Get to know the authorThere are an estimated 184,000 Americans living in Israel.
There are many great reasons for living in Israel – faith, heritage, history, culture, and the amazing beaches to name but a few. As an American expatriate living in Israel though, what exactly do you need to know regarding filing US expat (and Israeli) taxes?
All US citizens and green card holders whose global income meets IRS minimum thresholds are required to file a US federal tax return and pay taxes to the IRS, regardless of where in the world they live or their income is generated.
The good news is if you are already paying income tax in Israel, there are various exclusions and credits available to reduce your US tax bill and prevent you paying tax on the same income to the IRS too.
US taxes – what you need to know
If your annual, global income exceeds US $12,550 (per individual) in 2021 ($12,400 in 2020), or $400 of self-employment income, or just $5 of any income if you are married to but filing separately from a foreigner, then you are required to file Form 1040.
While any tax you may owe is still due by April 15, expats get an automatic filing extension until June 15. This can be extended still further online until October 15 if needed.
If you have foreign assets worth over US $200,000 per person, excluding your home if it is owned in your own name, you also have to file form 8938 and declare them.
If you had a total of at least US $10,000 in one or more foreign accounts at any time during the tax year, you also have to file FinCEN form 114, otherwise known as a Foreign Bank Account Report or FBAR.
“Online filings are required if you must file a tax return and you have income from a business, profession or employment. Even if you are required to file online, you must file the return online as well as the old-fashioned way (on paper).”
– (The Jerusalem Post)
If you pay income tax in Israel, there are several ways to reduce or avoid being taxed on the same income by the IRS. The two primary ones are the Foreign Earned Income Exclusion, which lets you exclude the first around US$100,000 of foreign earned income from US tax if you can demonstrate that you are a resident, and the Foreign Tax Credit, which gives you a dollar tax credit for every dollar of tax you’ve paid in Israel. The Foreign Tax Credit is normally a better option if you pay more tax in Israel than you would to the IRS, as you can carry the excess credits forward for future use. Be aware though that even if you don’t owe any tax to the IRS, if your income is over the IRS thresholds mentioned above, you still have to file.
The United States – Israel Tax Treaty
The United States – Israel Tax Treaty covers double taxation, however due to a Savings Clause, the benefits are limited for American expats living in Israel. The Savings Clause (found in Article 6, paragraph 3 of the treaty) states that the US can still tax American citizens living in Israel as if the rest of the treaty didn’t exist.
The treaty does ensure though that no one will pay more tax than the higher of the two countries’ tax rates, by allowing US expats in Israel to claim US tax credits against Israeli taxes paid and Israeli tax credits against US taxes paid, depending on where the income arises.
In practice this means that American citizens living in Israel normally end up filing both US and Israeli tax returns and paying the higher of the two countries’ tax rates on each type of their income.
To claim US tax credits against Israeli taxes paid, expats must file Form 1116 when they file their federal tax return.
By doing this, the vast majority of US expats in Israel won’t end up owing any US income tax.
Article 29 of the US-Israel Tax Treaty also allows the Israeli government to send US expats’ Israeli tax information directly to the IRS, along with their Israeli bank and investment account balances.
To claim a provision in the United States – Israel Tax Treaty (other than claiming US tax credits), expats should use IRS form 8833. For example, articles 23 and 24 of the treaty include provisions that may benefit American teachers, students and trainees.
Israeli taxes – what you need to know
If you’re resident in Israel, defined by Israel being the ‘center of your life’ during the tax year, and/or you spend a minimum of 183 days in Israel during the tax year, you should file an Israeli return. Israeli tax returns are due by April 30th if you file online.
The Israeli equivalent of the IRS is called the Israel Tax Authority.
Israeli income tax rates are relatively high compared to the US, so for many people it will make sense to claim the Foreign Tax Credit.
Israeli income tax rates range from 10% to 50%.
Catching up
Expats in Israel who are behind with their US tax filing because they were unaware that they had to file from abroad can catch up without facing penalties under an IRS amnesty program called the Streamlined Procedure, so long as they do so before the IRS contacts them about it.
We strongly recommend that if you have any doubts or questions about your tax filing situation as a US expat living in Israel that you contact a US expat tax specialist.
