Thank you to Avraham Deutsch’s office for authoring this article.
U.S. and Israel Tax Compliance-General Guidelines (for Tax Filings in Year 2020)
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 accounts balances via an annual FBAR (Foreign Bank Account Report).
U.S. Citizens and Green Card Holders (Resident Aliens)
If you are a U.S. citizen or resident alien, your worldwide income generally is subject to U.S. income tax regardless of where you are living. As such, you are subject to the same income tax filing requirements that apply to U.S. citizens or resident aliens living in the United States.
Foreign Earned Income Exclusion for U.S. Persons Living in Israel
Internal Revenue Code Section 911 deals with the foreign earned income exclusion and housing exclusion and deduction. As such, income tax benefits may apply if you meet certain requirements while living in Israel. Individual tax filers, or each spouse filing jointly, may qualify to treat up to $103,900 ($207,800 for joint filers) of income earned in Israel as not taxable by the United States. You also may be able to either deduct part of your housing expenses from your income or treat a limited amount of income used for housing expenses as not taxable by the United States. These benefits are called the foreign earned income exclusion and the foreign housing deduction respectively. As new Olim, in order to qualify for either the exclusion or the deduction, you must have both a tax home in Israel and earn income from personal services performed in Israel.
Foreign Earned Income Exclusion Eligibility (via IRS Form 2555)
You must meet at least one of the following two tests:
- Bona Fide Resident Test
You meet the bona fide residence test if you are a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. You can use the bona fide residence test to qualify for the foreign earned income and foreign housing exclusions and the foreign housing deduction only if you are either:
- A U.S. citizen
- A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect.
(Please note that, you do not automatically acquire bona fide resident status merely by living in a foreign country or countries for one year.)
- Physical Presence Test
You meet the physical presence test if you are physically present in a foreign country or countries for at least 330 full days during a period of 12 consecutive months. The 330 qualifying days do not have to be consecutive. The physical presence test applies to both U.S. citizens and resident aliens.
The physical presence test is based only on how long you stay in a foreign country or countries. This test does not depend on the kind of residence you establish, your intentions about returning to the United States, or the nature and purpose of your stay abroad. However, your intentions with regard to the nature and purpose of your stay abroad are relevant in determining whether you have a tax home in a foreign country
Generally, to meet the physical presence test, you must be physically present in a foreign country or countries for at least 330 full days during the 12-month period. You can count days you spent abroad for any reason. You do not have to be in a foreign country only for employment purposes but can also count vacation time.
You do not meet the physical presence test if illness, family problems, a vacation, or your employer’s orders cause you to be present for less than the required amount of time. However, the minimum time requirement can be waived if you must leave a foreign country because of war, civil unrest, or similar adverse conditions in that country. You must be able to show that you reasonably could have expected to meet the minimum time requirements if not for the adverse conditions, and that you had a tax home in the foreign country and were a bona fide resident of, or physically present in, the foreign country on or before the beginning date of the waiver.
Resident alien. A resident alien is an individual who is not a citizen or national of the United States and who meets either the Green Card test or the substantial presence test for the calendar year.
- Green card test: You are a U.S. resident if you were a lawful permanent resident of the United States at any time during the calendar year. This is known as the green card test because resident aliens hold immigrant visas (also known as “Green Cards”).
- Substantial presence test:You are considered a U.S. resident if you meet the substantial presence test for the calendar year. To meet this test, you must be physically present in the United States on at least:
- 31 days during the current calendar year, and
- A total of 183 days during the current year and the 2 preceding years, counting all the days of physical presence in the current year, but only 1/3 the number of days of presence in the first preceding year, and only 1/6 the number of days in the second preceding year.
Expatriation from the U.S.
Expatriation tax provisions apply to U.S. citizens who have renounced their citizenship and long-term residents who have ended their residency. Please contact our office to review the tax ramifications and other consequences of expatriation.
