Tax guide for Americans in Israel
US expats in Israel have to pay Israeli taxes by default. Coupled with their US citizenship this means paying taxes in two countries.
However, this comes with caveats. First of all, US expats are taxed by the US only on their worldwide income. Secondly, if US expats don’t qualify as Israeli residents, they only have to pay taxes on their Israel-sourced income. Finally, the US and Israel have a treaty in place to eliminate double taxation.
In our guide below we’ll go over taxation in Israel and its nuances — should you decide to relocate to Israel as an American expat. We’ll explain the residency rules, types of taxes that exist, how to file for income taxes, available tax deductions and much more. Strap in.
Israel overview
| Primary tax form for residents | Israeli residents file an annual tax return (Tatzhir Mas Hachnasa) |
| Tax year | Calendar year (January 1 – December 31) |
| Tax due date | April 30 (or June 30 for those filing online). Extensions may be available |
| Criteria for tax residency | Determined by the 183-day rule or a center of life test (family, economic, and social ties) |
| US tax filing requirements | US citizens and Green Card holders must file a US tax return annually, regardless of residence. |
| Eligibility for FEIE | Available in meeting the Physical Presence Test (330 days abroad) or the Bona Fide Residence Test |
| Methods of Double Tax Relief | US expats can claim the Foreign Tax Credit (FTC) or use the FEIE to offset US taxes |
| Tax residency for dual citizens | US tax obligations remain, even if Israeli citizenship is held. Israel does not tax new residents on foreign income for 10 years. |
| Estate and inheritance tax | No estate tax in Israel, but a US estate tax may apply. |
| Overview of local tax rates | Progressive income tax up to 50%, plus national insurance (Bituach Leumi) and VAT (17%). |
Resident vs. non-resident of Israel
In Israel, an individual's tax liability depends largely on his or her residency status. The main difference lies in the scope of taxable income:
- Israeli residents are taxed on their worldwide income. This includes income earned both inside and outside of Israel.
- Non-residents, on the other hand, are taxed only on income earned within Israel. Income earned outside of Israel is not subject to Israeli tax.
Who can be considered to be a resident of Israel?
The criteria for determining residency status in Israel are varied. First and foremost is the "center of life" of the individual. This concept includes several elements:
- Spending more than 183 days in Israel during a tax year generally qualifies an individual as a resident. In addition, spending a total of 425 days or more in Israel over three years may also lead to residency status.
- Where an individual's immediate family (spouse and children) reside plays a significant role in determining his or her center of life. Strong social ties within Israel, such as membership in local organizations, may also indicate residency.
- Property ownership, business activities, and employment in Israel are strong indicators of residency. Financial interests, such as bank accounts and investments in Israel, also contribute to this assessment.
- Actual physical presence in Israel and intent to remain in Israel are critical. Declarations of residency, possession of an Israeli identity card, and other formal ties to the country are considered.
- For individuals who may be considered tax residents of more than one country, the tie-breaker rule in applicable tax treaties may determine in which country they are considered tax residents.
These criteria are not exhaustive and the Israeli tax authorities may consider other factors on a case-by-case basis. Individuals with complex circumstances, such as those who divide their time between several countries, should seek professional advice to accurately determine their tax residency status.
Types of taxes in Israel
Israel's tax system is multifaceted and includes various forms of taxation that take into account the different economic activities and social needs of its residents.
Personal income tax rates
Personal income tax in Israel is characterized by a progressive rate structure. This means that the tax rate increases as an individual's income increases.
The system is designed to ensure equitable tax contributions, with higher earners paying a larger income tax. The specific Israeli tax brackets — and rates — are as follows (2024):
| Taxable income (ILS) | Tax rate |
| 0-81,480 | 10% |
| 81,480-116,760 | 8,148, plus 14% of the excess over 81,480 |
| 116,760-187,440 | 13,087, plus 20% of the excess over 116,760 |
| 187,440-260,520 | 27,223, plus 31% of the excess over 187,440 |
| 260,520-542,160 | 49,877, plus 35% of the excess over 260,520 |
| 542,160-698,280 | 148,451, plus 47% of the excess over 542,160 |
| 698,280 and above | 221,827, plus 50% of the excess over 698,280 |
These tiers and rates are subject to annual adjustments based on inflation and other economic factors.
