US Expat Taxes for Americans Living in Israel – What You Need to Know
There are an estimated 184,000 Americans living in Israel.
There are many great reasons for living in Israel – faith, heritage, history, landscapes, and the thriving culture 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 who earn a minimum of $10,000 (or just $400 for self-employed individuals) anywhere in the world 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 exemptions available to prevent you paying tax on the same income to the IRS too.
US taxes – what you need to know
If your income is more than US$10,000 (or $400 for self-employed individuals), you must file form 1040.
While taxes are still due by April 15th, expats get an automatic filing extension until June 15th. This can be extended still further online until October 15th.
If you have foreign assets with a total value of over US$200,000 (per individual), excluding a home owned in your own name, you also need to file a form 8938 declaring them.
If you had at least US$10,000 in total in one or more foreign accounts at any time during the tax year, you also need to file FinCEN form 114, also known as an FBAR (Foreign Bank Account Report).
If you are paying income tax in Israel, there are several ways to not pay tax on the same income to the IRS.
“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)
The two main exemptions are the Foreign Earned Income Exclusion, which allows you to exclude the first around US$100,000 of foreign earned income from US income tax if you can demonstrate that you are a resident of Israel, and the Foreign Tax Credit, which allows you a dollar credit for every dollar of tax you’ve paid in Israel. The Foreign Tax Credit is typically a better option if you pay more tax in Israel than you owe to the IRS, as you can carry the excess tax credits forward. Remember though, even if you don’t owe any tax in the US, if your total income is more than US$10,000 (or $400 if you’re self-employed) you still have to file.
The US and Israeli governments share taxpayer info, while Israeli banks pass on their US account holders’ account info to the IRS, so it’s not worth being economical with the truth or burying your head in the sand. The penalties for tax evasion for expats are stringent to say the least.
If you’re a US citizen or green card holder (including dual citizens) and have been living in Israel for some time but didn’t know you should have been filing taxes, don’t worry: there’s a program called the IRS Streamlined Procedure that allows you to catch up on your filing without facing any penalties. It’s better to do this soon though, before the IRS comes to you.
Israeli taxes – what you need to know
If you’re resident in Israel, defined by Israel being the ‘centre 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%.
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 an expat tax specialist.