Social Security tax benefits: Per Article 21 of the U.S.-Israel Income Tax Treaty, U.S. Social Security benefits paid to U.S. citizens residing in Israel are exempt from income tax in both the U.S. and Israel. This represents potential big tax savings for new Olim.
U.S. Federal Tax Filing requirements
If you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and for paying estimated tax are generally the same whether you are in the United States or abroad.
Your income and filing status generally determines whether you must file an income tax return. Generally, you must file a return for 2019 if your gross income from worldwide sources is at least the amount shown for your filing status in the following table.
|Single 65 or older||$14,000|
|Head of household||$18,350|
|Head of household 65 or older||$19,950|
|Married filing jointly||$24,800|
|Married filing joint – 65 or older||$25,600|
|Married filing jointly – both over 65||$26,800|
|Married filing separately||$5|
Net Investment Income Tax
In addition to regular income tax rates, the U.S. imposes an additional 3.8% net investment income tax on income exceeding certain levels ($200,000 for single filers and $250,000 for taxpayers filing married filing jointly). Proper tax planning must be done in order to avoid or minimize this assessment.
State and Local Tax Filing Requirements
While the United States bases its tax system on citizenship, State and Local governments generally base their tax systems on residency. As such, once you make Aliyah you generally will not be taxed in a State unless you have nexus or income derived from that State, such as work, investment or real estate rental income. Merely having a driver’s license or financial account in a State will generally not subject you to income tax in that State.
Self-employed persons: If your net earnings from self-employment are $400 or more, you must file a U.S. tax return even if your gross income is below the amount listed for your filing status in the table shown earlier. Proper U.S. tax planning is advisable for certain self-employed persons in order to avoid (or reduce) paying U.S. Social Security taxes.
The U.S. Expatriate Tax Calendar
- The last deadline to pay estimated Federal income taxes on your 4th quarter voucher of the previous tax year.
- S. “S” Corporations, partnerships & fiduciaries must file a tax return or extension.
- Tax liabilities for the tax year should be paid on this date in order to avoid accruing late payment interest and penalties.
- First quarter of the current tax year to pay the Federal estimated taxes and also to file an extension with the Federal and State tax authorities if you cannot qualify to be considered a U.S.
- Deadline for filing a “C” Corporation tax return.
- This is an important date for U.S. expatriates. This is the first deadline to file a U.S. tax return and FBAR (FBAR deadline coincides with your tax return deadline). You could file an extension to October 15th to file your U.S. tax return.
- The deadline for your second estimated tax voucher payment.
- Third estimated tax voucher payment is due.
- This is the final filing deadline for filing an “S” corporation and partnership tax returns on extension.
- Deadline to file Fiduciary tax returns on extension
- Deadline to file U.S. tax return unless you would need an additional two-month extension until December 15th.
- FBAR filing deadline.
- This is the final filing deadline for filing an “C” corporation and partnership tax returns on extension.
- Last deadline to file a U.S. income tax return, if an extension has been granted.
Why you need to become tax compliant in both U.S. and Israel?
Important tax rules and regulations permeate the U.S. Internal Revenue Code and the Israeli Income Tax Ordinance. As such, please be advised of the following important rules:
- Exchange of Tax Information – Under the Foreign Accounts Tax Compliance Act (FACTA) and Intergovernmental Agreement (IGA) signed between Israel and the United States, an exchange of tax information between the two countries commenced during 2016. Israeli banks are now required to issue FORM 1099 (or similar form) to U.S. citizens and to transmit the tax information directly to the IRS. Reciprocally, in 2017, Israel has begun to receive U.S. tax information on its citizens directly from the U.S.
- The U.S. Highway Funding legislation has already started the process of revocation or denial of U.S. passports for taxpayers with an outstanding balance of over $52,000 to the IRS. 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 U.S. passport would still be considered valid and will generally not be revoked.
