2012 nbn workshop summer 2012

Retiring to Israel

Don Shrensky, CPA (US/ISR)

Nefesh B’Nefesh Workshop

June-July 2012

Visit our website:

www.dscpa-israel.com

Email: [email protected]

Call Toll-free in the U.S.:

1-888-DSCPA-99

http://www.dscpa-israel.com/

mailto:[email protected]

TWO TAX SYSTEMS:

U.S. taxes

Israel taxes

Israel taxes residency - not citizenship

Aliyah = residency (in general)

U.S.A. taxes citizenship

Who is taxed?

Israel TaxesWho Is a Resident?

Determined by ‘Center of Life’. Where is your permanent abode. Where is your family living. Where is your regular or permanent business or place of

employment. Where are your social and cultural activities located. Where are your active and substantive economic

interests.

Unofficial tests include: Driver's license Where do you vote?

Israel Taxes

Who Is a Resident? (continued)

Physical presence test = presumption of residency =burden of proof.

Presumption of residency if you meet one of the following two tests: In Israel more than 183 days during the tax year. In Israel for 30 days or more in the tax year and a total of 425 days in the

current tax year, the prior year and the year before that.

Rebuttal of Presumption: By the taxpayer By the Israeli assessing officer

Israel Taxes - Pensions

U.S. Social Security

Exempt in both Israel and USA – tax treaty.

Israeli Bituach Leumi

Taxable in U.S., subject to Welfare Rule.

Exempt in Israel.


Pensions / Annuities

All U.S. pensions:

10 year exemption



U.S. Government pensions:

Exempt in Israel under treaty.



General Rule (when no exemption):

35% exempt of Israeli tax 65% taxed at regular graduated rates Credit allowed for U.S. tax paid First Bite – to Israel



Special Rule (when no exemption): U.S source pensions Resulting from work abroad Tax payer = Oleh Tax not more than U.S. income tax Calculated as if remained a resident of the U.S.A Credit for U.S. tax paid First Bite - to Israel

Israel Taxes - Investments

10 year exemption:From Israeli income tax on all non-

Israeli source investment income.From declaring said income to the

Israeli tax authorities.From possibly having to file tax

returns.


After 10 year exemption – Israeli taxes on non-Israeli source income:

Interest, dividends and capital gains @ 25% If substantive shareholder (>10%) @ 30% Real estate @ 25% Royalties = regular tax rates Rental income =

• regular tax rates on net rental income (less credit for U.S. taxes paid), OR

• 15% on gross rents less Israeli depreciation (no credit for U.S. taxes paid)


Tax benefits – investing in Israel Interest (non-resident bank account)

• Exempt for first 20 years (regulation)• 15% for the next 10 years

Rent from residential apartment• Exempt up to 4,910 NIS per month (2012) OR • Gross rents taxed @ 10%

Sale of residential apartment – exempt if no sale in previous 4 years

TASE – 25% on dividends and capital gains

Israel Taxes - Work & Business

10 year exemption: U.S. Business or Profession} Produced or Salary from U.S. employer } Accrued in U.S. From declaring said income to the Israeli tax

authorities. From possibly having to file tax returns.

**Consider splitting salary in the first 10 years**

Israel Taxes - Work & Business

After 10 year exemption and Israeli source income:

Taxable at graduated Israeli tax ratesSubject to Bituach Leumi (National

Insurance)Credit for U.S. taxes paid (federal and

state)

Israel Taxes

NATIONAL INSURANCE (Bituach Leumi)

Income subject to special income tax rates = exempt Income subject to regular income tax rates = liable

Exempt from contributions when reach retirement age: 60+ for women 65+ for men

Israel Taxes

NATIONAL INSURANCE (Bituach Leumi)

Aliyah / residency after age 60 – not eligible for standard retirement pension

Special old age allowance

Income supplement

Settlor / Grantor

Israeli Resident

Israeli Resident

Foreign Resident

Beneficiaries

Israeli Resident

Foreign Resident

Israeli Resident

Residence of Trustee immaterial

Trusts

FAQs• Should I sell my house / condo before

making aliyah?Israel = 10 year exemptionU.S. = Principal residence exemption

• Should I keep my tax-exempt bonds?

• Should I sell my business before making aliyah?

