taxed at a higher tax bracket. In addition, please contact our office to discuss your taxes related to the Net Investment Income (“NIIT” or Obamacare Tax) Tax and potential tax-saving ideas. Also important, is that the “kiddie tax” has been revamped and now follows the estate tax rates above $2,500 of unearned income.

Marginal Tax Rate Single and Married Filing Separately Married Filing Jointly Head of Household
10% $ 0 – $ 11,000 $0 – $ 22,000 $ 0 – $15,700
12% $ 11,001 – $ 44,725 $ 22,001 – $ 89,450 $ 15,701 – $59,850
22% $ 44,726 – $ 95,375 $ 89,451 – $190,750 $ 59,851 – $95,350
24% $ 95,376 – $182,100 $190,751 – $364,200 $95,351- $182,100
32% $182,101 – $231,250 $364,201 – $462,500 $182,101- $231,250
35% $231,251 – $578,125 $462,501 – $693,750 $231,251 – $578,100
37% Over $578,126 Over $693,751 Over $578,101

Most investments in mutual funds registered outside the U.S. pose a potentially complicated tax and accounting issue for U.S. taxpayers. Whereas U.S. registered mutual funds report gains and losses annually to the IRS and investors, foreign mutual funds do not. The IRS has termed foreign mutual funds as Passive Foreign Investment Companies or PFICs. PFIC investments, when sold at a profit, must be reported to the IRS based on the income earned subject to interest charges for each year that the investment was held.  In effect, the IRS wants to recoup the taxes that would have been paid had the PFIC reported its activity annually. As such, Form(s) 8621, (Information Return by a Shareholder of a PFIC or Qualified Electing Fund), must be filed with the taxpayer’s Federal income tax return every year. We recommend discussing this issue with your tax and investment advisor as there may be suitable alternative investments that are not subject to PFIC rules.

Individual tax identification numbers are required on every income tax return submitted to the IRS by a Non-resident Alien. A non-U.S. citizen with a U.S. tax filing requirement must obtain an ITIN either before submitting a tax return or apply for an ITIN (Form W-7) with the tax return submitted to the Internal Revenue Service. Our office can assist you with the process of obtaining an ITIN if necessary.

ITINs received after the due date of the tax return with extensions cannot be used for the current tax return.

ITINs expire and must be renewed periodically. The IRS will generally notify you that your ITIN will be expiring. ITINs that were not used to file a tax return at least once in the past 3 years will generally also expire. Expired ITINs can be renewed through our office.

If you did not receive the 1st Economic Impact Payment (“EIP”) or 2nd EIP you may still claim them as the Recovery Rebate Credit on your 2020 U.S. Income Tax Return.  The deadline for 2020 is June 15, 2024.

Eligible individuals who did not receive the third Economic Impact Payment ($1,400 per person) during 2021 may still claim the Recovery Rebate Credit on their 2021 Form 1040.  The deadline for 2021 is June 15, 2025.

When claimed on your 2020 and 2021 U.S. tax returns, generally, this credit will increase the amount of your tax refund or decrease the amount of the tax you owe.

You must file the 2020 and 2021 Forms 1040 to claim all Recovery Rebate Credits even if you are normally not required to file a tax return.

 

The U.S. foreign-earned income exclusion has been adjusted for inflation and has increased to $120,000 per taxpayer. As such, married taxpayers filing jointly, who meet certain requirements, may potentially exclude up to $240,000 of foreign earned income per tax return. However, one spouse may not utilize the unused portion of the exclusion of the other spouse. If one taxpayer elects the exclusion on a joint return, starting with the 2015 tax filings there is no child credit available on that income tax return. If you file separately, one spouse may claim the exclusion and one spouse may claim the child credit.  Please note that the Foreign Earned Income Exclusion applies only to work or self-employment income and does NOT apply to other passive income such as pension benefits, investment income, rental, or any other non-earned income.

A U.S. foreign tax credit may be used to reduce your U.S. income tax if you have paid Israeli tax (or have been taxed in another foreign country) paid on income sourced to Israel based on the US-Israel Income Tax Treaty. Conversely, Israel will also recognize taxes paid to the U.S. (or another foreign country) and generally apply these taxes as a credit against your Israeli income tax liability.

Article 21 of the U.S. – Israel Income Tax Treaty states that U.S. citizens who are Israeli residents are eligible to exclude U.S. Social Security benefits from their adjusted gross income. This provision may result in substantial tax savings. If you have included your social security income in the past on your income tax returns, our office can assist you with preparing your amended tax returns (up to three years retroactively) to potentially receive a potentially large refund of excess tax paid.

