The tricky tax tapestry for Americans in Israel – comment


When Phyllis and her husband embarked on their new life in Israel five years ago, they did so buoyed by the hope that the country’s tax benefits would prove an economic boon. They were advised that once they moved to Jerusalem they would no longer need to pay State Tax in California, and that like many other American couples, they thought they could transition smoothly without paying Israeli tax for ten years.

However, they soon discovered that this tax relief was not as straightforward as it appeared.

While the concept of a ten-year tax holiday for new immigrants is appealing, it is much less advantageous than it first seems. The starting gun for the ten-year exemption doesn’t fire the moment you attain Israeli citizenship. Instead, it begins when your “center of life” shifts to Israel, a concept fraught with legal ambiguity.

For instance, in the case of Phyllis and her husband, it turned out that the fact that they spent over a year in Israel before making Aliyah and owned an apartment in which they lived, had inadvertently shortened their ten-year exemption into eight and a half years. 

Beware of false assumptions

Furthermore, many new immigrants labor under the misapprehension that this ten-year tax exemption extends to all income sources. This assumption has led to many unpleasant surprises. The rules do not, in fact, fully exempt salaries or professional fees paid to olim from non-Israeli companies. Phyllis and her husband, who for the last 20 years received salaries from their joint company based in the US, fell into this tax trap.

US tax form (illustrative) (credit: INGIMAGE)

They dutifully continued to pay federal income tax in the US, oblivious of the requirement to also pay tax in Israel on their salary and corporate profits. This led to the unpalatable situation of double taxation. To avoid this, they had to enter a long negotiation with the ITA regarding the payment of Israeli tax on these salaries, then lodge a claim for a refund with the IRS – an unwelcome complication in an already complex process.

The rules for American immigrants with trusts further complicate the picture. Unlike the US, Israel’s tax regulations often hold the trustee liable for tax even if the trust is a grantor trust. Furthermore, if at least one beneficiary is not in their ten-year exemption period, the trust could be subjected to Israeli tax, undermining the perceived benefits.

In the case of Phyllis, both she and her brother, who is a long-time resident of Israel, were beneficiaries in a trust set up by her parents, who suddenly realized that the trust should have been taxed in Israel for many years.

In the final analysis, the tax benefits offered by Israel to new immigrants are not as simple or as generous as they first appear. It’s a complex puzzle, loaded with potential pitfalls and challenges. The story of Phyllis and her husband serves as a cautionary tale. As Tom Waits famously said, “The large print giveth, and the small print taketh away.” 

Before you make your move, it’s imperative to understand the intricacies of the Israeli tax landscape and seek professional advice from both Israeli and US tax professionals. Recognizing in advance the difference between information and knowledge could transform a complex tax situation into a manageable one. Therefore, tread carefully, consult a tax adviser, and then decide. After all, the true benefits of moving to Israel should not be obscured by an unexpected tax burden.

The writer is the founding partner of Benjamini & Co, an Israeli law firm specializing in taxation.