July 16th, 2020
Moving to Israel (Aliyah) – A U.S. Law Primer
Posted in: Business Law Tax Law Tagged: Jeremy M. Vaida
Author: Jeremy M. Vaida
You are a U.S. citizen, your bags are packed, your documents are in order, and you are about to board
your flight on El‐Al. A few hours from now you will be touching down, ready to mark a new chapter in
your life as an Oleh Chadash in the land of Israel. But while you may think you are leaving the U.S. of A.,
Uncle Sam is not quite done with you yet – not by a long shot.
Whether you intend to make Israel your permanent home or are simply looking to spend more time
with your grandchildren, there are several things to keep in mind:
Taxes and Financial Reporting
- Once you open a bank or other financial account in Israel, 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.
- Despite living abroad, you will still be required to file your individual income tax returns, even if you do not earn any income from U.S. sources.
- 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.
- 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, you could be forced to pay social security tax in both nations, subjecting your compensation to combined rate of 32.73%, starting from the very first dollar.
- Income derived from the performance of personal services (lawyers, doctors, computer programmers, consultants, etc.) are sourced where the activity is performed, i.e. where the individual is physically located. Therefore, even if you maintain your U.S. employment and work in Israel remotely, your income will be subject to tax in Israel.
Retirement
- U.S. social security tax payments are exempt from Israeli tax under the U.S.‐Israel Income Tax Treaty, even if you are living in Israel full‐time. Furthermore, such payments can, under circumstances, remain untaxed in the U.S.
- Pensions are also generally afforded favorable treatment, subject to either no tax or reduced tax in Israel. Depending on the pension, such income can be subject to U.S. tax while living in Israel but may be sheltered by foreign tax credits depending on the situation.
- While the receipt of retirement payments are generally tax preferred, saving for retirement while living in Israel can be a minefield. Most, if not all, tax‐preferred retirement vehicles in Israel can give rise to current‐year U.S. tax liabilities.
Real Estate
- Despite it being generally more challenging to purchase real estate in Israel as compared to the United States (higher down payment requirements and transaction costs), U.S. persons can still take advantage of the Primary Residence Exclusion while abroad. This means that U.S. persons can sell their principal residence in the United States (up to $500,000 for a married couple) and purchase an Israeli property without paying tax on the sale of the U.S. property.
- Additionally, U.S. persons can still deduct the mortgage interest they pay on their Israeli principal residence on their U.S. tax return. In certain situations, U.S. persons can even deduct the mortgage interest they pay if the property is considered a second home.
- However, for investment property, U.S. Persons cannot substitute U.S. property for foreign property for the purposes of a 1031 exchange (a tax‐free exchange of once piece of real estate for another). However, foreign property can be exchanged for other foreign property.
Trusts, Gifts and Estates
- Just like with the personal income tax, U.S. estate tax includes a decedent’s worldwide estate. Thus, by default, foreign assets are included for U.S. Estate Tax purposes. However, in some situations, U.S. taxpayers are entitled to a credit for foreign taxes paid.
- Non‐U.S. citizen spouses of U.S. citizens do not enjoy portability of their spouse’s lifetime exclusion. As a result, if the U.S. citizen dies first and leaves significant assets in the United States, they can become subject to U.S. Estate tax at much lower levels than anticipated.
- Due to the interplay between U.S. and Israel law, different trusts may be required to be set up depending upon where the intended beneficiaries reside.
- If assets are held in both jurisdictions, it is likely two wills will have to be drafted, one for U.S. purposes and one for Israeli purposes.
Renouncing U.S. Citizenship
- For those who believe that maintaining their U.S. connections is more trouble than it’s worth, citizenship renunciation is a viable alternative. However, renunciation is not without its own perils and potential pitfalls.
- Certain high‐income individuals, high net worth individuals, and tax non‐filers are subject to an exit tax equal to up 23.8% on the net unrealized gain in such person’s property (such as a house), as if the property had been sold for its fair market value on the day before the expatriation date.
- Even once an individual renounces their citizenship for tax purposes, they must still renounce their citizenship through the State Department. Likewise, renouncing one’s citizenship through the U.S. State Department does not count for tax purpose.
- Citizenship renunciation can also have a significant impact on estate planning if significant assets are left in the United States. Unlike U.S. citizens (who currently have a $11.8 million lifetime exclusion), non‐citizens are subject to Estate and Gift Taxes on U.S. assets in excess of $60,000.
- Even gifts between spouses are subject to strict limits (unlike for citizens who may gift between spouses without limits). Specifically, non‐citizen spouses can only gift up to $157,000 (for 2020) in U.S. property to one another.
- Gifts to other persons from expatriated individuals can cause the recipient to owe tax up to 40% of the value of the gift.
For more information on planning your move to Israel as a U.S. citizen, please contact Jeremy Vaida at
jvaida@steinsperling.com or at (301) 838‐3214.