NOLs from the tax year 2023 cannot be carried back but may be carried forward indefinitely until used up. The losses can only offset 80% of taxable income (not 100%). There are some exceptions to this rule such as farming losses and losses from non-life insurance companies.

Lower tax rates on long-term capital gains (whether derived in the U.S., in Israel, or another foreign country) generally apply to assets held for more than one year. For single taxpayers with taxable income under $44,625 and for taxpayers filing jointly with taxable income under $89,250, a zero percent long-term capital gains and qualified dividends rate will generally apply. Capital losses are still fully deductible against capital gains, and any capital losses, more than capital gains, may offset up to $3,000 of ordinary income if you are married and filing jointly. Net capital losses of more than $3,000 may be carried over indefinitely to future years.

Long-Term Capital Gains Tax Rate Single Married Filing Joint Head of Household Married Filing Separately 
0% $0 – $ 44,625 $ 0 – $ 89,250 $ 0 – $ 59,750 $0 – $44,625
15% minimum income $ 44,626- $492,300 $ 89,251 – $553,800 $ 59,751 – $523,050 $44,626 – $276,900
20% minimum income $492,301 and above $553,8511 and above $523,051 and above $276,901 and above

Both the IRS and the Israel Tax Authority (ITA) have recently ruled that cryptocurrencies are considered property. Since cryptocurrency is not backed by any country and can be extremely volatile, it will generally be treated as a capital asset and taxed at capital gains rates on the sale.  This means that any purchase of goods or services using cryptocurrency will generally result in the sale of a capital asset, which must be reported on your income tax return as such. Since cryptocurrencies can be valued in many foreign currencies, tracking buys and sells involves converting to USD and or NIS on the purchase and sale dates, to compute the gain or loss. In addition, if you regularly sell or trade cryptocurrency for profit it may result in your trading being taxed at regular income tax rates. A question on page 1 of Form 1040 addresses owning or trading cryptocurrency.

In addition to the “Obamacare” tax rules, additional provisions of these rules are as follows: Beginning in 2013 the IRS imposed an additional 3.8% tax on passive income for high-income individuals (see table below). For this purpose, passive income includes interest, dividends, and capital gains. Part of the passive income subject to this tax is dividends from your foreign-owned corporation. The tax on this income cannot be taken as a credit for Israeli tax purposes. Therefore, it may sometimes be advisable that taxpayers with Israeli corporations report earnings as additional salary rather than declaring a dividend. Earnings from salary are not subject to this tax. Please contact our Israeli tax department for more details.

Filing Status

for NIIT tax

 Income Threshold

w/o Form 2555

 Income Threshold

with Form 2555
Married filing jointly $250,000 $138,000
Married filing separately $125,000 $13,000
Single $200,000 $88,000
Head of household (with qualifying person) $200,000 $88,000
Qualifying widow(er) with dependent child $250,000 $138,000

The QBI deduction allows owners of flow-through entities such as Sole Proprietorships, S Corporations, or Partnerships a deduction of 20% of the income earned by the flow-through. There are several criteria for the flow-through entity to meet, including an income threshold, and the flow-through’s activity effectively connected with a U.S. trade or business. Regardless, most flow-throughs generating income from abroad might not see much additional benefit from this deduction since it only applies to income tax. Self-employment tax will not be reduced by this 20% deduction. The QBI deduction applies to U.S. real estate activities, but books and records must be available for each property owned or managed. The QBI deduction does not apply to real estate outside of the U.S.

You are a resident for income tax purposes if you are a lawful permanent resident of the United States at any time during the last calendar year. You are a lawful permanent resident of the United States at any time if you have been given the privilege, according to immigration laws, of residing permanently in the United States as an immigrant. You generally have this status if the U.S. Citizenship and Immigration Services (USCIS) (or its predecessor organization) has issued you an alien registration card, also known as a “green card.” You continue to have resident status under this test unless the status is taken away from you or is administratively or judicially determined to have been abandoned.

Resident status taken away. Resident status is considered to have been taken away from you if the U.S. government issues you a final administrative or judicial order of exclusion or deportation. A final judicial order is an order that you may no longer appeal to a higher court of competent jurisdiction.

Resident status abandoned. An administrative or judicial determination of abandonment of resident status may be initiated by you, the USCIS, or a U.S. consular officer.

If you initiate the determination, your resident status is abandoned when you file either USCIS Form I-407 or submit a letter stating your intent to abandon your resident status. Until you have proof that your letter was received, you remain a resident alien for U.S. tax purposes even if the USCIS would not recognize the validity of your green card because it is more than ten years old or because you have been absent from the United States for a certain period.

