Features of the US-Israel Tax treaty

13/11/2016

One of the countries with which Israel has signed a treaty on the subject of Double Taxation is the USA. There are some very interesting features affecting those who live in Israel and whom are also US citizens, green card holders, and US (tax) residents (known collectively as US persons).

By way of introduction, US persons are subject to US taxation on their worldwide income regardless of where they live in the world. Most other countries in the world would only tax their residents to such an extent, rather than their citizens.

The treaty contains sections that relate to different forms of income and payments, and provides rules as to which country (the US or Israel) has the first (and sometime only) right to tax that income or payment. In certain cases, the income may even be exempt in either or both countries. Listed below are a few of provisions in the treaty that apply to US persons.

US Social Security payments received by residents of Israel are exempt in both countries
US federal, state and local governmental pensions are taxed only in the United States
Most other non-government pensions are taxable first and foremost in Israel even if earned while working in the US.
Capital gains earned on US securities are taxed first and foremost in Israel. This applies provided that the taxpayer owned less than 10% of the shares of the company.
Charitable donations made in the country of non-residence can be used in the country of residence. This is limited to 25% of the income earned in the non-residence country. For example, an Israeli resident who has $100,000 of income from the USA in a tax year could use up to $25,000 of US donations against their Israeli tax.
Other sections of the treaty may be limited for US citizens and green card holders to the “savings clause” which provides the US the right to tax its citizens and residents as if the treaty did not exist.

When filing your US and Israeli tax returns, it is very important to ensure that tax is paid first to the country which maintains the first right to tax under the treaty. If the tax is paid to the wrong country, you could end up paying double tax since the country with the real first right to tax would not provide a credit for taxes paid to the wrong country.

The impact of oleh benefits is beyond this scope of this post, which may impact the taxation of certain income.

To discuss how these issues may affect you, contact us today.