Ask Miriam, the tax expert

Vol XIX: If a person has dual citizenship and is working in America for a year and a half, does that person have to pay Israeli taxes?

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November 13, 2006 12:45
Ask Miriam, the tax expert

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For Red Tape resources click here. Miriam Vilner is a licenced CPA (Isr.), a member of the Institute for Certified Public Accountants in Israel and a qualified Arbitrator registered with the Ministry of Justice. She holds degrees from London University and the Weizman Institute Send us your questions >> * * *

  • Volumes I - XIII * * * Vol XIX Q: If a person has citizenship in both Israel and America, and the person is working in America for a year and a half, does that person have to pay Israeli taxes? If so, how can they pay the least taxes without cheating? And how much taxes are taken out for $10,000 earnings during that time? $20,000? $30,000? A: Thank you for your question. The fact that you have dual citizenship is irrelevant. The question is your place of residence. Where the center of your life is. You have been 1 1/2 years in the States. Do you intend on returning? Is Israel your home? Where is your family? Permanent home, etc? If the answers are "yes" then you are liable for taxes in Israel. You can calculate your tax liability by going to www.mof.gov.il Q: I am a recent oleh from the US. I have a new business registered in the States, earning US dollars. What is my tax liability here in Israel? A: Thank you for your e-mail. A business in the States will only be exempt from tax if you had the business abroad at least 5 years prior to aliya. This does not seem to be your case. There are special conditions for a company abroad which is managed in Israel and whose only income is passive income. This also does not appear to be the case with you. * * * Vol XVIII Q: I am an Israeli citizen who has been living abroad for over three years. If I return to Israel, will I be exempt from taxes on my interest and dividends for five years? Will I have to file any tax returns during the first five years if I have no other income? A: You are exempt from tax for 5 years on assets held abroad and which you held before returning to Israel. You have to declare these assets and the income. There is a special shortened form for this type of income. Good Luck! * * * Vol XVII Q: I was recently told by my aging father that I will be named the executor of his will along with inheriting his house. As a dual citizen, what sort of tax will I be made to pay if I decide to sell the house and other assets in the inheritance? A: I'm afraid you might be in for a lot of tax. There is no inheritance tax in Israel but there is, of course, capital gains tax. Since there is no inheritance tax, the Income Tax Authorities have their own method of making up for that. All capital gains are calculated using the historic value of the asset. You are regarded as "stepping into your father's shoes." The cost of the asset is deducted from the sale value, not as of the day you inherited but as of the day your father purchased the asset. The same applies to the house for which you would have to pay "Mas Shevach" calculated according to the original cost and, in addition, it would be taxed at a higher rate as you now own two homes. This is the law. However, there is a possible way around all this, but to obtain all the details and to work out a plan would mean a private consultation with me and further work with a proficient lawyer (I can suggest one). Hopefully, it should succeed but there might be some unknown factor which could put obstacles in the way. The strategy can only be put into effect while your father is still alive. Good Luck Q: We are planning to move back to the US at the end of the school year and we are a bit confused as to what to withdraw. What are the tax ramifications re: Withdrawing our keren hishtalmut? Withdrawing pension (part that we can - I realize the law changed recently and part we cannot touch til age 66)? Severance Pay? My employer is of the policy of giving 3 months pay, plus the state required severance. I get one check for 3 months salary, how does this effect my collecting all my severance and when can I collect it? What is Keren Menahalim? Is it something I can draw on too? In general; I'm very confused as to what I can withdraw and take with me and when. A: Hi. Thank you for your questions. 1. Pension fund. It depends on the particular fund in which your employer deposited. For most funds, the best you can do is to freeze the money and collect it at pensionable age. It will accrue interest and linkage. However, the best way to find out would be to just call the fund and ask if after not working for a certain period in Israel (probably 6 months) the funds could be released. 