August 19th, 2020
Coming to America – A U.S. Law Primer for Israelis Moving to the United States
Author: Jeremy M. Vaida
After years of telling everyone your quitting the Middle East balagan, you’ve finally got your visa to America! Your friends and family are already calling to tell you what they want you to bring back to Israel when you come back for the Pesach.
But while you may think that you are leaving Israel behind, your new best friend, the U.S. government, is very interested in your foreign finances.
Establishing Tax Residency
- Foreign persons are always subject to U.S. tax on their U.S. source income. However, foreign persons can also become subject to tax on their worldwide income (essentially as if they were citizens), if they become “Resident Aliens” for U.S. tax purposes.
- Foreign persons are automatically classified as Resident Aliens if they receive a Green Card (i.e. achieved lawful permanent resident status).
- Foreign persons can become Resident Aliens, even if they do not have Green Card so long as they have a “substantial presence” in the United States. Foreign persons who are in the U.S. for at least 31 days in the current years and 183 days during the 3-year period that includes the current year (after applying a weighted average) are deemed to have a “substantial presence” and classified as “Resident Aliens” for U.S. tax purposes.
- It should be noted that in certain situations an individual that is a Resident Alien for U.S. purposes could also be technical resident in Israel. In such cases, the U.S.-Israel Income Tax Treaty provides a series of factors which break the tie between both countries so that the individual is only taxed as a resident of either Israel or the United States.
- As a Resident Alien, if you maintain any bank or other financial accounts in Israel totaling over $10,000, you will be required to file a Report of Foreign Bank and Financial Accounts (commonly known as an FBAR) on a yearly basis. The form is generally due April 15th of each year, but can be extended to October 15th.
- Depending upon your income and asset profile, you will be required to attach additional tax forms to your normal tax return, including but not limited to: Form 8938 (if you hold foreign assets in excess of certain value thresholds); Form 5471 (if you operate a foreign corporation); Form 8865 (if you earn income from a foreign partnership); etc.
Income Tax Consequences
- As referenced above, Resident Aliens are required to report and pay tax on their worldwide income. However, such income can be sheltered if you pay tax on that income in a foreign jurisdiction. As a result, if you pay Israeli tax on your Israeli income, you may not have to pay tax again in the United States.
- However, certain categories of income, such as rental income and interest income, are taxed at lower rates in Israel. As a result, it is more likely you have to pay U.S. tax on this kind of income even after paying tax in Israel.
- Nevertheless, the U.S.-Israel Income Tax Treaty can supersede how a specific category of income might otherwise be taxed. As a result, best practice dictates consulting the U.S.-Israel Income Tax Treaty before taking a position regarding your Israeli income on your U.S. tax return.
- Social Security Tax payments are not harmonized between the United States and Israel (due to the absence of a Totalization Agreement between the two nations). As a result, unless properly structured, your Israeli-sourced compensation could be subject to a combined rate of 32.73%, starting from the very first dollar.
- Almost all retirement accounts in Israel invest in companies that qualify as Passive Foreign Investment Companies (PFICs) for U.S. Income Tax purposes. PFICs can give rise to U.S. taxation that can easily approach 60-70% of the value of the retirement account themselves. Careful analysis of Israeli retirement plans must be conducted to avoid such negative tax consequences in the United States.
- In certain cases, an Israeli will not be considered a Resident Alien in the United States, despite otherwise satisfying the “substantial presence” test referenced above. Examples include:
- Certain Israeli government officials (those on an “A” or “G” visa, other than individuals holding “A-3” or “G-5” class visas);
- A teacher or trainee under a “J” or “Q” visa;
- A student under an “F,” “J,” “M,” or “Q” visa;
- A professional athlete temporarily in the U.S. to compete in a charitable sporting event.
- Generally speaking, being a Non-Resident Alien exempts one from complying with the vast majority of the tax and financial reporting requirements referenced above.
- Nonetheless, even foreign persons are subject to tax in the United States on their U.S.-source income. Examples of such income include:
- Income from real estate located in the United States;
- Income derived from services performed in the United States;
- Dividends from a U.S. Corporation;
- Other forms of income “effectively connected” with the United States.
Non-Resident Aliens that receive U.S.-source income are required to file a Non-Resident income tax return.
For more information on planning your move to the U.S., please contact Jeremy Vaida at firstname.lastname@example.org or at (301) 838-3214.
If you are someone moving from the United States to Israel find out more by reading Moving to Israel (Aliyah) – A U.S. Law Primer.