Moving to Israel doesn’t end an American citizen’s tax obligations to the US government. If you’re an American expat in Israel, you need to understand how US tax reporting affects you, so that you can make financially smart decisions.
US-Israel tax treaty
The US and Israel have signed a series of tax treaties which prevents dual citizens from being taxed in both countries. What this means practically is that you will be taxed in the country which is deemed to be your primary residence. This is determined based on many factors, primarily:
- Your habitual abode -You will be considered a resident of the country where you have the closer personal and economic relationship.
- Nationality – If you are a citizen only of one of the countries, you are considered a resident there. If you are a dual citizen, there are other factors that are brought into play.
If you are considered a permanent resident of Israel but maintain your American citizenship, you will likely not have to pay income tax on earned income in the US (there are exceptions on very high salaries), but you will have to file an income tax report each year. There are accountants in Israel who specialize in filing taxes for Israeli and American dual citizens, and it is generally preferable to work with them as opposed to hiring an American CPA who is not familiar with the issues facing dual citizens. (We have a long-standing relationship with Yosefa R. Huber, CPA, who assisted in the preparation of this article.)
Child tax credit
The United States government offers a tax credit per child which reduces the amount of tax that a citizen pays. For many dual citizens who are reporting income but not paying income tax, this can translate into a refund from the US government. At one time, it was popular for Israelis to go to great lengths to obtain American citizenship for their children in order to benefit from this payout, in situations where one parent was an American citizens but neither parent had ever lived in the US. However, due to the obligations these children will have to the US government in their adult life (starting with having to file an income tax report each year), parents should think carefully before going down that road.
FBAR
The FBAR (Foreign Bank Account Report, also known as FinCen Form 114) is a report that must be filed annually if you have an aggregate of over $10,000 in one or various non-US accounts, including savings accounts such as your pension fund, Keren Hishtalmut or Kupat Gemel. It is important to fill out this form before the deadline to avoid heavy fines. You can fill this form out yourself if you know exactly what needs to be declared. Otherwise, it is recommended to hire an expert to file on your behalf.
There is an additional report that you may need to file as part of your tax return if you exceed certain other higher thresholds. We advise you to speak to an Israeli-based US CPA if you think you may qualify for this requirement.
US Social Security for the self-employed
If you’re a self-employed American citizen, the US requires that you contribute 15% of your income to Social Security. If you accrue 40 credits, you will get a monthly payout upon your retirement. The Social Security tax can be quite challenging for dual citizens, who are also required to contribute to Bituach Leumi (Israeli social security) and a private pension plan. These regulations can discourage people from opening a small business or freelancing. An alternative is to be employed by an Israeli company which issues your invoices and pays you a salary each month (Employer of Record service), while you maintain creative control over your business.
Renouncing US citizenship
Some dual citizens feel that US citizenship is too much of a burden and that the privileges of voting in a US election and holding a US passport aren’t worth the headache of complying with US tax laws. Renouncing US citizenship is done by appearing in person at the US consulate, signing an oath of renunciation, filling out paperwork and paying a fee. It also requires giving up one’s green card, where applicable, not just letting it expire. You may also be liable for an exit tax, depending on your assets and past tax compliance. Renunciation is irreversible, so you need to be really sure before taking this step.