Israeli Tax Rules
The Israel tax system is governed by the Israel Tax Ordinance. Income earned in Israel by new Olim is taxable in Israel, whether as a wage earner, as a self-employed individual, or as a corporate shareholder.
As of 2003, Israel also changed its tax regime for reporting foreign (non-Israeli) income to a worldwide income basis akin to the U.S. In addition to the regular tax on Israeli source income, Israel structures its tax system on residency which is based upon your “center of vital interests”. Factors to determine residency include objective and subjective tests, including:
- Days spent in Israel
- Where the work is performed
- Where your family resides
- Where your assets are held
- Where your social networks are maintained.
New Olim have a ten-year tax exemption from Israeli tax on passive income derived outside of Israel (e.g. interest, dividends, capital gains, rentals, pass-through income and pensions). Wages or self-employment income earned in Israel is subject to Israeli tax immediately, but reduced Israeli income tax rate exists for new Olim (generally phased out over the first 3 ½ years after aliyah). Wages earned while physically present in the U.S. or any other country are generally exempt from Israeli tax for ten years. The Deadline for filing an Israeli income tax return is generally April 30, but extensions are available.
New businesses in Israel must generally open and maintain 3 files with the Israeli tax authorities:
- VAT (Value Added Tax)
- Income Tax (Mas Hachnasa)
- Bituach Leumi (Social Security).
Please contact your tax advisor for more details on how (and whether) to open a sole proprietorship or an Israeli corporation or other entity.
It is imperative that you familiarize yourselves with certain concepts regarding both U.S. and Israeli income tax law and how they may affect your personal situation. Proper tax planning and minimization of your taxes requires an analysis of many important issues, including the interplay between the U.S. and Israeli foreign income tax credit rules, the foreign earned income exclusion rules, and also how the applicable provisions of the U.S. – Israel income tax treaty affects your tax situation.
Israeli Income Tax Rates
The ordinary Israeli income tax rates for the 2019 tax year are 10%, 14%, 20%, 31%, 35% and 47% respectively. An additional 3% tax is due on higher income levels. You may be eligible to receive a refund of up to 35% of charitable contributions against your Israeli tax paid if you contribute to recognized Israeli charities.
For your convenience herewith are the 2018 Israeli tax tables.
|Marginal Tax Bracket||Total Income (NIS)||Total Taxes (NIS)|
|An additional 3% tax will be added on taxable income above 641,880 NIS|
Trusts and Estates
Beneficiaries of U.S. Trusts living in Israel and U.S. citizens requiring estate planning may also be subject to both U.S. and Israeli reporting requirements. Please contact your tax advisor if you have any type of trust to discuss the complex U.S. and Israeli compliance requirements.
U.S. Persons owning Israeli (and Other Foreign) Corporations
In general, and in accordance with the U.S. Tax Cuts and Jobs Act, U.S. persons who own more than 50% of the voting power or value of a foreign corporation are considered to be owning a Controlled Foreign Corporation (“CFC”). Complex rules apply including the Global Intangible Low-taxed income (“GILTI”) rules. Please contact your tax advisor to properly plan in these areas.
Choosing your CPA in the Future
When you make Aliyah you generally move away from your family and choose new banking relationships. It makes sense that you must also prudently decide on which experienced CPA will assist you with future U.S. and Israeli tax compliance and planning.
- S. based CPAs must have knowledge of U.S. expatriate taxation or else you may end up paying too much U.S. and State income tax.
- S. Israel Income Tax Treaty rules can exempt certain items from income tax (i.e. U.S. Social Security received while living in Israel is exempt from U.S. tax).
- State taxes – in most cases after making Aliyah you will not be subject to State income tax unless you have a nexus issue, (such as: work in a State, maintain real estate in a State, or have business interests in a State.)
- After Aliyah, if you have nexus issues your income would generally be reported as non-resident income on your State income tax return.