Tax on health insurance
The health insurance tax rate is calculated as a percentage of an individual's income.
For employees, the health insurance tax rate is around 3%-5% (based on whether a threshold of ILS 6,331 was exceeded). For the self-employed, the rate is slightly higher.
Land Appreciation Tax
The Land Appreciation Tax is aimed at the gains made on the sale of real estate. This tax is calculated based on the increase of the land’s value after its purchase.
For properties purchased after November 7, 2001, the LAT rate is generally set at 25% of the real gain. For properties purchased before that, the rate is determined by a blended approach.
Value-Added Tax
VAT in Israel applies to most goods and services and is included in their price. Businesses above a certain turnover threshold are required to register for VAT and file regular returns.
The standard VAT rate is 17%. VAT exemptions apply to certain goods and services, such as essential food items, financial services, and residential rentals.
Property tax
Property tax is a municipal tax in Israel levied on the owner or occupant of real estate. It’s set by local municipalities.
Property tax discounts are offered to various groups, including senior citizens, the disabled, and low-income families. Property tax is paid monthly or bi-monthly
Luxury and excise taxes
The luxury tax in Israel applies to items such as expensive cars and yachts. This tax is not a flat rate but is calculated as a percentage of the value of the item.
Excise taxes in Israel cover a range of products, such as tobacco, alcohol, and certain fuels. The high excise tax rates on tobacco and alcohol are part of a public health policy aimed at curbing the consumption of these products. Similarly, fuel taxes are driven by environmental policy to encourage the use of cleaner energy sources.
Exit tax
The exit tax in Israel exists for individuals who terminate their tax residency. This tax treats individuals as if they had sold all of their taxable assets on the last day of their residency and calculates the tax on the unrealized gains on those assets.
The exit tax primarily targets assets that are subject to capital gains tax, such as corporate stock or real estate investments.
Inheritance, estate, wealth, and gift taxes
There are no estate, wealth or gift taxes in Israel.
No inheritance or estate tax removes a potential financial burden on beneficiaries and simplifies the transfer of assets upon death.
Income tax filing in Israel
Filing income tax returns in Israel is an annual obligation for both residents and certain non-residents, including expatriates.
Here are the most important details:
- Tax year = calendar year (January 1 to December 31). Companies can have a different tax year.
- Filing deadlines: April 30 following the tax year in question
- Extensions: they are possible, but must be filed for before or on the original due date (April 30)
- Electronic filing: possible through the Israel Tax Authority’s online portal (Masav)
- Special considerations for expatriates: as income is taxed at the source, expats may not be required to file an Israeli tax return at all
-
Penalties for late/incorrect filing:
- Late filing: penalty amount depends on the length of the delay and circumstances for filing late
- Underpayment due to incorrect reporting: interest on the unpaid amount
- Failing to report certain income types/intentionally filing a false report can result in criminal prosecution
Unsure of every piece to be filed?
Get a free consultation with a tax pro!
Social security in Israel
National Insurance contributions in Israel are mandatory payments made by individuals and employers to the National Insurance Institute (Bituach Leumi).
Resident employees
For resident employees, the National Insurance contribution rate is 0.4% on the first ILS 7,122 of monthly earnings. After that the contribution rate increases to 7% (up to a maximum monthly salary of ILS 47,465).
Employers also pay social security contributions for each resident employee. This contribution is 3.55% of the first ILS 7,122 of the employee's monthly income. For the portion of income above ILS 7,122 and up to the maximum monthly salary of ILS 47,465, the employer's contribution rate is 7.6%.
Non-resident employees
For non-resident employees, the National Insurance contribution rate is significantly lower, set at 0.04% for the first ILS 7,122 of monthly income. For income above ILS 7,122 and up to the maximum monthly salary limit of ILS 47,465, the rate is adjusted to 0.87%.
Similarly, employers contribute to National Insurance on behalf of their non-resident employees at reduced rates. The employer's contribution is 0.59% of the first ILS 7,122 of the employee's monthly income. For the portion of the income above ILS 7,122 up to ILS 47,465, the employer contribution rate increases to 2.65%.
Tax deductions for expats in Israel
Expats may deduct certain expenses such as travel to and from work, professional training, and the purchase of work-related equipment or uniforms. Expats working from home can claim deductions on a portion of rent, utilities, and internet charges.
