The U.S. Presidential elections are behind us and the expectations are that many major tax and economic changes will be forthcoming from U.S. executive and legislative branches in the years to come. We will certainly keep you posted with updates on any major development. January, 2017 starts the beginning of the U.S. and Israeli ‘tax season’. As such, it is imperative that you familiarize yourself with the many recent changes to existing tax rules and regulations which permeate both the U.S. Internal Revenue Code and Israeli Tax Ordinance, and contact your tax advisor accordingly.
FATCA/ FBAR: FATCA is an Intergovernmental Agreement (IGA) that the US Department of Justice has signed with 120 partner countries. The purpose of the IGA is to provide the US with knowledge about the financial income and balances of its citizens around the world. In essense, these agreements create a two way transfer of information between the foreign country and the US and from the US to the partner country. In effect the US could demand income tax returns from delinquent or non-filers based upon information received from a partner country, since the US taxes the world-wide income of its citizens. FATCA requires filing Form 8938 (see below for more details).
Exchange of Information between U.S. and Israel: Under the Inter-governmental Agreement (IGA) signed between Israel and the United States an exchange of tax information between the two countries was scheduled to begin during 2016. Israeli banks will be required to issue FORM 1099 to its customers who are U.S. citizens and also transmit these forms directly to the IRS. Reciprocally, in 2017, Israel should begin receiving U.S. tax information on its citizens directly from the U.S.
Revocation of U.S. Passports: The recent U.S. Highway Funding legislation calls for potential revocation or denial of U.S. passports for taxpayers with an outstanding balance of over $50,000 to the IRS. Balances due to any State are not part of this legislation. The IRS must notify the taxpayer of this proceeding prior to facilitating a revocation of any U.S. passport. If payment arrangements have been made with the IRS, the taxpayer’s passport would still be considered valid and will generally not be revoked.
PFICs (Passive Foreign Investment Companies) are reported on Form 8621: Most investments in mutual funds registered outside the U.S. pose a potentially complicated tax issue for U.S. taxpayers. Whereas U.S. registered mutual funds report gains and losses annually to the IRS and to taxpayers, foreign mutual funds do not. The IRS has termed foreign mutual funds as PFICs. PFIC investments, when sold at a profit, have to report to the IRS the income subject to interest charges for each year that the investment was held. In effect the IRS wants to recoup the taxes that would have been paid had the PFIC reported its activity annually. As such, the Form 8621, (Information Return by a Shareholder of a PFIC or Qualified Electing Fund), must be filed with the taxpayer’s Federal income tax return every year in which the taxpayer recognizes certain gains or distributions, or makes a taxation method “election” with respect to the fund. Adding to the complexity and volume of paperwork is that a separate Form 8621 must be filed for each PFIC (i.e. for each separate foreign mutual fund), whether or not there are current year sales. Most investors in PFICs must pay income tax on all distributions and appreciated share values regardless of whether capital gains tax rates would normally apply. Capital gains rates only apply to the current year portion of the gain. Prior year losses are generally not carried forward to offset current year gains. We recommend discussing this issue with your tax and investment advisor as there are alternative investments not subject to PFIC rules.
Form W-9: Israeli banks as well as some other financial institutions are now requiring customers to sign a U.S. form W-9 (or W8-BEN for non U.S. citizens) in order to open or continue banking or investing with your financial institution. In many cases, your Israeli bank may require a declaration that the last 3 years of U.S. income tax returns and FBARs have been duly filed. Not submitting the signed form can result in the bank freezing your Israeli account.
Israeli Tax Update: In light of the recent Israeli tax legislation and with the commencement of the 2016 tax year, many of our clients may require Israeli tax services during the year. To assist with overall tax planning and compliance, we have a network of tax professionals and lawyers that assist us in this capacity. Among the services provided are:
1. New or Current Businesses for self employed ("Atzmai"), Israeli corporations, and non-profit organizations ("Amutot"):
a) Assistance in opening files with V.A.T.
b) Opening files with Israeli Income Tax Authority ("Mas Hachnassah")
c) Opening files with National Insurance ("Bituach Leumi")
2. Filing Israeli income tax returns:
a) Individuals – including calculation of tax for self-employed individuals and
filing for refunds based on charitable deductions. You may be eligible to receive a refund of up to
35% of charitable contributions against your Israeli tax paid if you contribute to recognized Israeli charities.
b) Corporations – all services including full bookkeeping, write-up, and audit
c) Non-profit organizations –including bookkeeping, write-up and audit
3. Representation before the Israeli Income Tax Authority, V.A.T., and Bituach Leumi in cases of audit, or correspondence received.
4. Projects to complete tax returns for deliquent or non-filers under the the Israeli Tax Amnesty Program.
Israel has also changed its tax regime for reporting foreign (non-Israeli) income from 2003 in addition to the regular tax on Israeli source income and has an amnesty program for taxpayers that have failed to report income earned abroad (e.g. from work or investment income earned in the U.S. or any other country). Proper tax planning and minimization of your taxes requires an analysis of many important issues, including the interplay between the non-Israeli and Israeli foreign U.S. income tax credit rules, the foreign earned income exclusion rules, and also how the applicable provisions of the U.S. – Israel income tax treaty (or with any other country that has an income tax treaty with Israel) affects your tax situation.