IRS Streamlined Procedures for Non-Compliant U.S. Taxpayers Living Abroad
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 designed a streamlined procedure to allow taxpayers to enter 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 that have resided outside the U.S. and have not filed U.S. income tax returns for at least 3 years. 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) writing a detailed explanation, delineating your non-willfulness and delinquency and attaching it to your tax returns, d) spending no more than 35 days in the US during at least 1 of the three years. The IRS will expedite the review process and may not assess penalties for taxpayers filing under this procedure.
Under the Bank Secrecy Act, a Foreign Bank Account Report (FBAR) must be e-filed annually with the U.S. Treasury by October 15th, if the following criteria apply:
- 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 having a financial interest in the company’s accounts.
- ii)The aggregate value of all foreign financial accounts exceeds $10,000 or the equivalent amount in foreign currency (e.g. 35,000 NIS or more) at any time during the calendar year.
iii) Foreign financial accounts include, but are not limited to, both checking and savings accounts, Israeli pension accounts, brokerage accounts, mutual funds and unit trusts.
The Form 8938 (Statement of Foreign Financial Assets) must be filed with your U.S. income tax return (in addition to your FBARs), if you live in Israel (or abroad) and
- i) 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
- ii) Your foreign financial accounts exceed $600,000 (filing joint) or $300,000 (filing single) at any time during the tax year.
Please be advised that non-filing of an FBAR or IRS Form 8938 can lead to the IRS imposing severe penalties of $10,000 or more in many cases.
Passive Foreign Investment Company (“PFICs”)
Most investments in mutual funds registered outside the U.S. pose a potentially complicated tax issue for U.S. taxpayers. Whereas U.S. registered mutual funds report gains and losses annually to the IRS and to taxpayers, foreign mutual funds do not. The IRS has termed foreign mutual funds as PFICs. PFIC investments, when sold at a profit, have to report to the IRS the income 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. In addition, prior year PFIC income is ordinary income and therefore not eligible for capital gain rates. Also, since PFIC losses are limited, investing in a PFIC can become an expensive proposition for a taxpayer who has a U.S. filing requirement. We recommend discussing this issue with your tax and investment advisor as there are alternative investments not subject to PFIC rules.
Israeli banks as well as some other financial institutions are now requiring customers to sign a U.S. form W-9 (or W8-BEN for non U.S. citizens) to open or continue banking with your financial institution. In many cases your Israeli bank may require that you sign a declaration that the last 3 years of U.S. income tax returns and FBARs have been duly filed.
Individual tax identification numbers (“ITIN”) are required on every tax return submitted to the IRS which includes a non-U.S. citizen. U.S. citizens must have a Social Security number that is used for all tax filings. A non-U.S. citizen with a U.S. tax filing requirement must obtain an ITIN before submitting a tax return to the Internal Revenue Service. Our office can assist you with obtaining an ITIN if required. In addition, a U.S. citizen can generally elect to have a non-U.S. spouse included in a U.S. tax return if it assists in reducing taxes.
U.S. Income Tax Rates
The U.S. income tax rates for the current tax year (2019) are 10%, 12%, 22%, 24%, 32%, 35% and 37%. Under the “stacking rule”, in order to determine your income tax bracket, income excluded on Form 2555 (Foreign Earned Income Exclusion) will be added back to adjusted gross income. As a result, investment income may potentially be taxed at a higher tax bracket.
Foreign Tax Credits
A U.S. foreign tax credit may generally be claimed from non-U.S. taxes paid on income earned in a foreign country such as Israel. Conversely, Israel will also recognize income taxes paid to the U.S. and apply them as a credit against your Israeli income tax liability.
Social Security Benefits Received by a U.S. Citizen Residing in Israel
The U.S. – Israel Income Tax Treaty states that U.S. citizens that 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, our office can assist you with your amended tax returns (up to three years retroactively) to potentially receive large refunds.
