Tips for year-end tax planning that you need to know
Your Taxes: As the year-end is getting closer, now is a good time to do some last-minute tax planning.
shekel and dollar exchange Photo: REUTERS
As the year-end is getting closer, now is a good time to do some last-minute tax
planning. Last week, we discussed some year-end tax tips for businesses in
Israel. In this article we do the same for individuals.
In 2012, Israeli tax rates range from 10 percent to 48%. The 48% rate
applies to annual income exceeding NIS 501,960 in 2012. A 30% minimum rate
applies to certain passive income of people aged under 60, but a flat rate of
25% applies to most dividends, interest and capital gains if you hold under 10%
of the payor. (For rental income, see below.) In addition, National Insurance
Institute (NII) payments are payable on income up to NIS 502,200 in 2012 at the
following rates: 1) Employees: 3.5%-12%; 2) Employers: 3.45%-5.9% (increasing to
6.5% in 2013); 3) Freelancers: 9.82%-16.23% (but 52% is deductible when paid for
income-tax purposes); 4) Nonworking: 9.61%-12% (but 52% is deductible when paid
for income-tax purposes).
No NII payments are due regarding: annual
income over NIS 502,200, most dividends, capital gains, rental income taxed at
10%-15%, nonworking new immigrants (olim) for 12 months.
Beat the 2013
In 2013, individuals with annual income over NIS 800,000 approximately
(we await an inflationary update) will pay a 2% surtax.
increase their maximum tax rate from 48% to 50% on salary, business profits,
dividends, interest and capital gains.
Therefore, consider accelerating
bonuses, dividends, interest payments and capital gains into 2012, where
possible, if you don’t mind paying the resulting reduced tax
The pension rules have gotten very
complex. Here are a few brief points to check out for 2012.
starting point is to check if you are a “privileged member” (amit mootav), which
refers to an individual for whom amounts contributed to an Israel-approved
provident pension fund is at least NIS 16,548.
The next thing to check is
whether your salary income is pensionable (your employer joins you in
contributing to your pension fund), or you are entitled to a pension by law or
by contract. In practice, all salary income is now pensionable after six months
Also important is the “entitling income” limit. This is your
actual income, but no more than NIS 102,000 of income if you only have salary
income in the year; no more than NIS 142,800 if you have no salary income in the
year. If you have both, both limits apply: NIS 142,800 in total, including NIS
102,000 for salary income.
Contributions must be to an approved pension
provident fund for yourself or your spouse, or up to 1.5% (generally) for
children over 18 in the tax year.
You enjoy a combination of tax
deductions (which reduce taxable income) and tax credits (which reduce the tax
itself), but not both on the same pension contributions.
If you are a
“non-privileged member,” you can make claims for Israeli pension-fund
contributions you make this year as follows:
1) A tax credit of 25% of
life-insurance premiums or 35% of pension-fund contributions.
But the tax
saving cannot not exceed the higher of NIS 1,968; or 5% tax credit up to NIS
7,140 if you had no salary income in the year; or 7% of entitling income if you
had salary income in the year, with no more than 5% of entitling income to be
spent on life insurance.
2) A tax deduction for non-salary-based pension
contributions, including a deduction of 7% of non-salary income, but no more
than NIS 9,996; plus a further deduction of 4% of non-salary income, but no more
than NIS 5,712 if you paid 12%-16% of entitling income to the pension
3) A tax deduction for salary-based pension contributions the lower
of: non-pensionable salary of 5% deduction, but no more than NIS 5,100; and on
any salary a 5% deduction, but no more than 5% of NIS 408,000 minus your
If you are a “privileged member,” you can claim for
Israeli pension-fund contributions you make this year as follows:
1) A tax
credit of 25% of life-insurance premiums or 35% of pension-fund contributions:
if you had no pensionable income in the year, the tax saving cannot not exceed
the higher of NIS 3,936 or a 5% tax credit of up to NIS 10,200; if you had
pensionable income in the year, the tax saving cannot not exceed the higher of
NIS 3,936 or 7% of pensionable entitling income plus 5% of non-pensionable
income up to NIS 204,000.
2) A tax deduction for any income: 11%
deduction for amounts paid on income up to NIS 102,000 minus pensionable
3) A tax deduction for additional income: 7% deduction plus a
further deduction of 4% of non-salary income if you paid 12%- 16% of entitling
income to the pension fund.
