Guide to U.S. Expat Taxes in Israel
If you are a United States citizen living in a foreign country like Israel, you might be obligated to pay taxes in both countries. While being taxed twice can get expensive, there are ways to reduce the money you owe.
The United States and Israel have different sets of factors they use to determine who should be paying taxes. Whether a person must pay taxes in the United States often depends on citizenship and residency status. In Israel, a somewhat looser determination is made based on areas of vital interest, like property ownership, business dealings, and how long you are in the country. If you live in Israel, you might have to pay taxes there in addition to US federal income taxes. The American foreign tax credit can help you reduce the amount of money you owe the US government. You might also have options for reducing your taxes while living and working in Israel.
Call our CPAs at US Tax Help at (541) 362-9127 for assistance with your international tax situation.
Paying Taxes in the United States and Israel
Being an expat and living abroad definitely has its perks. However, you must always be mindful of your tax situation. Living in a different country like Israel does not necessarily relieve you of your tax obligations in the United States. On top of that, Israel might expect you to pay taxes, depending on your situation. Our CPAs can help you determine what kind of taxes you might owe, how to pay them, and how to reduce them if possible.
The United States imposes taxes largely based on citizenship. As an expatriate living in Israel, you might still be on the hook for federal income taxes. You likely will not need to worry about state taxes because you are technically not a resident of any state in the union.
How the United States assesses your taxes might depend on where you earn your money. For example, suppose you are a U.S. citizen living in Israel and own a business based in and operating from the United States. In that case, it might be difficult to avoid federal income taxes. However, if you have a job or own a business in Israel, your income earned abroad might be taxed differently or not at all, as discussed in more detail below.
Israel might tax you based on how deep your connections are within the country. Sometimes called a “center of life” test or a test of “areas of vital interest,” Israel might consider a tax resident if you have strong connections to Israel. Factors like property ownership, renting, residency, employment, and business relations might all be considered.
As an American expat, you might not be a legal citizen of Israel. However, if you live in Israel full-time, have a job, or own a business within Israel, you might be considered a tax resident. Remember, you do not have to have Israeli citizenship to be considered a tax resident.
Claiming an American Foreign Tax Credit While Paying Taxes in Israel
One way of reducing the money you owe in taxes is to claim a foreign tax credit in the United States. A foreign tax credit may be applied to income you earn that is taxed both in Israel and the United States. You may not typically apply this credit to other taxable assets, like property taxes.
This tax credit may be claimed on your U.S. taxes by filing Form 1116. The way it works is that you would pay Israeli taxes on your income first. Next, when you file your U.S. federal taxes, you may claim this credit and reduce your taxable income. For example, if you paid $1,000 in taxes on your income to Israel, and the United States wants to tax that same income, you may claim a $1,000 tax credit by filing Form 1116.
Paying Taxes in the U.S. While Earning Income in Israel
If your income is derived from sources in Israel, you might be eligible to take advantage of the foreign earned tax exclusion. If you meet the criteria for eligibility, the income you earn in Israel can be excluded from your taxable income in the United States, thus lowering your federal income taxes.
If you are a United States citizen and a lawful bona fide resident of a foreign country for a continuous period that includes a total tax year, you are eligible for this exclusion. This means that American expats living and earning income in Israel can likely exclude their wages earned in Israel from their U.S. taxes.
For example, if you live in Israel and earn a significant portion of your income in Israel, that portion of your income, up to a certain extent that is regularly adjusted for inflation, may be excluded from your U.S. taxes.
Other Ways to Reduce Your Taxes While Living or Working in Israel
Depending on your living situation in Israel, there might be additional ways you can avoid heavy taxes from the U.S. or Israel. One way is to use housing expenses you pay in Israel as an exclusion or deduction on your U.S. taxes.
The foreign housing exclusion may apply to certain expenses paid for by employer-provided money. This includes income paid to you by an employer in Israel or housing expenses paid for by your employer that are considered part of your taxable foreign income. The foreign housing deduction is similar but only applies to housing expenses paid for through self-employment income.
Figuring out foreign housing exclusions or deductions can be complicated, and numerous figures must be calculated before we figure this out. Your foreign housing amount is determined by taking your total foreign housing expenses (e.g., rent, mortgage payments, utilities) and subtracting what is known as the base housing amount. Your base housing amount is determined on Form 2555 and is connected to your maximum allowable foreign earned income exclusion. You might need help figuring this out, and we are here to assist.
Call US Tax Help for Assistance with Your American and Foreign Taxes
Call our US tax accountants at US Tax Help at (541) 362-9127 for guidance and help with your international tax situation.