Foreign Earned Income Exclusion
The foreign earned income exclusion has been adjusted for inflation and has increased to $105,900 per taxpayer. As such, married taxpayers filing jointly, who meet certain requirements, may potentially exclude up to $211,800 of foreign earned income per tax return. However, one spouse may not utilize the unused portion of the exclusion of the other spouse. By electing the exclusion, you may preclude eligibility for the U.S. child credit. Please note that this exclusion applies only to work or self-employment income and does NOT apply to other passive income such as pension, investment income, rental or any other non-earned income.
Long Term Capital Gains and Qualified Dividends
Rates on long term capital gains (whether derived in the U.S., in Israel or in another country) generally apply to assets held for more than one year. For single taxpayers with taxable income under $39,375 and for taxpayers filing jointly with taxable income under $78,750 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 in excess of capital gains may offset up to $3,000 of ordinary income if married filing jointly. Net capital losses in excess of $3,000 may be carried over indefinitely to future years.
Net Investment Taxes
Beginning in 2013 the IRS has 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, are dividends from your foreign-owned corporation. The tax on this income cannot be taken as a credit for Israeli tax purposes. Therefore, it may 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 department for more details.
Section 199A New Deduction for Qualified Business Income (QBI)
For tax years beginning after December 31, 2017, taxpayers other than corporations will generally be entitled to a deduction for each taxable year equal to the sum of:
- The lesser of (A) the taxpayer’s “combined qualified business income amount” or (B) 20 percent of the excess of the taxpayer’s taxable income for the taxable year over any net capital gain plus the aggregate amount of qualified cooperative dividends, plus
- The lesser of (A) 20 percent of the aggregate amount of the qualified cooperative dividends of the taxpayer for the taxable year or (B) the taxpayer’s taxable income (reduced by the net capital gain).
A taxpayer’s combined qualified business income amount is generally equal to the sum of (A) 20 percent of the taxpayer’s qualified business income with respect to each qualified trade or business plus (B) 20 percent of the aggregate amount of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership income.
Definition of Qualified Trade or Business
A qualified trade or business includes any trade or business other than a “specified service trade or business” or the trade or business of performing services as an employee. A specified service trade or business means any trade or business involving the performance of services in the fields of health, law, accounting, actuarial sciences, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners, or which involves the performance of services that consist of investing and investment management trading, or dealing in securities, partnership interests, or commodities.
Specified Services Limitation
The specified service trade or business exclusion does not apply to the extent the taxpayer’s taxable income does not exceed certain thresholds: $415,000 (joint filers) and $207,500 (other filers). Application of this exclusion is phased-in for income exceeding $315,000 and $157,500, respectively. In computing the QBI with respect to a specified service trade or business, the taxpayer takes into account only the applicable percentage of qualified items of income, gain, deduction, or loss, and of allocable W-2 Wages and qualified property.
|Filing Status||Income Threshold Amount|
|Married filing jointly||$250,000|
|Married filing separately||$125,000|
|Head of household (with qualifying person)||$200,000|
|Qualifying widow(er) with dependent child||$250,000|
U.S. Child Tax Credit
A U.S. Taxpayer identification number (SSN) is now required by the due date of tax return. If you do not have a Social Security Number (SSN) for your dependent by the due date of your 2019 return (including extensions), you may not be able to claim the child tax credit (CTC) or the additional child tax credit (ACTC). This applies to your original or amended 2019 tax return, even if you get the SSN at a later date. (i.e. a child born in March, 2019 has until December 15, 2020 to receive a Social Security Number and still be eligible to claim the child credit.) Taxpayers who exclude earned income, currently up to $105,900 (per taxpayer) on their 2019 joint tax returns will not be eligible to receive a child credit even if only one taxpayer uses the exclusion. Please be advised that the credit may not be able to 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, in order to avoid missing a year of child credit.
Starting with 2018 tax returns, the child credit increases to $2,000 but the refundable portion is limited to $1,400. The phase-out income level also increases significantly, which will allow more, higher-income earners to qualify for the credit. Single taxpayers or those taxpayers whose filing status is married filing separately, can have adjusted gross income up to $ 200,000, and married taxpayers filing jointly can have adjusted gross income up to $ 400,000, and still be eligible for a refundable child tax credit.