2. The 3 months' pay is simply a bonus and taxable at the upper limit of your tax rate this year. However, if you do not work a full year, you may be able to claim a tax rebate. If you let me have your 106 form when you get it (around Feb. / March 2008) I can check this out for you. The form will include the 3-month bonus. Your severance pay will be reported separately and paid after you leave your place of employment. How long after, I can't tell you. It depends on the fund and their policy. Again you have to contact the fund. It's probably the same one as the pension fund. 3. Bituach Menahalim is just a provident fund. You can withdraw sums deposited up to 1/1/2006. The fund will deduct 35% tax at source, which you may try to claim back 6 months after leaving Israel, if you are prepared to state that you have not been employed for half a year. Our office could help you with this. IN YOUR POSITION I WOULD STOP MAKING PAYMENTS TO THE PROVIDENT FUND-BITUACH MENAHLIM IMMEDIATELY. Money deposited after 1/1/06 will not be paid before pensionable age. As long as you are resident in Israel, all interest from the pension fund and Bituach Menahalim is taxable when it accrues from deposits after 1/1/2003. After you leave the country, you can claim that the interest is tax-free as you are non-resident. Good Luck. * * * Vol XVI Q: First of all, I appreciate the postings and advice you offer on Cafe Oleh. My question is this. My wife and I are planning aliyah as retired persons, whose income is primarily dividends and capital gains on stocks and bonds. My understanding is that Israel taxes long term capital gains at 15%. What about short term capital gains? As well, in the US we pay 35% tax rate on REIT (real estate investment trust) dividends and not 15% on regular dividends. What would the rate be for both these types of dividends (qualified and non-qualified dividends) on US earned dividends as residents in Israel. Also what rate is bond interest taxed? Is there any difference between dividends on common stock or preferred stock? Finally, do we get the first 5 years tax free as Oleh Chadash? I thank you very much for your time A: Thank you for your e-mail. However, these questions are really out of the scope of the column and I suggest we meet when you do actually come on Aliya. As a general guideline, there are no longer privileges for Olim Hadashim on dealings in the Capital markets. At one point they received special tax rates, however, when the rates in Israel were equated with those abroad, this was automatically abolished. Unfortunately the authorities have not really stabilized their attitudes and there are constant changes in the laws regarding capital markets. I go at least twice a year for a dys course on updating. What is worse, although I should not reveal this, apart from the International Income tax unit which deals only with large companies abroad, the workers dealing with the files can neither read the documentation nor are they conversant with all the considerable up-dates. However, as a general guideline: Tax on interest from bonds: dollar bonds or linked bonds 20% non-linked shekel bonds 15% Capital gains: 20% for individuals Dividends: 20% There is no difference in taxation on common stock and preferred stock. I can't think of any reason why there should be. REIT's are taxed as all dividends. HOWEVER, they have only been issued on the Tel-Aviv stock exchange for about 1-2 months. I presume that when the tax authorities discover a higher tax rate abroad, they will rush to introduce it here. That's the general picture. The complications and regular changes are mainly in the field of setting off capital gains against capital losses. This subject requires consultation. Again, by the time you get here, all this may be changed. Good Luck Q: What is the obligation (tax) of a Yisraeli ("Yored" of 30 years) who transferred funds to Israel and is now earning interest (dollar and shekel) and capital gains (and losses)? The bank classifies me as a "Yisraeli toshav chutz." Thanks. A: I presume the bank will deduct tax at source. You don't say in which country you reside; I presume it is the U.S.A., then there is a mutual treaty against double taxation and you might be able to claim exemption from taxation in Israel under the treaty. I don't know how it works in that direction, when an Israeli has investments in the U.S.A. they have to fill in a W* BEN form and may claim exemption under the treaty. As of 2005, the taxes on all capital gains including dividends are the same in both countries, except for REITs, which are very new in Israel and don't enjoy a lower tax rate as in the States. In spite of the equalization of tax rates, it is probably worth your while paying tax in the U.S.A., presumably you are entitled to personal tax allowances there and in Israel, as a toshav chutz, you are not entitled to them. You have to ask at the Bank in Israel or the Commercial Attache if there is an equivalent of the W* BEN form. Good luck. * * * Vol XV Q: I was recently fired from my job. What portion of my severance pay (pitzuyim) is tax free, should I wish to withdraw from my bituach menahalim insurance policy? A: 1. If you withdraw your bituach menahalim before the age of 67, you will pay 35% tax, unless the first payment was before 1/1/2003. I don't advise it. It is now government policy to discourage bituach menahalim. When you P.G. find another job, ask them to make contributions to a recognized pension fund. Your tax benefits will be much higher. 