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Last update - 02:37 05/03/2004
Bottom Dollar / Tax masks
By Alan R. Deutsch

It's Purim time and this year's question is which mask to use, that of Uncle Sam (U.S.) or that of Uncle Moshe (Israel). The reason is that Purim often coincides with the height of the income tax filing season, which is now well underway in both the U.S. and Israel.

This year's tax season will be much more involved for many of you than in the past, since filing income tax returns and paying tax is now generally required by both countries. (Don't forget however, as previously mentioned, that certain exemptions exist for immigrants living in Israel for less than 10 years).

One primary question will be which country - the U.S. or Israel - receives the income tax payment (a.k.a. "the first bite"), and which country provides credit for payment made to the other country. The answers to this, and other related questions, are quite complex, and different interpretations of the U.S.-Israel Income Tax Treaty, Israeli Income Tax Ordinance and U.S. Internal Revenue Code exist.

However, TRAC - the Tax Reform Action Committee, which was spearheaded by the AACI and headed by Yitzchak Heimowitz and Max Weil - last week issued a consensus, drafted primarily by attorney Eli Clark, regarding different types of income. The report's main recommendations follow (For the entire TRAC report, please contact AACI).

l Regarding U.S. source pensions: Pending clarification of many issues, TRAC recommends that income tax on U.S. pensions received by U.S. citizens resident in Israel should be paid as an initial matter to the United States. A credit for U.S. tax paid should then be claimed on the taxpayer's Israeli tax return.

l Regarding U.S. source dividends: In general, TRAC recommends that income tax on U.S. source dividends received by U.S. citizens resident in Israel be paid as an initial matter to the United States.

l Regarding U.S. source interest: Pending clarification of many issues, TRAC recommends that income tax (at any applicable rate) on U.S. source interest received by U.S. citizens resident in Israel be paid as an initial matter to the United States. A credit for U.S. tax paid should then be claimed on the taxpayer's Israeli tax return.

l Regarding U.S. source capital gains: Pending clarification of many issues, TRAC recommends that income tax on U.S. source capital gains received by U.S. citizens resident in Israel be paid as an initial matter to the United States. A credit for U.S. tax paid should then be claimed on the taxpayer's Israeli tax return.

TRAC will actively seek a conclusive directive from the respective authorities in Israel and in the United States and emphasizes that the above are interim recommendations only and do not constitute tax advice.

Dear Alan, We are retired and moved to Israel 5 years ago. Our gross income is about $ 100,000 including $ 20,000 of U.S. Social Security Benefits, and our Federal and New York income tax returns are prepared by our U.S. accountant in New York, who has done our returns for 30 years. We recently heard from a friend that U.S. citizens living in Israel are exempt from paying U.S. income tax on U.S. Social Security Benefits received. If that is true, it seems that we are paying $ 5,000 a year too much to the IRS. Please shed light on this. And are we also liable for New York taxes? Thank you, Fred and Joanna Berger

Dear Fred and Joanna, Unfortunately it appears that your U.S. accountant in New York has done you a disservice. I have seen this time and time again, where U.S. citizens make aliyah and sever close ties with practically everyone and every institution except their accountant.

According to the U.S.-Israel income tax treaty, your Social Security benefits received would be excludable from gross income. As such, you can apply for refunds for the past three years and get substantial refunds. You also may be paying too much to New York. Generally, you would be obligated to pay tax to New York if a nexus existed such as if you work there (commute), own real estate or a partnership or business, etc. If none of these exist, you may not even be required to file a New York income tax return and may also be eligible for substantial refunds. Merely having a bank or brokerage account or New York drivers' license would not require you to file New York income tax returns.

Dear Alan, We live in Israel and itemize our deductions due to high amount of charity give. What other items are deductible? John and Rena Meller

Dear John and Rena, mortgage interest paid to an Israeli bank and arnona (Israeli real estate tax) are generally also deductible. Your U.S. charity may or may not be deductible depending primarily upon whether the charity would meet the U.S. requirements as a charitable organization.

Alan (Avraham) R. Deutsch, CPA, MBA, APC and is a specialist in tax planning and compliance and investment consulting. Contact him at alan-cpa@netvision.net.il for his tax planning newsletter.