Tax breaks, credit points and bookkeeping - here's what olim need to know - opinion

YOUR TAXES: Most olim know they are exempt from Israeli tax for 10 years on foreign income. The problem is they may still have to pay foreign tax on such income.

 Illustrative image of doing taxes. (photo credit: PXHERE)
Illustrative image of doing taxes.
(photo credit: PXHERE)

Before the Knesset dissolved itself, it passed Amendment 262 to the Income Tax Ordinance, which tinkers with tax breaks for olim (new immigrants).

Most olim know they are generally exempt from Israeli tax for 10 years on foreign-source income and capital gains. The problem is they may still have to pay foreign tax on such income.

As for Israeli-source income, there is no Israeli tax exemption. Instead, olim get limited tax breaks in the form of extra personal “credit points” to use against tax on Israeli-source income. Some reports suggest that olim get “an extra” tax credit. This doesn’t tell the full story.

What are credit points?

Many countries grant their citizens or residents personal deductions or allowances that reduce taxable income. Israel grants its residents credit points that reduce tax, not income. This is meant to be egalitarian, as each credit point reduces the tax liability by the same amount, whether you are rich or poor.

A Visa credit card is seen on a computer keyboard in this picture illustration (credit: REUTERS)
A Visa credit card is seen on a computer keyboard in this picture illustration (credit: REUTERS)

In general, a man gets 2.25 credit points, and a women gets 2.75 credit points, which discriminates in favor of women. In 2022, each credit point is worth NIS 223 per month (NIS 2,676 per year) off your tax liability. There are additional credits for children and a few other things.

What about olim?

Olim with an aliya certificate (Teudat Oleh) or who are entitled to one, get extra credit points. Under the new system in effect from January 1, 2022, olim generally get one extra credit point worth NIS 223 per month for the first 12 months, three extra credit points worth NIS 669 for the next 18 months, then two credit points worth NIS 446 per month for 12 months and then back to one credit point worth NIS 223 per month for the next 12 months. The total benefit period is 54 months

The old rules gave olim three credit points for 18 months, two credit points for next 12 months, one credit points for the next 12 months and one credit point for the next 12 months. The total benefit period was 42 months.

To sum up, there are two-thirds fewer tax breaks in year one, but the tax breaks last a year longer.

Comment: Are aliya tax breaks changeable and no longer sacrosanct?

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Don’t cook your books

On another unrelated matter, olim who choose to start a business in the Start-up Nation are usually surprised to learn how strict the Israeli bookkeeping and customer billing rules are.

Approved Israeli software or printed books must be used – not Excel, Word, QuickBooks or Sage. Otherwise, the Israel Tax Authority (ITA) not only levies fines, it can also estimate taxable income, which is never good for the taxpayer. Also, it is illegal to issue invoices without VAT registration as an “authorized dealer.”

In practice, smaller businesses typically outsource the accounting and tax reporting to an accountant or bookkeeper who has all the approved software and can deal with the filings by the deadline in the middle of each month.

The ITA officials periodically leave their desk and buy things to find out whether their purchases are recorded. They then mock those caught out (anonymously) in press releases.

July 3 was a big tax audit day in the Afula area. It seems nine out of 60 businesses failed to record such purchases as income in their books and provided a variety of explanations. Many were engaged in trade or building supplies, especially “exempt dealers” just below the sales threshold for “authorized dealers” (NIS 102,292 in 2022).

One who paid NIS 100 argued, “I am suspicious about the price you claim you paid me.” Another received NIS 45 and tried to relate it to a different purchase for NIS 40. Others claimed temporary staff must have received the money paid and not recorded it.

Another tax audit campaign the same day focused on vacation lodgings (tsimerim) in the Nazareth area. Eight out of 23 businesses checked failed to record income, and one was caught accepting excessive cash.

One business that failed to record a check for NIS 4,000 said it was merely a contribution to expenses. Two others failed to record “Bit” phone-app payments. One claimed he must have missed it. The other claimed he had merely received advance payments by “Bit” totaling NIS 2,200 and he would issue receipts at the end of the month. An acupuncturist said she was too busy to record receipts from 10 clients totaling NIS 1,850.

Comment: Don’t let them catch you and mock you. Keep books and issue invoices as required.

As always, consult experienced tax advisers in each country at an early stage in specific cases.

leon@h2cat.com

The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd.