TAX TIPS for New Immigrants:
Oleh General Guidelines to U.S. Tax Compliance
U.S. citizens and lawful permanent residents (people who have Green Cards) must file a U.S. tax return and report their worldwide income. In some situations, income which is exempt from taxes in Israel will be still taxed in the U.S. As an example, rental income below a statutory amount that might not be taxable in Israel, is still reportable in the U.S. Another example is a Keren Hishtalmut fund (short term tax free saving plan in Israel). Israel generally will not tax a matured Keren Hishtalmut that is cashed out. However, it is taxable in the U.S.
The same income which you earned in Israel needs to be reported on your U.S. tax return. There is an "earned income" exclusion from U.S. taxes. For a 2013 tax return, the exclusion amount was $97,600. This means the first $97,600 of earned income, once reported, can then be excluded from your income calculation. There is another approach which can be taken instead of the "earned income" exclusion. You are entitled to a foreign tax credit on income reported to the U.S. where Israeli income tax has been withheld at source. The foreign tax credit applies to both earned and unearned income. An example of unearned income is interest income.
If you reside in Israel and collect Social Security, the U.S.-Israel Tax Treaty exempts the Social Security payments from taxation in either country.
If you are self-employed, Israel does not have a Totalization Treaty with the United States. This means a self-employed dual citizen residing in Israel will pay both Bituach Leumi and U.S. Social Security tax on the same income.
If your children are U.S. citizens, they may also subject to U.S. taxes on the income they earn. In addition, your child may entitled you to a Child Tax Credit of $1,000 per child under the age of 17. In order to claim your child for the Child Tax Credit, you must have earned income (i.e. salary), your child must be a U.S, citizen in the year you are claiming them and your child must have a Social Security number.
If your spouse is not a U.S. person, he or she is not required to file a U.S. tax return. As a U.S. citizen, you may make an election to treat your non-U.S. spouse as a U.S. citizen for U.S. taxes. This election, once made, stays in effect until such a time that the election is revoked. The election can be made once and revoked once.
There are additional informational forms which must be included as part of your annual tax filing. Although these forms are informational in nature and do not usually impact your tax liability, failure to include them can result in substantial penalties. Examples of these forms are Form 5471 for reporting certain ownerships in foreign companies and Form 8938 (FATCA) used to report financial accounts with values over $200,000 at the end of the year or $300,000 during the year for a single taxpayer living overseas. The values are higher for married taxpayers.
The FBAR, the Report of Foreign Bank & Financial Accounts, is an information return filed with the United States Treasury. It is not a tax return. You are required to file an FBAR if your foreign bank & financial accounts in aggregate exceed $10,000 in a tax year. In order to determine the overall value, a U.S. citizen should inventory out each & every account, including bank accounts (checking,savings, securities) pensions, hishtalmuts & gemels, associated with their name. The FBAR is required to be filed by June 30th of the following year.
Jeffrey Nurkin is a licensed U.S. CPA and a member of the California State Board of Accountancy since 1987. Jeffrey has been practicing in Israel since 1993. Please visit his website at www.nurkincpa.com. He can be reached at firstname.lastname@example.org. Please feel free to contact Jeffrey to discuss your particular tax situation at no obligation.