Don Shrensky's seminar from NBN pre-aliyah seminar, summer 2012

1. Retiring to Israel
Don Shrensky, CPA (US/ISR)
Nefesh B’Nefesh Workshop
June-July 2012

2. Visit our website:
www.dscpa-israel.com
Email: don@dscpa-israel.com
Call Toll-free in the U.S.:
1-888-DSCPA-99

3. TWO TAX SYSTEMS:
 U.S. taxes
 Israel taxes

4. Who is taxed?
 Israel taxes residency - not citizenship
 Aliyah = residency (in general)
 U.S.A. taxes citizenship

5. Israel Taxes
Who 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?

6. 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

7. 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.

8. Israel Taxes - Pensions
Pensions / Annuities
 All U.S. pensions:
10 year exemption

9. Israel Taxes - Pensions
Pensions / Annuities
 U.S. Government pensions:
 Exempt in Israel under treaty.

10. Israel Taxes - Pensions
Pensions / Annuities
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

11. Israel Taxes - Pensions
Pensions / Annuities
 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

12. 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.

13. Israel Taxes - Investments
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)

14. Israel Taxes - Investments
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

15. 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**

16. Israel Taxes - Work & Business
After 10 year exemption and Israeli source
income:
 Taxable at graduated Israeli tax rates
 Subject to Bituach Leumi (National
Insurance)
 Credit for U.S. taxes paid (federal and
state)

17. 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

18. Israel Taxes
NATIONAL INSURANCE (Bituach Leumi)
 Aliyah / residency after age 60 –
not eligible for standard retirement pension
 Special old age allowance
 Income supplement

19. Trusts
Settlor / Grantor Beneficiaries
Israeli Resident Israeli Resident
Israeli Resident Foreign Resident
Foreign Resident Israeli Resident
 Residence of Trustee immaterial

20. FAQs
• Should I sell my house / condo before
making aliyah?
Israel = 10 year exemption
U.S. = Principal residence exemption
• Should I keep my tax-exempt bonds?
• Should I sell my business before making
aliyah?

21. 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

22. U.S. Income taxes
U.S. Social Security
• Exempt from tax
In Israel
In USA
• Direct deposit to bank
In Israel
In USA
• 100% monthly benefit reduced (< full retirement
age)
Resident in Israel
Work >45 hours / month
Employee

23. 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

24. Normal retirment age
Year of birth Age
1937 and prior 65
1938 65 and 2 months
1939 65 and 4 months
1940 65 and 6 months
1941 65 and 8 months
1942 65 and 10 months
1943-54 66
1955 66 and 2 months
1956 66 and 4 months
1957 66 and 6 months
1958 66 and 8 months
1959 66 and 10 months
1960 and later 67

25. 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]

26. U.S. Income Taxes
 FBARs
 Super FBAR
 FATCA
 PFIC

27. 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

28. Foreign Financial Assets
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

29. Foreign Financial Assets
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

30. Foreign Financial Assets
HIRE Act – Super FBAR
Filing threshold Form 8938
If living in the U.S. - >$50,000
If living overseas –
joint return - >$400,000 on 31 Dec
or > $600,000 at any time during the tax year
other than joint - >$200,000 on 31 Dec
or > $300,000 at any time during the tax year

31. Foreign Financial Assets
HIRE Act – Super FBAR
“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

32. Foreign Financial Assets
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.

33. Foreign Financial Assets
FATCA
 30% withholding tax at source for account holders who
refuse to divulge if they are U.S. persons
30% 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

34. Foreign Financial Assets
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.

35. Foreign Financial Assets
FATCA - Proposed Regulations
• 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).

36. Foreign Financial Assets
FATCA - Proposed Regulations
• 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.

37. U.S. Income taxes
PFICS
 Holders of foreign mutual funds (‫(קרן נאמנות‬
 Certain corporate shareholders required
 Must file annual report with IRS
 50% of Assets = Passive
 75% of Gross Income = Passive
 Taxed at highest tax rate: today = 36%

39. Visit our website:
www.dscpa-israel.com
Email: don@dscpa-israel.com
Call Toll-free in the U.S.:
1-888-DSCPA-99