Ask the tax expert: Calculating pensions

Vol XXVI: I am often asked about the laws governing laws of Bituach Leumi and when it is worthwhile to take your pension. I cannot calculate for everyone but I will give some guidelines.

By MIRIAM VILNER
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tax88
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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 >> * * *
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  • Volumes XX-XXIII * * * Vol XXVI I am often asked about the laws governing laws of Bituach Leumi and when it is worthwhile to take your pension. It has become especially important to seek professional advice, owing to the new definition of "retirment age" I cannot calculate for everyone but I will give some guidelines. First: If you were born before 06/1939 (men) and 06/1944 for women or after 05/1942 for men and 05/1953 for women, you can stop reading this. Only the first two paragraphs apply to you. Anyone born before 06/1944 (women) or 06/1939 (men) reached "retiring age" at 60/65 respectively and could receive their pension at this age BUT if they carried on working, and earned over 4,296 NIS then 60% of any earnings above this sum will be deducted from their pensions AND they miss a chance of increasing the pension by 25%. Anyone born after 05/1953 (women) or 05/1942 (men) can receive their pension at the age of 64/67 respectively. BUT if they carry on working, and earn over 4,296 NIS then 60% of any earnings above this sum will be deducted from their pensions AND they miss a chance of increasing the pension by 25%. Q1: What happens to those born in between these dates? A1: The age at which you are entitled to a pension without any deduction for earnings from business or work: Up to 30/06/2004, the age was 65 for women and 70 for men. As of 01/07/2004, the age for women will increase gradually at the approximate rate of 4 months a year up to a maximum of 70. A2. The age at which you are entitled to a pension with 60% of the earnings from business or work: above the limit of 4,296 NIS (2007) are deducted. Up until 30/06/2004, the age was 60 for women and 65 for men. As of 01/07/2004, the age for both men and women will increase gradually at the approximate rate of 4 months a year, up to a maximum of 67 for men and 64 for women. Q2: Can you give us an example to make it clearer? A2: Yes take a woman born between 05/1950 and 04/1951 who continues working and earns 7.000 NIS a month She is entitled to a pension at the age of 62 and 8 months but if she continues working 60% of 7,000 - 4,296) =1,622 NIS will be deducted. This will be the case until she reaches the age of 67 and 8 months. I cannot answer (personal) questions as to whether it is worthwhile postponing one's pension for five years or not. The date for the maximum pension is identical to the date when a person may work without the 60% deduction. Everyone must make his/her own calculation and take note! He/she must include his/her life expectancy. To help you in your calculation" The basic pension 25 years' work stands at 1,716 NIS, an extra 25% would be an extra 429 NIS The calculation for anyone not working would be 60* 1,717=102,960 NIS loss if the pension is deferred for 5 years As opposed to 429 NIS * life expectancy (in months) for the extra gained by deferment. That means 20 years after retirement. If I have to sum up, which I would prefer not to do as it so much depends on personal circumstances, as a C.P.A., I would advise those continuing to work after their official retirement age (I did and it's the healthiest thing one can do) to also defer their pensions from Bituach Leumi. For those not working, you have to make your own calculation, it probably is not worthwhile deferring the Bituach Leumi pension. Good Luck Miriam Vilner M.Sc. C.P.A. (Isr.) www.lesstax4u.co.il * * * Vol XXV Q: I am about to make aliyah, and am about to complete on a new build apartment. If I decide to rent out the apartment for the first year or so, what tax does one pay on the income? What deductions - mortgage interest etc. can one deduct? Many thanks A: Thank you for your e-mail. In principle, you will be liable for tax on rental income from a property in Isarel (on property abroad you have a 5 year exemption). However, rental incomes are exempt up to a ceiling of around $1,200 and providing that the apartment is used for living only. It is important that this be in the contract. Mortage payments do not grant a tax reduction unless we are considering a busines property and even then only a percentage of the interest. If you are liable for ax on your rental property, there are alternatives possibilities of taxation and it would be worthwhile consulting a professional to see which suits you best. Good luck with your Aliya. Q: I am a dual citizen of the US and Israel, residing in Israel. I have received employee stock motions according to Israeli tax rules according to chapter 102 with Ne'man. If I exercise my options I will be subject to 25% income tax upon sale of the resulting shares. However, I have no idea what will be my tax liability in the US. Specifically: 1. Is the exercise of options without the sale of the resulting shares considered a tax event? (In Israel it is not). If so, how will I be taxed? 