Some US Tax Laws that Israelis Should Know About
Mark H. Hess
Ever since Americans began making Aliyah, it was assumed that when they had children in Israel, they would make sure that their children became
American citizens. While there may be some advantages for an Israeli to be a dual-citizen of the US, the US tax laws may present significant disadvantages.
An Israeli citizen who is not considered an Israeli resident for the year and earns income in the US in that year will not be subject to tax in Israel on the income earned in the US. That person will, however, be subject to tax in Israel on any income earned in Israel.
Most of the countries in the world follow a formula similar to that of Israel: residents of the country are taxed on their world-wide income from whatever source, but nonresidents of a country are taxed in that country only on income earned in that country.
The United States is an outlier – it taxes citizens or residents on their world-wide income from whatever source, and only those who are nonresidents and not citizens of the US will be taxed solely on income earned in the US.
עו"ד מארק הס, צילום פרטי
If your parents took care of getting you American citizenship and you have never set foot in the US, you will pay tax on all your income in Israel
Let’s get back to the young Israeli child whose parents made Aliyah from the US. Thinking that they were bestowing a tremendous kindness on their child, the parents arranged for the child to become a dual Israeli-US citizen as soon as they were able to do so.
Fast forward 25 years or so and now the child is making a comfortable living working for a hi-tech firm in Israel. Even if that person never set foot in the US in his entire life, he is considered to have earned income in the US during each year that he was working in Israel and is liable to pay federal US income tax on those earnings. He will likely have to file tax returns in the US for each of those years and will have to pay US income tax and penalties on the amounts due.
There is an income tax treaty between Israel and the US that is designed to minimize double taxation where an person is otherwise subject to tax in both countries. However, if the Israeli waits many years before filing back US tax returns, there is a good chance that the benefits of the treaty will no longer be available and that as a result he will be paying double tax on that income.
If you are a dual US-Israeli citizen and have not filed US income tax returns, speak to a US tax lawyer or tax accountant at your earliest convenience so you take care of this problem as soon as possible. And if you are Israeli and are eligible to become a US citizen, make sure that you think through all of the pros and cons before deciding what to do.
Unlike Israel, the USA has an estate tax (מס עיזבון)
Another aspect of US tax law for Israelis to consider is the federal estate tax. On death, the estate of a US citizen or resident is subject to tax at a maximum rate of 40% on total assets valued in excess of $12.92 million located anywhere in the world. Additionally the estate of a non-citizen, nonresident is taxed at a maximum rate of 40% on total real estate and tangible personal property assets in excess of $60,000 located in the US.
So if an Israeli has a substantial amount of assets outside of the US, and little or no assets in the US, he or she might be much better off not being a US citizen or resident. On the other hand, if an Israeli has substantial assets in the US, he or she likely will be better off as a US citizen. Unlike with income taxes, there is no estate tax treaty between Israel and the US since Israel does not have an estate tax.
Think carefully about whether it is appropriate for you to receive a house in the USA as a gift
The US also has a federal gift tax which tracks the estate tax. So a US citizen or resident can make gifts totalling as much as $12.92 million during his or her lifetime without being subject to the gift tax, but gifts made anywhere in the world will be applied to this limit. A non-resident, non-citizen is subject to gift tax on any gift of real estate or tangible personal property located in the US; gifts of property located outside of the US by non-resident, non-citizens are not subject to the gift tax. As with estates, the maximum rate of tax on gifts is also 40%.
Do you have a green card and no longer live in the US? You will also be taxed on your income outside the US
An additional aspect of US tax law that can affect Israelis relates to those Israelis who are not US citizens but possess a green card. Under US immigration laws, a Green Card holder is considered a permanent resident of the US and is allowed to work in the US.
So an Israeli who possesses a Green Card and resides in the US will be treated for income tax purposes in the same manner as a US citizen – he or she will be taxed in the US on their world-wide income. If an Israeli who has a Green Card has concluded that it is no longer in his or her best interests to maintain the Green Card, he or she can voluntarily abandon that status by filing the appropriate form with the US government.
What should be done to renounce American citizenship or a green card and will we be required to pay taxes or a fine in this situation?
A dual US-Israeli citizen may decide based on the above that he or she is better off renouncing US citizenship. In order to do this, he or she has to appear in person before a US consular or diplomatic officer in a foreign country, sign an oath of renunciation, fill out some paperwork and pay a fee. As is often the case, there are some tax considerations that need to be considered before expatriating.
A US citizen renouncing his or her citizenship may be subject to an exit tax. This tax will apply if his average tax liability for the 5 tax years ending before the date of expatriation is above a certain limit ($178,000 for 2022), if his net worth was $2 million or more on the date of expatriation, or if he fails to certify that he complied with all US tax obligations for the 5 tax years preceding the date of expatriation.
The exit tax is calculated by assuming that all of his assets were sold at fair market value as of the date of expatriation. The government then charges 23.8% capital gains tax on the excess of that gain over an exclusion limit ($767,000 in 2022). If a Green Card holder resided in the US for at least 8 out of any 15-year period and decides to give up his or her Green Card, he or she is subject to the same expatriation rules that apply to a US citizen.
What will happen if we no longer enter the US and decide to ignore the demands of the tax authorities in the US?
Some Israelis might take the position that these rules are so cumbersome that it is better to ignore them and rely on the notion that the IRS (Internal Revenue Service – American Taxes Authority ) will most likely not learn about Israelis who violate US tax law provisions or that the IRS is not interested in pursuing all but the most highly compensated and wealthiest persons. It would be a grave mistake to take this position, particularly if you are a dual US-Israeli citizen living in Israel.
Over the past decade the IRS has developed an extremely sophisticated computer system to help detect when persons or businesses located either in the US or abroad might be taking highly aggressive tax positions, such as understating their income, overstating their expenses, or mischaracterizing taxable income as tax-free income.
Based on its review of a number these factors, the IRS will decide which tax returns filed in which years should be audited. For the most part, such audits are handled via email but can drag on for very long periods of time, so compliance is typically far better than playing Russian roulette with the IRS.
The author of the article, Mark H. Hess is Tax Attorney, Licensed in California and Israel
עו"ד מארק הס הוא עורך דין מומחה בתחום המס בארה"ב ובישראל עם למעלה מ-40 שנות ניסיון במשרדי עורכי דין גדולים. מארק מתמחה בייעוץ הן לחברות למטרות רווח והן ללא כוונת רווח ולמנהלים בכירים בשלל סוגי תוכניות חיסכון לעובדים, לרבות תוכניות פרישה רשמיות ושאינן רשמיות, תוכניות פיצויים/תגמולים דחויים, תוכניות בריאות ורווחה, אופציות לעובדים ותוכניות תגמול הון, כולל תוכניות הענקת אופציות שאינן מוסמכות ואופציות כתמריץ, מניות פאנטום, מניות מוגבלות ושאר הטבות.
