Cross-border taxation | מיסוי בין דורי
Ron Zalben CPA (US/Israel)
Binyamin Radomsky, CPA (Isr), ACA (UK)
Cross-border taxation is one of the most complex and confusing areas of life, and affects more and more people with generations of families living in different countries. This is a particular issue for those living in Israel with family elsewhere in the world who are trying to plan their affairs for later in life. There are plenty of stories of Israelis paying exorbitant amounts of tax due to well-meaning plans made by families abroad who forgot to take into account the Israeli taxation.
Whilst Israel – in contradistinction to many other Western countries – does not (yet) have an inheritance/estate tax, Israel ensures to get its tax take based on capital gains upon the sale of assets – and where an asset is inherited, the descendant “steps into the shoes” of the deceased. This can lead to some significant differences in tax bases between different countries, as well as there being a potential double taxation – an estate tax abroad, and a capital gains tax in Israel – with no allowance given in either country for the tax paid in the other country. There are potential solutions available, but there is no question that planning ahead of time is the right way to go.
You made Aliya from the USA. You are duly following US tax law and filing your US tax return each year. What about your kids? They are growing up in Israel, possibly even born in Israel, and do not feel such a strong connection to the US. Most of these kids are US citizens, and therefore, are required to file American tax returns. US citizens have to report on their worldwide income to the United States provided they have income.
It is important to note that most US citizens living in Israel and working as an employee in Israel will most likely not be obligated to pay US income taxes on their Israeli wages. However, even if they won’t owe income tax, they still need to file a US tax return and report it to the US. US citizens that are self-employed will pay social security taxes to the US, but most likely will not be obligated to pay American income taxes. There may be American tax to pay on investment income depending on the circumstances.
In addition, there are reporting requirements on balances in foreign bank accounts including investment accounts, pension accounts, and other similar accounts if in total the balance in all these accounts added together are over $10,000 at any time of the year. The reporting is on an FBAR, which is separate from the tax return. There is no tax to pay on this form but must still be reported. However, the penalties for not filing can get steep.