With the deadline for the government’s new “Savings Plan for Every Child” approaching in just one week, experts are urging American immigrants to review their options wisely – to avoid possibly finding their children’s income subject to double taxation.
As of January 1, 2017, the Finance Ministry and the National Insurance Institute launched a long-term program for Israeli children, through which the NII will be depositing NIS 50 monthly into individual savings plans until the age of 18. By next Thursday, June 1, parents must decide whether to direct the money to a bank account or an investment provident fund – the latter of which may be subject to the watchful eye of the United States Internal Revenue Service.
“It’s important for parents of US citizens to be aware, before they make the decision, that there are potential taxation and reporting issues,” Yosefa Huber, a Petah Tikva-based US certified public accountant, told The Jerusalem Post.
The investment provident funds appear to fall under the IRS’s category of “Passive Foreign Investment Companies” (PFICs), she said. As result, Huber explained, parents who select the provident fund option will likely need to do much more reporting to the IRS than those who pick the bank account – with that reporting varying based on certain choices they make during the first year.
In that first year after opening the provident fund account, the parents will need to file a document called “Form 8621” to the IRS, detailing whether they want the fund to be treated as “mark-to-market” – valuing assets based on most recent market prices – or whether they want to defer all of the income for evaluation until it is withdrawn, according to Huber. The first option will likely require the parents to obtain a wide array of specific details as to the content and movement of specific stocks in the fund, while the second option may be subject to significant punitive taxes and interest, she explained.
Parents who select the bank account savings plan, on the other hand, will likely find the reporting process much easier – similar to that of any other bank account, she continued.
“There’s no issue of holding stock in a foreign company; you’re not getting dividends from it,” she said. “You’re just getting interest.”
Huber was so concerned that many American-Israeli parents may be unaware of their options that she recently wrote a lengthy post on her website about the two options, offering details about the plans as well as the IRS reporting requirements. Rather than settling on a random government account assignment, parents should take the time to educate themselves and make an informed decision, she argued.
“Why wouldn’t you take the opportunity to choose?” Huber asked.
Larry Stern, a partner and certified public accountant at the Tel Aviv based Aboulafia Avital Shrensky & Co., likewise pointed out the many disadvantages associated with choosing the investment provident fund.
“Given the small amount of money to start with, I look at the bank account option as the better option for US citizen children because it avoids a lot of the administration issues,” Stern told the Post.
Even assuming that the rate of return on the selected provident fund is higher than that of the interest being accrued at the bank, the fund risks “double taxation” due to the PFIC issue, he explained. As a result, the child will need to file complicated tax returns, paying accounting fees that “eat up potential growth,” Stern added.
“I would generally recommend choosing the bank option, when comparing the interest income from the bank option to the potential growth in the [provident fund], less the administrative costs to deal with the US compliance requirements,” he said.
Asked if immigrants to Israel from places outside the US must take similar matters under consideration, Stern said that most other countries do not place such restrictions on their citizens, as long as they break tax residency.
The US, he explained, is among the only countries that taxes its citizens on worldwide income.
Although the NII began depositing the NIS 50 monthly sums for children in January, those who have yet to sign up will receive their payments retroactively.
The money is paid on the 20th of each month to a designated savings account held in the child’s name.
For those parents who fail to make a choice about the account type, the Israeli government will be selecting a provident fund at random.
Parents also have the option to match these savings with an additional NIS 50 per month, deducted from the “child allowance” already being paid to them by the NII.
Once a child reaches the age of 18, the NII will also deposit a grant in the savings account of NIS 500, and if the teenager then chooses to not withdraw any of those savings until the age of 21, the NII will add another NIS 500. Parents are able to withdraw money from the savings plans before the child turns 18 only in the case of a life-threatening medical condition or death of the child, according to the terms.
While the ministry already announced the “Savings Plan for Every Child” program in December, and began enabling parents to make their choices at that time, plans had only been selected for 1.563 million children as of this week. Parents of nearly half the children eligible still had not chosen plans, with just a week left to do so.
Of the parents who did choose programs, those of 945,000 children selected an investment provident fund, while those of 618,000 chose the bank option.
“This is the first time that the State of Israel is saving money for its citizens,” Finance Minister Moshe Kahlon said on Tuesday. “I turn to the parents – choose a plan for the children. This is a dramatic decision for their future.
With this money, they will be able to acquire higher education, open a business and achieve a more equal opportunity for life.”
To select plans, parents should head to the NII’s designated website for the matter: hly.gov.il. While program choices can be made only in Hebrew, instructions are also available in PDF files in English, Arabic and Russian.