If applicable, $2,000 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 in excess of $3,000. 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. Children must be U.S. citizens aged 16 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 credit can be quite complicated since there are many factors to consider. In addition, the IRS has the ability to conduct income tax audits which may require verification of income and other pertinent information.
Estates and Gifts
In 2019, the annual gifting limit for each taxpayer and spouse is $15,000 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 $11,400,000 on U.S. estates. 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.
State and Local Tax Returns
Refunds may be available for taxpayers who may be unnecessarily filing resident U.S. State income tax returns after they moved to Israel. You should be aware that maintaining a bank account, brokerage account or driver’s license in a particular State does not automatically necessitate a tax filing in that particular 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 would generally only file a non-resident income tax return in that State.
Standard Deduction amounts are as follows: Single or Married Filing separately – $12,400; Married Filing Jointly – $24,800; Head of Household – $18,350. Taxpayers over the age of 65 may claim an additional deduction of $1,300 each, if married, or $1,600 if single. Taxpayers with qualifying deductions in excess of 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
Starting with your 2018 tax return, personal exemptions have been eliminated. They have been replaced by an additional $600 child credit for dependents and a $500 tax credit for non-child dependents. Both of these credits will only offset tax, but are not refundable.
In order to qualify for future U.S. Social Security retirement benefits one must pay in to 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 earning in excess of $5,500 annually. This is primarily accomplished by:
- i) Being self-employed in Israel and reporting Israeli self-employment income on your U.S. income tax return,
- ii) Working in Israel for a U.S. entity and receiving a Form W-2 (employee) or Form 1099 (independent contractor),
iii) Traveling to the U.S. to work as an employee (W-2) or as a self-employed individual (1099).
Automatic Extension, Estimate Tax Payments and Automatic Withdrawals
Automatic income tax return extensions are available until June 15 of the current tax year 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 15, while penalties will begin to accrue after June 15. Filing an extension will extend the time to file until October 15, and an additional extension may generally be granted until December 15, but certain restrictions may apply. It is strongly recommended that taxpayers who owe income tax but do not file by June 15Th should make a payment with their extension. For the upcoming year, it is imperative that taxpayers pay estimated taxes on a timely basis in order 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 withdrawal from your U.S. bank or other financial account.
Tax Retirement Plans/Required Minimum Distributions (“RMD”)
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 70 1/2 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. 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.
Avoiding Early Withdrawal Penalties from Retirement Funds
An early IRA distribution may be made without being subject to the 10% early withdrawal penalty provided the 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. The early withdrawal penalty will also not apply in certain circumstances such as medical premium payments or higher educational expenses.
Higher Education Credit
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 [please note, for 2018 only the credit is available.] The credit is generally available for U.S. universities and for certain foreign 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, married filing separately provides no eligibility for AOC.. To claim the AOC a student must receive a Form 1098-T or its equivalent that contains the Tax Identification Number of the university. Students at accredited universities outside of the U.S. will not receive a 1098-T, but may still be eligible to claim the credit.
Corporations, LLC’s and Trusts
Corporations may be excellent tax planning vehicles, especially for taxpayers working outside Israel and in light of Israeli tax reform. “C” Corporation tax rates for 2018 have been reduced from 35% to a flat 21% and have thus regained popularity.
“S” Corporations, Limited Liability Companies (“LLC’s”) 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. Starting in 2018, income from pass-through entities above $315,000 will be taxed at a maximum rate of 21%, and there are adjustments to income that will be applied.
Alan (Avraham) Deutsch is a CPA, with over 30 years’ experience. Alan and his associates specialize in U.S. and Israeli income tax planning and compliance as well as in investment consulting. Alan has seven office locations and 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@example.com. Please visit his website at www.ardcpa.com for more information.