This article is by Ron Zalben CPA (US/Israel)

First right to tax capital gains from stocks and property in the US

A US citizen who is a resident of Israel (with the assumption that the Israeli resident is not in the 10 year exemption period) who sells US corporate stock will pay the first right of tax to Israel on the capital gain (generally the sales price less the original cost). This is the situation where the US citizen does not own more than 10% of the stock of the company, in the situation where the US citizen owns more than 10% of the stock the US has first right to tax the capital gain.

The reason that Israel has the first right to tax the stock in the situation where the US citizen owns less than 10% of the stock is due to the tax treaty between the US and Israel. There are several paragraphs when combined in tandem in the treaty that give Israel the first right to tax these stocks. The US then gets a secondary right to tax the capital gain. In the situation of a long-term capital gain the taxpayer pays a 25% tax to Israel and because the maximum tax rate in the US is 20% generally no additional tax is paid to the US-there are some exceptions to this since there are complex rules regarding the foreign tax credits. In the situation of a short-term capital gain it is possible that the taxpayer may have to pay additional tax to the US since the maximum capital gain rate in the US is 37% and the capital gain is taxed at 25% in Israel-In this situation the taxpayer will pay an additional 12% to the US. In the situation where the short term capital gain rate is less than 25% in the US the tax payer will not pay any additional tax to the US.

In the situation where the taxpayer owns more than 10% of the US stock the US will have the first right to tax the capital gain and Israel will give a credit for the US tax due. In the situation where a taxpayer sells property in the United States the first right to tax the capital gain will be to the US. A credit for both US federal taxes as well as state tax can be claimed as a credit against Israeli taxes. City taxes cannot be claimed as a credit against Israeli taxes.

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