Your Taxes: Year-end tax planning tips for individuals

Not just businesses need year-end tax tips.

By LEON HARRIS
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. This week we do the same for individuals.
Personal tax rates
In the case of individuals, the top income-tax rate of 45 percent in 2010 for income over NIS 472,081 per year (index linked) will continue into 2011, and decrease to 44% in 2012, 43% in 2013, 42% in 2014, 41% in 2015, and 39% in 2016.
Passive income from dividends, interest and capital gains remain taxable at a rate of 20% in most cases, but various exceptions exist.
Consider whether you can legitimately defer investment income or salary bonuses until next year.
There are many other types of year-end tax planning to consider where relevant. Here is a selection.
Pension contributions
Putting money to one side in pension and savings plans (referred to as provident funds) each year is always important. With regard to tax relief for approved provident-fund contributions, the rules have gotten incredibly complex. Therefore, you should check your situation and needs with your accountant and financial advisers.
Here are a few brief highlights that might apply in your case for 2010.
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 Israeli approved provident pension fund is at least NIS 15,389.
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 under a recent amendment.
Also important is the “entitling income” limit. This is your actual income, but not more than NIS 97,200 of income if you only have salary income in the year, not more than NIS 136,800 if you have no salary income in the year. If you have both, both limits apply – NIS 136,800 in total, including NIS 97,200 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 not exceeding the higher of NIS 1872; or 5% tax credit up to NIS 6,840 if you had no salary income in the year; 7% of entitling income if you had salary income in the year; but no more than 5% of entitling income to be spent on life insurance.
2. A tax deduction for non-salarybased pension contributions including a deduction of 7% of non-salary income, but no more than NIS 9,576; further deduction of 4% of non-salary income, but no more than NIS 5,472 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 not more than NIS 4,860; and on any salary a 5% deduction, but not more than 5% of NIS 388,800 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: 5% tax credit up to NIS 9,720; - if you add pensionable in the year: 7% of pensionable entitling income plus 5% of non-pensionable income up to NIS 194,400.
2. A tax deduction for any income: 11% deduction for amounts paid on income up to NIS 97,200 minus pensionable income 3. A tax deduction for additional income: 7% deduction plus a further deduction of 4% of non-salary income, you paid 12%-16% of entitling income to the pension fund.
Additional income is defined as nonpensionable income of up to NIS 97,200 plus NIS 388,000 minus the higher of pensionable income or NIS 97,200.
If you are a “10%-or-more shareholder” in a company controlled by five or fewer individuals, no more than NIS 11,390 of pension fund contributions can be deducted as an expense by the company in 2010.
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 after six years 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 2010 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.
In the case of self-employed people, consider contributing NIS 17,010 in 2010 to claim a deduction from taxable income of up to NIS 10,935. This is based on maximum income for these purposes of NIS 243,000 in 2010. Payments of 7% are recognized, but 2.5% is not deductible, while 4.5% is deductible.
Contributions should not exceed NIS 17,040, otherwise fund income will be taxed and the exemption will not be applicable.
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 54,456, resulting in a possible contribution of NIS 3,811 (at 7%). This is based on the difference between the business income limit of NIS 243,000 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 310 in 2010, but the contributions will not be recognized if they exceed NIS 7,636,000 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. Note that the NIS 7,636,00 limit is scheduled to fall back to NIS 4,208,000 in 2011, so it is better taxwise to be generous with your donations in 2010 rather than 2011.
US citizens residing in Israel should consider contributing to recognized “Friends of Israeli Charity” institutions in the US with a view to qualifying for a deduction for US purposes and a tax credit for Israeli tax purposes on contributions not exceeding 25% of taxable income, under special rules in the US-Israel Tax Treaty.
New immigrants If you became a new or “senior returning resident” (after living abroad 5 - 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.
If you moved to Israel before 2007, your maximum tax holiday is usually 5 – 10 years, and only for passive investments you acquired before you moved.
Check if a sale would be exempt from Israeli tax (and what any foreign tax effect is).
Regardless of when you moved to Israel, don’t panic if you can’t or didn’t sell an overseas asset within the tax holiday period, as a partial Israeli capital gains tax exemption is still possible according to a special formula – check it out and check out any foreign taxes.
Losses
Bona fide business losses can be offset against other income in the same year or against future business income but never against past income. 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. So if you are a 10%-or-more shareholder in your own company and you personally made losses this year on some securities, consider taking a dividend from your own company before the year-end.
Trusts
Anyone with an actual or potential link to a trust (settlor, 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. Testamentary trusts can be extremely helpful in avoiding double tax on inheritances from non- Israeli residents to Israeli resident heirs, if certain conditions are met.
Rental income
Residential rental income in Israel is currently exempt if it does not exceed NIS 4,680 per month. Any excess reduces the exemption shekel for shekel. So rent above NIS 7,020 (excess NIS 2,340) is taxable, under one of two alternatives at your choice: (1) pay tax at a rate of 10% of gross rent by January 30, 2011, and no national insurance or (2) pay tax at a rate of 30% – 45% plus national insurance on net rental income after deduction expenses and depreciation.
Rent paid upfront is taxable when received, not when it should have been received. Different rules apply to commercial rents and overseas rents.
Other Special deductions may be available for investors in Israeli movie productions and oil partnership unitsspecialist advice should be obtained.
Pay your taxes Interest and indexation accrues on 2010 tax debts at the CPI rate of inflation plus 4%, commencing January 1, 2011, but no interest and indexation is due if you pay by January 31. If you pay your 2010 taxes by February 28, you avoid 50% of the linkage and interest and if you pay by March 31, you avoid 25% of the linkage and interest.
If you want more detailed info or to ask questions regarding year-end tax planning, please come to our educational seminar on December 22 – at 7pm at 128 Ahuza Street, Raanana.
There is no charge and no other obligation.
Please register at the email below or by phone: 09-7730255 as places are limited.
As always, consult experienced tax advisors in each country at an early stage in specific cases.
leon@hcat.co Leon Harris is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.Tax