If the USCIS or U.S. consular officer initiates this determination, your resident status will be abandoned when the final administrative order of abandonment is issued. If you are granted an appeal to a federal court of competent jurisdiction, a final judicial order is required.

To qualify for future U.S. Social Security retirement benefits a taxpayer must accumulate in the U.S. Social Security system a minimum of 40 quarters (credits).  These credits can be earned even while residing in Israel. One can accrue a maximum of 4 quarters per year by generally earning in excess of $7,000 annually. This is primarily accomplished by:

  1. Being self-employed in Israel and reporting Israeli self-employment income on your U.S. income tax return,
  2. Working in Israel for a U.S. entity and receiving a Form W-2 (employee) or Form 1099 (independent contractor),
  • Traveling to the U.S. to work as an employee (W-2) or as a self-employed individual (1099).

Please contact our office to assist you in qualifying for Social Security benefits.

If you are of retirement age and ready to claim benefits, here are some of the steps to take:

  1. Obtain an Earnings Record from the Social Security Administration (SSA).  The request form (SSA-7004) is on the US Embassy website under the tab Social Security benefits.
  2. Your benefits can be adjusted for Israeli pensions being received but not for any Kitzvat Ziknah (through Bituach Leumi). This adjustment is based on the SSA’s rule called the Windfall Elimination Provision (“WEP”).  If you are claiming benefits at your full retirement age, then your Social Security payments can be reduced by up to 50% depending on the size of your pension that was based on wages not subject to Social Security. The WEP adjustment for recipients of Social Security at age 63 is Dollar for Dollar up to the value of the Israeli pension.  Since Israeli pensions are taxable on your Form 1040 and the SSA has access to your tax returns, the IRS has information regarding your pension amounts.  After your benefits are adjusted for WEP, the SSA decision can be appealed and possibly reversed.  Please contact one of our professionals if this applies to you.  There may be good news on the horizon regarding WEP adjustments.  There is a bill before the House Ways and Means Committee to eliminate WEP adjustments in the future.  We will keep you abreast of the developments of the bill and hope for the elimination of WEP.

If you are of retirement age and ready to claim benefits, here are some of the steps to take:

  1. Obtain an Earnings Record from the Social Security Administration (SSA).  The request form (SSA-7004) is on the US Embassy website under the tab Social Security benefits.
  2. Your benefits can be adjusted for Israeli pensions being received but not for any Kitzvat Ziknah (through Bituach Leumi). This adjustment is based on the SSA’s rule called the Windfall Elimination Provision (“WEP”).  If you are claiming benefits at your full retirement age, then your Social Security payments can be reduced by up to 50% depending on the size of your pension that was based on wages not subject to Social Security. The WEP adjustment for recipients of Social Security at age 63 is Dollar for Dollar up to the value of the Israeli pension.  Since Israeli pensions are taxable on your Form 1040 and the SSA has access to your tax returns, the IRS has information regarding your pension amounts.  After your benefits are adjusted for WEP, the SSA decision can be appealed and possibly reversed.  Please contact one of our professionals if this applies to you.
  3. Make an appointment using the Embassy’s email request to start receiving Social Security benefits.  The request should generally be answered within 30 days by phone from US Embassy personnel either in Israel, Greece, or Italy.  They will set up an appointment and complete the interview on the phone.
  4. After applying, the Social Security Administration may send you a questionnaire relating to your income.  This questionnaire is sent to determine that benefits are being sent to a living person. If any of their correspondences are unanswered, your benefits could cease and must be applied again.

The American Opportunity Credit (“AOC”) can be claimed for qualified tuition and related expenses for any of the first four years of a college or university degree. The credit is up to $2,500 for those paying $4,000 or more in qualifying tuition for an eligible student. Forty percent of the credit is refundable which allows a taxpayer to receive up to $1,000 cash back for each eligible student claimed on the tax return, even if no income tax is due.  The credit is generally available for U.S. universities and for certain foreign accredited universities (please contact our office for the list of eligible Israeli universities). The credit begins to phase out at $80,000 for taxpayers filing single or $160,000 for taxpayers filing jointly. To claim the AOC, a student must receive a Form 1098-T or its equivalent that contains the Employer Identification Number of the university. Students at accredited universities outside of the U.S. may or may not receive a 1098-T but still be eligible to claim the credit. The credit is not available on a tax return when the filing status is Married Filing Separately.

Automatic income tax return extensions are available until June 15th for U.S. taxpayers who reside outside of the U.S. If there is a balance due with your tax return, interest will be accrued from April 15th, while penalties will begin to accrue after June 15th. Filing an extension will extend the time to file until October 15th. An additional extension may be granted until December 15th, but certain restrictions may apply. It is strongly recommended that taxpayers who owe income tax but do not file by June 15th make a payment with their June 15th extension. For the upcoming year, it is imperative that taxpayers pay estimated taxes on a timely basis to avoid underpayment of estimated tax penalties. Our office can assist you in setting up electronic payments with the IRS using the Electronic Federal Tax Payment System (EFTPS) via automatic withdrawal from your U.S. bank or other U.S. financial account, which will reduce the potential for penalties on late payments.

The failure to file a penalty is usually 5% of the tax owed for each month the return is overdue, up to 25% of the tax bill.  The penalty for Failure to File a tax return within 60 days of the due date (including extensions) has increased to the greater of $450 for returns with a due date after December 31, 2023, or 100% of the tax due, whichever is smaller. The penalty will apply to 2023 tax returns and will be inflation-adjusted each year.

According to the IRS, if you are due a refund or are not required to file income taxes, no penalties are assessed for not filing.

Recently the IRS passed special legislature reducing potential penalties for U.S. citizens living in Israel. Please contact us for more information.

Direct deposit of refunds is available only to U.S. bank accounts.  Please note that each year the IRS closes the e-filing system during the 3rd week of November and electronically filed tax returns with refunds requesting direct deposit will only be electronically filed once the system reopens.

Within 60 days of a distribution from an Individual Retirement Plan (“IRA”), a taxpayer can roll over the distribution to another retirement plan tax-free. If no rollover is made within 60 days, the taxpayer is required to pay tax on the distribution at ordinary income tax rates.

Once you reach age 72* you generally must begin to withdraw funds from traditional IRAs on an annual basis and pay the required income tax. The amount of your RMD is calculated by using the IRS life expectancy tables and should be supplied to you by your investment advisor (usually 5% of the balance must be withdrawn each year). In addition, conversion to a Roth IRA can be a valuable tax planning tool for both U.S. and Israeli tax purposes. Your tax and pension advisor should be contacted in this regard.

*The age for RMD has risen to 72 years of age since 1/1/2020.

There are many circumstances where an early IRA distribution may be made without being subject to the 10% early withdrawal penalty, for example, if funds are used to purchase a first home even in Israel. The distribution amount is limited to $10,000 per taxpayer and/or spouse from each individual’s account. New in 2020, the early withdrawal penalty will not apply for up to $5,000 for childbirth or adoption expenses. In addition to the penalties assessed ordinary income tax is due on early IRA and pension withdrawals.

For 2023, the annual gifting limit for each taxpayer and spouse is $17,000 to each eligible recipient and includes children and grandchildren. Gifting continues to be an excellent way to potentially reduce the value of your U.S. taxable estate as well as future U.S. estate income taxes.  There is an inflation-adjusted exemption of $12,920,000 for 2023 on U.S. estates. Married couples may be able to shield $25,840,000 from estate and gift tax over their lifetime.

It should be noted that non-U.S. citizens investing directly in U.S. real estate or holding any other asset in the U.S. such as stocks and bonds etc. are only entitled to an Estate Tax Exclusion of $60,000. Any property valued above that amount would potentially have high estate income taxes assessed before the assets can be distributed. Please contact our office for tax planning ideas to minimize your estate tax and also with respect to writing a will.

Refunds may be available for taxpayers who may be unnecessarily filing resident U.S. State income tax returns after they have moved to Israel. You should be aware that merely maintaining a bank account, brokerage account, or driver’s license in a particular state does not automatically necessitate a tax filing in that state. However, if you own real estate, maintain a business, commute to and work in a particular state, or have any other activity considered nexus (strong connection) to a state, you will generally only file a non-resident income tax return in that state and be subject to tax only on that nexus income. Making internet sales from Israel, more than $100,000 to any one state, may require the filing and remitting of Sales Tax.  Please confer with a tax expert if you are in this situation.

Corporations may be excellent tax planning vehicles, especially for taxpayers working outside Israel and also considering Israeli tax reform. “C” Corporation tax rates are a flat 21% and have thus regained popularity. “S” Corporations, Limited Liability Companies (“LLCs”), and certain Trusts are called pass-through entities. The pro-rata share of the pass-through entity’s income must be reported on the taxpayer’s personal income tax return and is taxed at the individual’s personal income tax bracket.