Certain types of deductions are available for companies as well:
- Business expenses, such as rent for business space, utilities, and office supplies
- Wages and salaries paid to employees
- Depreciation of assets such as machinery, equipment, and vehicles
- Fees paid for professional services
- Marketing (both traditional and digital) and advertising expenses
Israel offers several tax incentives for new immigrants and returning residents:
- A 10-year tax holiday on income earned outside of Israel, including income from employment, business, and investments
- A 10-year exemption from reporting foreign income and assets
- Possible reduced income tax rates earned in Israel during their first years in the country
Special deductions for qualified expatriates
Expatriates working in Israel may qualify for special tax deductions, such as:
- Housing expenses, including rent and utilities, as well as expenses related to relocating to Israel
- Expenses incurred when traveling between Israel and their home country, especially for business purposes
- Expenses for cultural adaptation and language training necessary for integration into the Israeli work environment
Tax credits for expats in Israel
The Israeli tax system uses a credit point system, where each point represents a reduction in the taxpayer's liability. This system applies to all taxpayers, including expatriates.
Each credit point in this system has a specific value, which is set at ILS 235 per month. Resident taxpayers are guaranteed a minimum entitlement of 2.25 points.
The system ensures additional points are available based on various criteria, such as having dependent children, being a recent immigrant, or being part of a single-parent family.
Foreigners, as opposed to resident expatriates, do not qualify for personal tax credits.
Expatriates who contribute to eligible non-profit organizations in Israel can claim these contributions as tax credits.
The tax credit for charitable contributions is calculated as a percentage of the amount donated. To claim this credit, expatriates must ensure that their contributions are made to approved organizations and keep proper documentation, such as receipts or donation certificates.
US-Israel tax treaty
For American expatriates living in Israel or Israeli citizens working in the US, this treaty provides a framework to ensure that they are not unfairly taxed by both countries on the same income. The treaty accomplishes this through several mechanisms:
- Reduced rates of withholding taxes on dividends, interest, and royalties. For example, a US company paying dividends to an Israeli resident may withhold taxes at a reduced rate specified in the treaty rather than at the standard rate under US law.
- Claiming a tax credit in one country if taxes were already paid in another
- lear definitions for determining tax residency, which helps individuals and businesses understand their tax obligations in each country
- Procedures for resolving disputes regarding the interpretation or application of the treaty
Is there a US-Israel totalization agreement?
No. Totalization agreements exist to eliminate double social security coverage for people who live/do business in two countries.
The US has no such agreement with Israel, meaning US expats have to pay for health coverage in both countries. The upside is that they get to enjoy benefits of both healthcare systems to the fullest.
Essential tax forms for US expats in Israel
American expatriates in Israel should be aware of Israeli tax forms relevant to their financial activities in the country. Key forms include:
- Annual income tax return (Form 1301): this form is used to report their annual income. It covers various types of income, including employment, business, and investment income.
- Capital Gains tax report (Form 1335): Expats involved in the sale of assets such as real estate or stocks in Israel must report these transactions.
- Real estate tax report (Form 1358): US expats who own real estate in Israel should report any rental income or capital gains from property sales.
- VAT returns: Expats who have a business or are self-employed in Israel must file VAT returns if their turnover exceeds a certain threshold.
US expats should also remember to file forms required from them by US law, such as:
- Form 1040: the standard US individual income tax return form. US citizens and expatriates use this form to report their worldwide income, including income earned in Israel.
- Form 2555 (Foreign Earned Income Exclusion): This form is used by expats to claim the Foreign Earned Income Exclusion (FEIE), which allows them to exclude a certain amount of their foreign earned income from their US taxable income.
- Form 1116 (Foreign Tax Credit): For those who pay taxes in Israel, Form 1116 can be used to claim a credit for foreign taxes paid.
- FBAR (Foreign Bank and Financial Accounts Report): US expats with foreign bank accounts that exceed certain thresholds must file the FBAR electronically through FinCEN's BSA E-Filing System.
- Form 8938 (Statement of Specified Foreign Financial Assets): This form is required if the total value of the expatriate's foreign financial assets meets or exceeds a certain reporting threshold.