U.S. Income taxes

Special rules for U.S. Citizens living in Israel:

• Foreign Earned Income Exclusion: Exclude up to $92,900 foreign earned income Each spouse has separate exclusion

• Tax treaty benefits: US Social Security benefits exempt from both

US and Israeli tax • U.S. Tax Returns Required:

Federal only Not state nor city

U.S. Income taxes

U.S. Social Security• Exempt from tax

In IsraelIn USA

• Direct deposit to bankIn IsraelIn USA

• 100% monthly benefit reduced (< full retirement age)Resident in IsraelWork >45 hours / monthEmployee

U.S. Income taxes

U.S. Social Security• If self employed in Israel –

Annual benefits reduced$1 for each $2 earned > $14,640 (2012)First year of retirement –

$1 for each $3 earned >$38,880

• Full retirement age = full benefits

Normal retirment age

Year of birth Age

1937 and prior 65

1938 65 and 2 months





1943-54 66






1960 and later 67

U.S. Income Taxes

Information Reports TD F 90-22.1 Foreign Bank Account Report - FBARs

3520 Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts

3520-A Information Return of Foreign Trust with a US Owner

5471 Information Return of US Persons with Respect to Certain Foreign Corporations

5472 Information Return of a 25% Foreign-Owned US Corporation or a Foreign Corporation Engaged in a US Trade or Business

926 Return by a US Transferor of Property to a Foreign Corporation

8865 Return of US Persons with Respect to Certain Foreign Partnerships

8938 Statement of Specified Foreign Financial Assets [new 2011]

U.S. Income TaxesU.S. Income Taxes

FBARsFBARs Super FBARSuper FBAR FATCAFATCA PFICPFIC

Foreign Financial Assets

Foreign Bank Account Report – FBAR

Accounts > $10,000 on any given day in tax year

Aggregate of accounts = include all accounts

Financial interest • includes if own foreign company

Signature authority • volunteer for non-profit organization• controller for company

Penalty $10,000 for not filing each year

Penalty of $100,000 or 50% of account balance for each year if willful failure to file

U.S. person must file


Foreign Bank Account Report – FBAR

bank accounts brokerage accounts mutual funds Commingled fund Keren Hishtalmut Kupot Gemel Bituach Minhalim Foreign-issued Life Insurance Policy – cash value


HIRE Act – Super FBAR

• For years beginning after 18 Mar 2010 [2011]• U.S. individual/entity• “specified foreign financial assets”• Aggregate value > specified amount• Report on tax return



Filing threshold Form 8938

If living in the U.S. - >$50,000

If living overseas –

joint return - >$400,000 on 31 Decor > $600,000 at any time during the tax year

other than joint - >$200,000 on 31 Decor > $300,000 at any time during the tax year



“Specified Foreign Financial Assets”:

• Any financial account maintained in a “foreign financial institution”

• Any stock or security issued by non-U.S. person• Any interest in foreign entity• Any financial instrument or contract held for investment and issued by non-U.S. person• Foreign-issued Life Insurance – cash value


FATCA

Starting in 2013 foreign banks have to enter into an agreement with the IRS.

Banks will be required to determine which of their account holders are U.S. persons - due diligence.

Information on U.S. persons’ bank account activity will be reported to the IRS starting from tax year 2013.


FATCA

30% withholding tax at source for account holders who refuse to divulge if they are U.S. persons30% withholding tax at source for all account holders at banks that refuse to comply with FATCA.Israeli banks have agreed to comply with FATCA.

Withholding applies to U.S. source income “U.S. account” = any financial account held by “specified U.S. person” or U.S. owned foreign entity


FATCA - Proposed Regulations

• In 2014 (for the 2013 calendar year), only the name, address, TIN, account number and account balance must be reported.

• Required reporting on income beginning in 2016 (for the 2015 calendar year)

• Required reporting on gross proceeds beginning in 2017 (for the 2016 calendar year).

• Withholding will not be required on foreign pass thru payments until January 1, 2017;

• Participating FFIs will be required to annually report the aggregate amount of certain payments to each nonparticipating FFI.



• Exempt from Review = Preexisting individual accounts with a balance or value of US$50,000 or less (US$250,000 for certain cash value insurance or annuity contracts) and preexisting entity accounts with a balance or value of US$250,000 or less.

• Accounts with a balance or value in excess of these amounts but less than US$1 million will be subject only to review of electronically searchable records (i.e., information that can be accessed using a database search).



• Account balance exceeds US$1 million - Manual review of paper records Manager’s actual knowledge of indicia of US ownership will be required, and FFIs will need to implement appropriate policies and procedures to ensure

compliance with the requirement.

• Verification of compliance through third-party audits will not be mandated, and FFIs may generally rely on periodic internal reviews rather than external audits.

U.S. Income taxes

PFICS

Holders of foreign mutual funds (קרן נאמנות)Certain corporate shareholders requiredMust file annual report with IRS

50% of Assets = Passive 75% of Gross Income = Passive

Taxed at highest tax rate: today = 36%

Visit our website:

www.dscpa-israel.com

Email: [email protected]

Call Toll-free in the U.S.:

1-888-DSCPA-99

http://www.dscpa-israel.com/

mailto:[email protected]

2012 nbn workshop summer 2012

Economy & Finance

taxes israel taxes

israel taxes residency

israeli income tax

israel work

exempt of israeli tax

year exemption israeli

tax returns

regular income tax rates