Considering Israeli tax legislation and the commencement of the 2023 tax year, many of our clients may require Israeli tax services during the year. To assist with overall tax planning and compliance, we have a network of tax professionals and lawyers who assist us in this capacity. Among the services provided are:

  • New or Current Businesses for self-employed (“Atzmai”), corporations, and non-profit organizations (“Amutot”):
    1. Assistance in opening files with A.T. (“Ma’am”).
    2. Opening files with the Israeli Income Tax Authority (“Mas Hachnassah”).
    3. Opening files with National Insurance (“Bituach Leumi”).
  • Filing Israeli income tax returns:
    1. Individuals – including calculation of tax for self-employed individuals and filing for refunds based on charitable deductions
    2. Corporations – including full bookkeeping, write-up, and audit.
    3. Non-profit organizations – including bookkeeping, write-up and audit.
    4. Assistance with filing for the Israeli Tax Amnesty Program.
  • Representation before the Israeli Income Tax Authority, V.A.T., and Bituach Leumi in cases of audit or correspondence received.

Israeli Tax Tidbits

  1. Payments made to the Israeli Tax Authority before January 31, 2024, for taxes incurred in 2023, will be exempt from linkage and interest. If you think that you may owe tax you are welcome to send your information to Ruchi Lefkowitz, CPA, in our Israeli tax department, ([email protected]) who can assist you in calculating an amount for an estimated payment.
  2. To help reduce your overall Israeli tax burden you can make contributions before December 31, 2023, to your retirement funds. Depending on your gross income, there is a maximum amount that you can benefit from when you contribute to your Kupat Gemel or Keren Hishtalmut. If you would like an exact calculation based on your own numbers, please contact Ruchi at 02-568-4608.
  3. A tax credit of 35% of your charitable donations against your overall Israeli income tax liability is available provided you have contributed more than 200 shekels and that the charities are authorized under section 46(A) of the income tax ordinance. There is a maximum contribution allowed which is either 30% of taxable income or 10,198,808 shekels.
  4. Inventory count

In a business that has inventory, it is necessary to conduct a complete count of the inventory (known as a physical count).

The inventory count should be accurate for 12/31/23.

(The physical count could be done starting from 12/20/23 until 01/10/24 on one condition; that there would be an exact listing of the inventory transactions on 12/31/23). The inventory value should be adjusted to 12/31/23.

  1. Osek Patur – עוסק פטור

Since 2016, an Osek Patur must report to the VAT authorities. The VAT Report needs to be submitted by 2/28/24. The maximum income for an Osek Patur is 107,692 ILS for 2023.

For your convenience, the 2023 Israeli Income tax rates are listed below.

Marginal Tax Bracket Total Income NIS
10% 81,480
14% 81,481 – 116,760
20% 116,761 – 187,440
31% 187,441 – 260,520
35% 260,521 –  542,160
47% 542,161 – 698,280
50% 698,281 and up
An additional 3% tax will be added on taxable income above 698,280 NIS
  1. Rent of personal residence will be exempt up to 5,470 ILS per month. Clients who chose the 10% tax rate for rent should pay a 10% deposit by 1/31/2024.

KEEPING PERSONAL INFORMATION SAFE

There are many articles you can research on the web on the topic of safeguarding your personal information.

Here are some tips:

  • The IRS never calls or emails a taxpayer. Do not respond to any IRS e-mail requests.
  • Do not disclose your Social Security number or birthdate on the phone unless you initiate the call, and it is necessary.
  • Do not send credit card information by e-mail or social platforms.
  • Have an updated firewall and anti-virus protection installed on all computers.
  • Safeguard your Social Security number and shred all notices stating Social Security numbers before disposing of them.

Alan (Avraham) Deutsch is a CPA, with over 35 years of experience. Alan and his associates specialize in U.S. and Israeli income tax planning and compliance as well as in investment consulting. He and his family made Aliyah in 1993.  He lectures frequently in the U.S. and Israel and his articles appear in various publications. Deutsch and Associates have seven office locations throughout Israel. Alan can be reached at 02-999-2104, 03-527-3254, 09-746-0623, or 052-274-9999, or you can e-mail him at [email protected]. Please visit his website at www.ardcpa.com for more information.

The materials provided in this presentation and any comments or information provided by the presenter are for educational purposes only and nothing conveyed or provided should be considered legal, accounting, or tax advice. The content presented here represents information and opinions of the guest writers and not Nefesh B’Nefesh.

Please contact your own tax attorney, accountant, or tax professional with any specific questions you have related to the information provided that is legal, accounting, or tax nature.

*Last updated on January 25, 2024*

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