2. Pitzuyim are exempt for one monthly salary multiplied by the number of years you worked (partial years included). You must insist on receiving form 161 to be legally exempt. Good Luck in your next job Miriam Q: In a couple of years, I will be able to start using my rabbinical pension fund, 403(b). According to US law, money from a church run pension fund used as parsonage is tax exempt in the US. Will I have to pay tax on this or report this to Israeli tax authorities? What part, if any, of this pension fund money is taxable in Israel? A: If the source of your pension was previous employment as an employee, as I understand from your e-mail, 65% of the pension is taxable. Unless: 1. The U.S. government is paying you the pension and you can prove that it is exempt in the U.S.A. 2. Yes you do have to report it. 3. You have a five-year exemption after making aliya I have available a booklet for 120 NIS or $25 on the Tax Reform. Since publishing the booklet, there have been changes/equalizations on the tax rates in the capital Market, but otherwise it is up-to -date. Q: I am about to inherit an apartment in Herzliya. What are the tax consequences and is it better to lease it or sell it? Thank you, Ben Walker A: As of writing there is no inheritance tax in Israel, although there is a Russian lady Knesset member who is all out to introduce it. Re: selling or letting, you have to make your own decision. Rents are relatively low in Israel compared to purchase price. However, you can expect capital gains. Q: This is a new oleh query. I recently hired an Israeli tutor for my child. The tutor asks me to not fill in the check with her name because she does not claim the tutoring as income. What is the law? If she is making an insignificant amount per month, does she even need to declare it? Can any legal action be taken against me for hiring her? A: The answer to all your questions is "yes". You are transgressing the law by giving blank cheques and aiding her in hiding an extra income. Yes she is obliged to report and yes if (but they probably won't) the authorities catch her - you may be questioned. Remember: any tax not paid by one person has to be made up somehow by taxing another. If people declared their income in Israel as they do in the States or England, we might also have their lower tax rate. Q: I have two questions- I am in private practice a LCMHC and pay self employment taxes. My first question is - can I somehow claim a loss of business for clients whom I have seen and haven't gotten paid for? My second question is - can I claim $$ for the difference in what I actually get paid by insurance companies like medicaid with the difference in what my hourly charges are? A: I am surprised at your question: How can you claim for "losses" arising from low payments from insurance companies? And why should you want to? Do you want to declare your income (from insurance and others) or declare a higher income and pay more tax because you think you are underpaid? Losses from non-payment from clients is very problematic and the income tax authorities will only recognize it if a number of years (more than one at least) have passed and you can prove that you have initialized legal proceedings). * * * Vol XIV Q:: I have recently taken on help in the house - Ozeret. She is an Israeli girl and seems to have a lot of demands. Do I have legal obligations? A: Yes you do. The rights and status of household help is defined by Labor Court decrees. It has been decreed that the relationship between an employer and household help of any kind, including those giving childcare, are determined by the laws governing all relationships between employer and an employee. I will try to give you some indications, if you have a specific question which I don't cover, you can call the Histadrut at and they will answer you. Q: My children are taken care of in the care-takers' house. I bring them every morning do the same laws apply? A: No the laws apply only to care-takers in your house. Q: Do I have to deduct any taxes from her wages? A: No you do not deduct taxes. Household help is exempt from Income Tax deductions, even if they are earning more than the minimum exempt wages. However, if the family is obliged to file a tax return at the end of the year, they are obliged to declare that the wife works