Additional income is defined as the lower of:
1) non-pensionable income of up to NIS 102,000 or 2) NIS 408,000 minus the
higher of pensionable income or NIS 408,000.
rules apply to 10%-or-more shareholders in a company controlled by five or fewer
Study funds (keren hishtalmut)
Israel offers tax-efficient
medium-term savings plans. They were originally intended to finance studies, but
in practice, generally, you can withdraw money for any purpose six years or more
after starting to deposit in the plan with no Israeli tax
Employees customarily contribute 2.5% and the employer 7.5% of
employment income on salary of up to NIS 15,712 per month or NIS 188,544 per
year in 2012 to the study fund. For 10% shareholders in a company controlled by
five or fewer individuals, up to 4.5% is deductible within certain
Special expense-deduction rules apply to 10%-or-more shareholders
in a company controlled by five or fewer individuals.
In the case of
self-employed people, consider contributing NIS 17,850 in 2012 to claim a
deduction from taxable income of up to NIS 11,475. This is based on maximum
income for these purposes of NIS 255,000 in 2012. Payments of 7% are recognized,
but 2.5% is not deductible, while 4.5% is deductible.
income is taxable to the extent fund contributions exceed NIS 17,850. If an
employee has a business on the side, he can contribute a similar 7% to a study
fund (and deduct 4.5%) out of business income of up to NIS 66,456, resulting in
a possible contribution of NIS 4,651 (at 7%). This is based on the difference
between the business income limit of NIS 255,000 and the employment income limit
of NIS 188,544.
Charitable contributions by individuals to
institutions approved under Section 46 of the Income Tax Ordinance qualify for a
tax credit of up to 35% if they exceed NIS 180 in 2012, but the contributions
will not be recognized if they exceed NIS 9 million or 30% of taxable income,
whichever is lower.
Any excess donation may be carried forward and used
in the next three tax years, but total current and forward donations remain
subject to the limits in that tax year.
Special rules apply to US
citizens residing in Israel in the US-Israel Tax Treaty.
If you became a new or “senior returning resident” (after living abroad 10
years) on or after January 1, 2007, you enjoy a 10- year Israeli tax holiday
regarding overseas income and capital gains. So perhaps other family members
would like you to invest in overseas business operations or passive investments
instead of them – but check out all aspects in each country concerned.
Foreign- and Israeli-resident individual investors (“angels”) may
deduct from total taxable income a “qualifying investment” of up to NIS 5
million in shares of certain Israeli start-up technology companies over a
benefit period of three tax years commencing with the tax year in which the
investment is made. The investment must be made in the years 2011-2015. The
individual must hold the shares allocated to him throughout the three-year
benefit period. Specialist advice should be obtained.
securities can be offset against gains from other securities in the same or
future years, or against dividend/ interest income if they would otherwise be
taxed at 25% or less. This rules out offsetting personal capital losses against
dividends or interest from a company in which you hold 10% or more, as the tax
rate would be 30% (or more in 2013).
Anyone with an actual or
potential link to a trust (settlor/grantor, trustee or beneficiary) in Israel or
abroad should immediately review all aspects in light of a new Israeli tax
regime that was implemented in 2006.
rental income derived by Israeli- or foreign-resident individuals is currently
exempt if it does not exceed NIS 4,910 per month. Any excess reduces the
exemption shekel for shekel. So rent above NIS 7,365 (excess NIS 2,455) is
taxable, under one of two alternatives at your choice: 1) pay tax at a rate of
10% of gross rent by January 30, 2013, with no NII payments, or (2) pay tax at a
rate of 30%-48% plus NII payments on net rental income after deduction of
expenses and depreciation. Only option No. 2 applies to nonresidential rental
income in Israel.
As for non-Israeli rental income of all types
(residential or commercial), Israeli-resident individuals can choose between: 1)
pay tax at a rate of 15% of gross rent minus depreciation per Israeli
depreciation regulations, or 2) pay tax at a rate of 30%- 48% plus NII payments
on net rental income after deduction of expenses and depreciation and a credit
for foreign federal and state taxes.
Rent received upfront is taxable
when received, not when it should have been received. Different rules apply to
commercial rents and overseas rents.
Other tax breaks
deductions may be available for investors in Israeli movie productions and oil
partnership units. Specialist advice should be obtained.
Take advice. The above is extremely brief and general. It is vital to take
detailed specific advice relating to your case right away because the year-end
As always, consult experienced tax advisers in each
country at an early stage in specific cases.
Leon Harris is
a certified public accountant and tax specialist at Harris Consulting & Tax