2. When I eventually sell the shares, what will be my tax liability in the US? A: Thank you for your e-mail. If you realise your options for shares in Israel, you will not be liable for tax (this is not a tax event) PROVIDING the shares stay with the trustee and are not passed onto to you. The moment they are passed on to you and leave the trustee's hands, you are liable for tax. Otherwise you are liable for tax in Israel only when you sell. Re the US, I don't know. I am trained and qualified only in Israel - and it's enough working in what must be the most complicated and unstable tax field there is. * * * Vol XXIV Q: Hi,What is the tax status of income from investments in Israel such as GIC's and Mutual funds (passive income) after making aliyah? Thanks. A: Thank you for your e-mail. Passive income from investments are exempt for five years after coming on Aliyah. However, the source of such income must be assets held outside of Israel both prior and after Aliyah. I'm afraid this does not seem to apply to you. I don't know what GCI's are. I can only add that income on Israeli foreign currency deposits remain tax free for the first 20 years after Aliyah. However, there are many restrictions to this law and a special declaration must be completed for the Tax Authorities and the bank. We have available a booklet (revised recently) on the Tax reform with emphasis on guidance for Western Immigrants and returning residents for $35 or 150NIS incl. V.A.T. Another area in which our office may be helpful is our specialization in tax rebates for losses in the Capital Market. We do not charge to examine your liabily and rights for a rebate and there is no obligation. If you would like to avail yourself of our services, ask your bank or investment manager for forms 867A 867B and 867C (all of them. There are three a year).and send them to me by fax to 050-8975934. You may do this for all the years 2004-2006 inclusive. Good Luck Miriam Vilner M.Sc. C.P.A.(Isr.) Q: Dear Miriam, My wife and I are making aliyah next summer. My income is totally based on my 100% disability-both from Social Security Disability and NY State Workmen's Compensation. This money is tax free in the US-is it tax free in Israel? A: Thank you for your e-mail. Your social security pension is tax free in Israel, even if you were not disabled, according to paragraph 14 of the income Tax ordinances any government pension is exempt unless it was accrued from your working for the government. NY State Workmen's Compensation, is in theory liable for tax, This is on the basis that any sum of money received as compensation, has the same tax liabilty as the financial loss it is to cover However, there are a number of ways around this the simplest being going to a Bituach Leumi committee and receiving disability authorisation. However, it has to be over 90% collective for you to be tax exempt. 2. It is possible that the sum you receive, after the 35% reduction to which you are entittled as all israelis, will not reach the minimum amount for tax liability. Strictly the 35% reduction applies only to a pension you receive from our via an arrangement with your former employer. 3.There is a clause which states that you cannot be charged more tax in Israel on a pension than you would pay in the States. I use this clause for my clients but so far have always counselled them to pay some tax on their pensions in the Statws to make it relevant. We have available a booklet on the Tax Reform (revised 01/01/07 and how it affects new immigrants and returning residents for $35 or 150 NIS Good luck with your Aliya Miriam Vilner M.Sc. C.P.A. (Isr.) Q: I am about to retire and want to know how much I will have to budget with. 1. I am married and will receive something from Bituach Leumi every month.(how much??) 2. I will receive a pension of about NIS3,200.00 per month. 3. I am a bereaved parent and will receive about NIS5,000.00 per month from Misrad ha Bitachon. What taxes, if any will I have to pay on all of this? A: Thank you for your e-mail. I cannot tell you how much you will receive from Bituach Leumi, it depends on many factors: 1. How many years you paid Bituach Leumi 2. How old you were when you first requested your Bituach Leumi pension. 3. Your date of birth is also a factor as "retirement age" has been redefined since 2003. I advise you to phone and ask them, they have all the information on their computer and can answer you precisely. Their number is (I think) *2640 Bituach Leumi and payments to bereaved parents are, of course, tax free. Your pension is not tax free but you are entitled to a 35% deduction and will not be liable for tax as you won't reach the minimum taxable income. You did not ask, but if you are expecting to receive interest from savings funds (not dividends on the stock market) you may be entitled to an exemption because of low income. Finally, you have given more to the country than anyone should be asked to give in saner times. Now sit back and enjoy your retirement and what the country gives you Miriam Vilner M.Sc. C.P.A. (Isr.) www.lesstax4u.co.il 050-4564049 03-5343727 *** I have available a booklet on the new Tax Reform which outlines the various tax rates and exemptions for 150 NIS or $35. 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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