without details of her income. Since the abolishment of tax concessions for a non-working spouse as from 200o, this is no longer significant. Q: Do you recommend that I take out insurance for any accident in the home? A: If you have property insurance for your home, you are probably also covered for third party claims. However, you are obliged by law to pay National Insurance benefits for your household help. This is required to cover work accidents Q: Do they benefit from paid yearly holidays? A: Yes. You are obliged to give them paid leave according to the Yearly Leave Law. It is calculated according to her daily wage, the number of days a month that she has worked in the previous year and her seniority (the amount of years she has been in your employ.) Child caretaker of household help (ozeret), who has worked for you for a complete year, is entitled to payment according to the number of years that she has worked for you, the number of hours a month that she works and the current rate for the year, as published by the Histadrut in the Employers laws. Q: Do I have to pay for Sick Leave ? A: The household worker is entitled to sick leave on the strength of a doctor's certificate for one "working month" a year calculated relative to the extent of the employment. For example, a weekly Ozeret, is entitled to 4 working days a year. Q: What is Severance Pay? A: Any child care-taker or household help is entitled to severance pay if you discontinue her employment or if she leaves for reasons which entitle her to severance pay. Severance pay is calculated according to the average daily or hourly wage during the last 12 months of her employment multiplied by her last hourly wage multiplied by the number of years that she has worked including part of the year. Important Warning: There are employers who pay severance pay at the end of every year, the help may sign that she has no further claims on the employer for severance pay for this year. However, unless there is a complete discontinuation of employer/employee status for at least three months, there is no legal basis for denying the rights to severance pay on the strength of these payments (and signature). They will be legally interpreted as bonuses and not severance pay. Q: What is the position with Chagim? A: If a Chag falls on the day that the household help/child care-taker works, she is entitled to paid leave. However, take care that you are not "taken for a ride". The law applies only to Moadei Yisrael and does not include Chagim such as Purim, Chanukka, Chol Hamoed. I was even asked once to pay for La g Be'Omer - of course, I refused. Q: What is the position with foreign workers? A: Recently there has been a reform in the tax deducted from foreign workers. As from 1/1/2003, foreign workers are allowed personal deductions ("Nukudot Ziku") from their taxable income, as are all Israeli citizens. The possibility of benefiting from this tax deduction applies only to those workers who receive a wage slip from their employers and whose salaries are reported to the Israeli Income Tax Authorities. It goes without saying, that the new laws do not apply to foreign workers working illegally and whose wages are not reported to the Authorities. Most of the legal foreign workers, whether for building contractors, in agriculture, care-taking via employment agencies etc., are supposed to receive their salaries in an orderly fashion including a salary slip. Therefore, any foreign worker from whom tax was deducted as from 1/1/2003 can enquire at the nearest office of the Israeli Income Tax Authority. He will be required to fill in a form and declare his income and request a rebate. It is important that he goes with his passport. The worker must also present a copy of the yearly report he received from his employer - form 106. The worker must also open or have a bank account to which the money will be transferred. Since the Tax Authorities have not allocated special workers for this job and, of course, it cannot be expected that they will be able to speak the language of the foreign worker, it would benefit the foreign worker to hire the services of a licensed office dealing in tax returns. I would also advise the foreign worker to "shop around" as the fees for this service range from 15%-40%. Israeli employers are asked to inform the foreign workers of their rights and aid them by providing acceptable 106 forms. I have available a booklet on the (now not so) new Tax Reform which outlines the various tax rates and exemptions for 120 NIS or $25. Miriam Vilner B.Sc. (Lond.), M.Sc., C.P.A. (Isr.) 03-5343727 050-4564049 Fax: 03-5345637 e-mail miriamcpa@012.net.il * * * Cafe Oleh experts have been chosen for their knowledge and reputation. Cafe Oleh does not take responsibility for any advice they offer. Click here to send us your questions for Miriam.
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