There are many facets to both doing business in Israel, as well as making transition to living from the US into Israel. It affects virtually every aspect of life – only a few examples are food, home size, community, culture, language, and financial. Of course, within financial differences between the US, there are many areas such as differences in banking, renting or buying a home, retirement planning, paying bills, how to budget, tax systems, making store purchases, and the list goes on endlessly. When I made aliyah with my family nearly four years ago, I knew my life would change, but I had no idea that it would change so much. And even now that I feel rooted here, I still feel that I am learning constantly about the differences between the realities of living in the two countries. Having said that, I would like to address answers to some recent questions which were brought to my attention which caught my eye, as the questions are interesting and challenging to address, while the answers are important.
Q #1: Does anyone know if you need to claim the money you received from Sal Klita on your US taxes? Thanks!
As a CPA and a US tax professional, I thought about the same thing, when I was an oleh chadash. In reality, the tax law does not make it entirely clear whether or not Sal Klita is taxable income. However, my opinion based on research, and based on what I have seen others do, is that Sal Klita is not taxable in the US. Generally, the IRS considers all income under Section 61 of the Internal Revenue Code as taxable income, unless the Code considers that type of income exempt from tax. Based on my reading, it appears that the reason is that Sal Klita is a public assistance benefit that is not compensation for services under the umbrella of a general welfare exception. It also may be that Sal Klita could be considered a gift from the Israeli government, and gifts are not considered taxable based on the Internal Revenue Code.
Q #2: Is there any reason (tax, or otherwise) that an Israeli marrying an American citizen (who made aliyah) should not add himself to his fiance’s US bank account? Thanks for a speedy answer.
Not simple to answer, as this depends on a variety of factors, which can complicate matters.
It is important to understand that the US taxes its citizens and permanent residents on their worldwide income, but only taxes NRA’s (nonresident aliens) on certain types of income from US sources. Generally speaking, I see that when a US Citizen is married to an NRA spouse, that the US citizen needs to file US tax returns, even if none of the US Citizen’s income is from American sources. But NRA spouses often have no US source income. Therefore, the couple usually has the US citizen spouse file with a Married Separate or Head of Household status, and the NRA spouse does not file at all, unless a special election is made for them to file a joint return and treat the NRA spouse as if he/she was a US Citizen. With this election, all worldwide income of the NRA spouse is reported to the US. Although this sounds like it would hurt the couple, there are times when this can be beneficial to help the couple qualify for certain tax credits.
In any case, where the US Citizen files separately from the spouse, one would think that the NRA being on an interest-bearing bank account would cause the spouse to need to file, and cause additional tax, due to the interest income. Actually, now, the US citizen would only need to report half of the interest income, because the other half belongs to the NRA spouse. The NRA would not need to file, because on Form 1040NR, the US tax return for NRA’s, interest income that must be reported only if it is connected with a US trade or business.
But a different consideration, which I am less familiar with, is that now, the NRA spouse has an interest in a foreign bank account relative to Israel. Due to recent FATCA my understanding is that Israel has a foreign bank account reporting requirement, similar to the US FBAR.
If you are a US Citizen making aliyah and married to an Israeli who is not a US Citizen, it is important to talk to both a US and Israel CPA’s to explain the facts & circumstances of your situation.
Q #3: Recently a CPA advised that if you are a USA citizen and you have an OSEK murshe (freelancer) in Israel you are liable for another 15% tax on income to Social Security (USA). Something that would not be applicable if you are an Employee or if you have a Company (and pay yourself a salary). Anyone know about this?
This notion is correct. A US Citizen who has net self-employment income, whether from US sources, or sources of another country, must pay Self-Employment tax (SE tax) to the USA. SE tax is calculated and reported on the US Income Tax Return (Form 1040), but is not actually an income tax. SE tax is essentially the employer and employee sides of Social Security tax and Medicare tax, which are 6.2% and 1.45% each for the employer and employee, a total of 15.3%. The break comes after the first $118,500 of net SE income. At that point, the income is only subject to Medicare tax, which is 2.9% for SE purposes. But additional the atzmai (the Hebrew term for a self-employed individual) must pay bituach leumi and mas bruit. Although the US-Israel Tax Treaty, as well as the foreign tax credits and earned income exclusions, alleviate double taxation by the US and Israel on the same income, these benefits only apply to income tax. There is no measure to prevent or even mitigate double Social Security or Medicare type taxes.
For this reason, many of my clients incorporate their Israeli business. The individual then draws a salary from the Israel corporation, and only has to pay the Social Security and Medicare type taxes to one country – Israel. This, however, is not a good solution for everyone. You must consider that both a self-employed individual in Israel and an Israel corporation must have financial statements from an Israeli CPA. Therefore, consider that financial statements are likely to be more complicated, and more costly to prepare than the financials for a self-employed business. Additionally, the Israeli corporation doesn’t normally pay tax in the US, but must file Form 5471 to disclose the corporate activities to the IRS. Adding Form 5471 will make your US tax return more complicated and expensive to prepare. Therefore, you must consider your income to decide whether you are better off paying SE tax, or having extra costs of US tax prep and more complicated financial statement preparation.
