Tips for year-end tax planning that you need to know

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.

Personal tax rates

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 surtax

In 2013, individuals with annual income over NIS 800,000 approximately (we await an inflationary update) will pay a 2% surtax.

This will 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 sooner.

Pension contributions

The pension rules have gotten very complex. Here are a few brief points to check out for 2012.

The 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 by law.

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 fund.

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 pensionable salary.

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 income.

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.

Special expense-deduction rules apply to 10%-or-more shareholders in a company controlled by five or fewer individuals.

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 liability.

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 limits.

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.

Subsequent fund 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.

Charity

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.

New immigrants

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.

Be an angel

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.

Losses

Losses from 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).

Trusts

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

Israeli residential 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

Other special deductions may be available for investors in Israeli movie productions and oil partnership units. Specialist advice should be obtained.

Closing remark

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 is approaching.

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 Ltd. leon@hcat.co