For your convenience herewith are the 2016 Israeli tax tables.
|Tax Rate||Total income||Total taxes|
U.S. Child Tax Credit (recent changes):
Taxpayer identification number (SSN) is now required by due date of tax return. If you do not have a Social Security Number (SSN) for your dependent by the due date of your 2016 return (including extensions), you may not be able to claim the child tax credit (“CTC”) or the additional child tax credit (“ACTC”). This applies to your original or amended 2016 tax return, even if you get the SSN at a later date. (i.e. A child born in March, 2016 has until December 15, 2017 to receive a Social Security Number and still be eligible to claim the credit.) Taxpayers who exclude earned income, currently up to $101,300 (per taxpayer) on their 2016 joint tax returns will not be eligible to receive a child credit even if only one taxpayer uses the exclusion. We recommend applying for Social Security numbers as soon as possible after your child is born. Please be advised that the credit may not be able to be claimed retroactively. If you claim the CTC or ACTC, but you are not eligible for either credit and it is later determined that your error was due to reckless or intentional disregard of the CTC or ACTC rules, you will not be allowed to claim either credit for 2 years. If it is determined that your error was due to fraud, you will not be allowed to claim either credit for 10 years. You may also have to pay interest and penalties to the IRS.
IRS Streamlined Procedures for Non-Compliant U.S. Taxpayers Living Abroad and Offshore Voluntary Disclosure Program (“OVDI”): In recognition that some U.S. citizens living abroad have failed to file annual U.S. Federal income tax returns and foreign bank account reports (FBARs), the IRS has designed a streamlined procedure to allow taxpayers to enter the IRS tax filing system and then be considered in “good standing”. Many factors and requirements apply, but primarily this procedure is available for U.S. taxpayers that have resided outside the U.S. since January 1, 2009 and have not filed U.S. income tax returns for at least 3 years. Among the strict requirements for being accepted under the IRS streamlined process are: a) filing three years of U.S. income tax returns, b) filing six years of FBARs, c) not spending more than 35 days in U.S. in one of the last 3 years, d) writing a detailed explanation, delineating your non-willfulness and delinquency, and attaching it to your tax returns. The IRS will expedite the review process and may not assess penalties for taxpayers filing under this procedure. Taxpayers not meeting the requirements of the streamlined process can avail themselves of the IRS Offshore Voluntary Disclosure Program (please contact our office for more details about OVDI).
FBARs: Under the Bank Secrecy Act, a Foreign Bank Account Report (FBAR) must be e-filed annually with the U.S. Treasury by April 15th each year (which may be extended to December 15th if you have a valid extension for your current income tax return), if the following criteria apply:
i) The person has a financial interest, signature authority or other authority that is comparable to a signature authority over one or more accounts in Israel or another foreign country. Please note that shareholders who hold more than 50% of a foreign company's shares are considered as having a financial interest in the company's accounts.
ii) The aggregate value of all foreign financial accounts exceeds $10,000 or the equivalent amount in foreign currency (e.g. 35,000 NIS or more) at any time during the calendar year.
iii) Foreign financial accounts include, but are not limited to, both checking and savings accounts, Israeli pension accounts, brokerage accounts, mutual funds and unit trusts. Paper filings of FBARs (form TD F 90-22.1) are no longer accepted by the U.S. Treasury and have been replaced by online filing of form FINCEN 114.
Form 8938 (Statement of Foreign Financial Assets) must be filed with your U.S. income tax return (in addition to your FBARs), if you live in Israel (or abroad) and
i) The value in your foreign financial accounts exceeds $400,000 (filing joint) or $200,000 (filing single) on the last day of the year, or
ii) Your foreign financial accounts exceed $600,000 (filing joint) or $300,000 (filing single) at any time during the tax year.
The Affordable Care Act (aka “ObamaCare”): This law begins affecting taxpayers for 2014. Under the individual shared responsibility provision of the law, taxpayers must have minimum essential coverage (health insurance) for the entire year or will have to make a shared responsibility payment (“SRP”) on their 2016 tax returns. For most U.S. citizens living abroad there is an exemption from the SRP provided that the taxpayer would qualify under the bona fide residence or physical presence tests to exclude their income. Even if their income is not excluded, taxpayers residing abroad would generally qualify for the exemption from the SRP. U.S. citizens who meet neither the physical presence nor residency requirements will need to maintain minimum essential coverage, qualify for a coverage exemption or make a shared responsibility payment for each month of the year. For this purpose, minimum essential coverage includes a group health plan provided by an overseas employer. One exemption that may be particularly relevant to U.S. citizens living abroad for a small part of a year is the exemption for a short coverage gap. This exemption provides that no shared responsibility payment will be due for a once-per-year gap in coverage that lasts less than three months. Please be advised that the new U.S. administation is contemplating significan changes to this law. As such, we will keep you apprised of developments.
Alan (Avraham) Deutsch is a CPA, with over 30 years’ experience. Deutsch and his associates specialize in income tax planning and compliance as well as in investment consulting. Deutsch has five office locations and can be reached at 02-999-2104, 03-527-3254, 09-746-0623 or 052-274-9999, or you can e-mail him at email@example.com. Please visit his website at www.ardcpa.com for more information.