United States expats living in Israel should be filing their taxes. The United States has hunted down American tax fugitives in Israel in the past, and there have been tens of thousands of Americans living in the country as outlaws.
It’s not in your best interest, if you’re an expat, to get to the point where your unfiled tax returns have turned into a legal matter and the Internal Revenue Service contacts banks in Israel to question your finances.
In 2011, the IRS said that around 100,000 Americans in Israel were required to file tax returns, and in 2009 only 7%of the seven million U.S. expats worldwide filed their taxes.
If you’re an expat, you will have to file taxes in the United States even if you pay taxes in Israel. Even if taxes aren’t owed, a tax return is required. A 1040 must be submitted for anyone that earns $10,000 or more, or $400 for a self-employed individual.
As an expat, the Israeli government will share your tax information with the IRS. Banks are also required to report any financial information they obtain to the IRS if you’re a U.S. account holder.
Filing taxes with the United States is a requirement, but you may not need to pay any taxes to the United States. Double taxation can often be avoided by paying taxes in the country which has the first tax rights under the treaty.
If you’re receiving U.S. Social Security payments, you will not have to pay taxes on this income in either country. Pensions on the local, federal or state level from the U.S. are taxed only in the United States.
The United States will tax you based on your worldwide income, but there are exclusions that exist that will help relieve your tax burden. The Foreign Earned Income Exclusion (FEIE) applies to US citizens that live abroad. FEIE excludes income to a certain amount, which is adjusted annually, and is $103,9000 in 2018.
The exclusion is offered to income earned for wages or self-employment outside of the United States. As a taxpayer, you must meet the requirements of one of two tests to be approved for FEIE:
- Bona fide resident test, which requires the taxpayer to be a resident of the foreign country for a full U.S. tax year.
- Physical presence test, which the taxpayer must have resided in Israel for 330 out of any 12-month tax period.
Employer contributions into a pension plan in Israel may be non-taxed in Israel and taxed in the United States.
Paying your taxes in Israel and the United States is a requirement, and if you don’t file properly, you may have to pay fines or penalties. An accountant that specializes in both Israeli and U.S. tax laws will be able to help you determine how to proceed if you have unfiled taxes
If your taxes are prepared and paid properly, you’ll be able to avoid most double taxation issues. Investments may be taxable in the US and not Israel, and all of this information must be provided to the IRS.