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.
U.S. Taxes
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.
Israeli Taxes
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.
Who is Required to Pay Taxes in Israel?
Determining whether a U.S. expat needs to pay taxes in a foreign country can take time and effort. A person’s legal tax obligations vary by country. It is important to contact our team so we can help you figure out if you are considered a tax resident of Israel.
Israel’s laws regarding whether someone is considered a tax resident are somewhat subjective. A person may be a tax resident of Israel and obligated to pay Israeli taxes if their “center of life” is in Israel. But what does this mean, exactly?
Whether Israel is the center of your life depends on various subjective criteria. For example, your familial, social, and economic ties to Israel may be used to help establish tax residency. If you have family in Israel, do business there, and are considered a member of a local community in the country, you might be a tax resident. These factors are very subjective. Satisfying one or more of them might not automatically make you a tax resident of Israel.
You should also consider whether you earn income from Israeli sources. For example, you might work for an Israeli company or have interests in Israeli investments. Remember, simply earning money while living in Israel does not automatically make you a tax resident. You might be working in Israel, but your income derives from an American company.
How to Tell if a U.S. Expat is an Israeli Tax Resident
As mentioned above, determining whether someone is a tax resident can be a complicated process. While you might check some important boxes on the list of criteria for tax residents, these factors generally must be considered altogether based on the totality of the circumstances.
As said, your center of life must be in Israel. Family, economic, and social ties are considered. If you have a permanent home in Israel, your family lives with you in Israel, your regular place of business or employment is in Israel, and you have active and substantive economic interests in Israel, you might be deemed a tax resident.
If you meet certain, more objective criteria, it may be assumed that you are a tax resident. Remember, this is a rebuttable presumption. Even if you meet the following criteria, we might still argue that you are not considered a tax resident.
If you spent 183 days or more in Israel during the last tax year, you may be presumed to be a tax resident. Alternatively, if you spent at least 30 days in Israel during the last tax year and the total duration of your stay during this tax year and the two prior is at least 425 days, you may be presumed to be a tax resident.
What Do Taxes in Israel Look Like for U.S. Expats?
If you are considered a tax resident of Israel, you may be obligated to pay taxes on your income derived from Israeli sources. The tax rate in Israel may differ from that in the United States, and it is important to have a tax professional help you with your taxes in both countries.
If you earn less than $77,400 from an Israeli source, you are taxed at a rate of 10%. The more income you earn, the higher the tax rates become. If you earn at least $77,400 but less than $110,880, you are taxed at a rate of 10% on the first $77,400 of income and 14% on anything in excess of that amount. The highest tax bracket is for those making more than $663,240. Tax residents must pay $210,697 plus 50% of any income in excess of this amount.
There might also be other tax obligations in addition to personal income tax. For example, you might have to pay capital gains tax on investments based in Israel. Capital gains taxes in Israel may range from as low as about 15% to as high as about 30%. If you own a home or other property in Israel, you may also be obligated to pay property taxes.
Important Tax Forms to File for U.S. Expats Living in Israel
When filing your taxes in the United States, it is important to inform the IRS of your holdings, interests, and accounts in Israel. Depending on the nature of your holdings and their worth, there might be significant tax implications for you in the U.S.
IRS Form 1040 is used to file your individual income tax returns. These are the basic forms necessary for nearly all taxpayers. If you earn an income, you likely need to file Form 1040. The United States may assess taxes based on your worldwide income, so information about your income in Israel may need to be reported on these forms.
You might also need to file IRS Form 8938, a statement of specified foreign financial assets. This is where you report what kind of financial holdings you have in Israel and how much they are worth. These might include various accounts and investment holdings. You only need to report these assets if their total value meets a specific threshold. Talk to our team about the current threshold.
You should also talk to our team about filing FinCEN Form 114, otherwise known as the Report of Foreign Bank and Financial Account (FBAR). You must file an FBAR if you are a U.S. citizen with financial accounts outside the United States that are valued at more than $10,000.
Expats living in Israel, or any other country for that matter, tend to have complex tax obligations. You might have financial holdings in both countries, and reporting requirements for each country may differ greatly. It is best to gather all documentation regarding your finances in both countries before meeting with a qualified tax professional.
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 your housing expenses 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 can do so. 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.