ITIN’s for Non Resident Aliens:
Individual tax identification numbers are required on every tax return submitted to the IRS. U.S. citizens must have a Social Security number that is used for all tax filings. A non-U.S. citizen with a U.S. tax filing requirement must obtain an ITIN before submitting his tax return to the Internal Revenue Service. Our office can assist you with the process of obtaining an ITIN if required, as there have been some new developments with the ITIN process.
ITIN’s expire and have to be renewed. The IRS should generaly notify you that your ITIN will be expiring and it will have to be renewed if you are still filing a current U.S. Income tax return. ITIN’s that were not used to file a tax return at least once in the past 3 years will also expire. Expired ITIN’s can be renewed through our office.
U.S. Income Tax Rates:
The U.S. income tax rates for the current tax year are 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. Under the "stacking rule", in order to determine your income tax bracket, income excluded on Form 2555 (Foreign Earned Income Exclusion) will be added back to adjusted gross income. As a result, investment income may potentially be taxed at a higher tax bracket.
U.S. Foreign Earned Income Exclusion:
The foreign earned income exclusion has been adjusted for inflation and has increased to $101,300 per taxpayer. As such, married taxpayers filing jointly, who meet certain requirements, may potentially exclude up to $202,600 of foreign earned income per tax return. However, one spouse may not utilize the unused portion of the exclusion of the other spouse. If one taxpayer elects the exclusion on a joint return, starting for 2015 there will be no child credit available on that return. If you file separately, one spouse may claim the exclusion and one spouse may claim the child credit, which may result in a smaller refund than would have been on a joint return in a previous tax year (when it was permissible). Please note that the Foreign Earned Income Exclusion applies only to work or self-employment income and does NOT apply to other passive income such as pension benefits, investment income, rental or any other non-earned income.
Foreign Tax Credits:
A U.S. foreign tax credit may be used on non-U.S. taxes paid on income earned in a foreign country such as Israel. Conversely, Israel will also recognize taxes paid to the U.S. and apply them as a credit against your Israeli income tax liability.
Social Security Benefits Received by a U.S. Citizen Residing in Israel:
The U.S. - Israel Income Tax Treaty states that U.S. citizens that are Israeli residents are eligible to exclude U.S. Social Security benefits from their adjusted gross income. This provision may result in substantial tax savings. If you have included your social security income in the past on your income tax returns, our office can assist you with preparing your amended tax returns (up to three years retroactively) to potentially receive large refunds.
Long Term Capital Gains and Qualified Dividends:
Rates on long term capital gains (whether derived in the U.S., in Israel or in another country) generally apply to assets held for more than one year. For single taxpayers with taxable income under $36,900 and for taxpayers filing jointly with taxable income under $73,800 a zero percent long term capital gains and qualified dividends rate will generally apply. Capital losses are still fully deductible against capital gains, and any capital losses in excess of capital gains may offset up to $3,000 of ordinary income if married filing jointly. Net capital losses in excess of $3,000 may be carried over indefinitely to future years.
Net Investment Taxes:
In addition to the “ObamaCare” tax rules, additional provisions of these rules are as follows: Beginning in 2013 the IRS has imposed an additional 3.8% tax on passive income for high income individuals (see table below). For this purpose, passive income includes interest, dividends and capital gains. Part of the passive income subject to this tax, are dividends from your foreign-owned corporation. The tax on this income cannot be taken as a credit for Israeli tax purposes. Therefore, it may be advisable that taxpayers with Israeli corporations report earnings as additional salary rather than declaring a dividend. Earnings from salary are not subject to this tax. Please contact our Israeli department for more details.
Filing Status Income Threshold Amount
Married filing jointly $250,000
Married filing separately $125,000
Head of household (with qualifying person) $200,000
Qualifying widow(er) with dependent child $250,000
U.S. Child Tax Credit:
If applicable, $1,000 per eligible child may be available to offset any potential U.S. income tax liability or refunded. Taxpayers must have reportable earned income from wages (via Israeli Form 106 or similar foreign wage slip) or self-employment income in excess of $3,000. The earned income of both husband and wife can be combined even if one spouse is NOT a U.S. citizen. The non-citizen spouse requires a U.S. tax identification number (TIN), which can be acquired by filing U.S. Tax Form W-7. Children must be U.S. citizens aged 16 and below and must possess a U.S. Social Security number. Please note that maximizing the child credit can be quite complicated since there are many factors to consider. In addition, the IRS has been conducting income tax audits which may require verification of income and other information. Amended tax returns may be filed back to the tax year 2013 in order to claim the child credit (2013 amended returns must generally be filed by April 15, 2017).
Estates and Gifts:
The gifting limit per spouse of $14,000 annually to each eligible recipient includes children and grandchildren. Gifting continues to be an excellent way to potentially reduce the value of your U.S. taxable estate as well as future U.S. estate income taxes. There is an inflation adjusted exemption of $5,340,000 on U.S. estates. Please consult your tax advisor for more details regarding your estate planning and writing a personal will. It should be noted that non US citizens investing directly in US real estate are only entitled to an Estate Tax Exclusion of $60,000. Any property valued above that amount would have estate taxes assessed before the asset can be distributed.
State and Local Tax Returns:
Refunds may be available for taxpayers who may be unnecessarily filing resident U.S. State income tax returns after they moved to Israel. You should be aware that maintaining a bank account, brokerage account or driver’s license in a particular State does not automatically necessitate a tax filing in that particular State. However, if you own real estate, maintain a business, commute to and work in a particular State, or have any other activity considered nexus (strong connection) to a State, you would generally only file a non-resident income tax return in that State.
Standard Deduction amounts are: Single or Married Filing separately - $6,300; Married Filing Jointly - $12,600; Head of Household - $9,300. Taxpayers over the age of 65 may claim an additional deduction of $1,200 each, if married, or $1,550 if single. Taxpayers with qualifying deductions in excess of these amounts may generally itemize their deductions. Please note that bank mortgage interest, Israeli real estate tax (arnona), Israeli income taxes, and certain charitable contributions paid to Israeli sources may also qualify as itemized deductions. A phase out of itemized deductions will apply if income exceeds $311,300 (filing joint) and $259,400 (filing single).
A personal exemption of $4,050 per person is available for each individual listed on the tax return for 2016. A U.S. citizen may only be claimed as an exemption once during each tax year. In some cases, grandparents may sometimes claim their grandchildren as exemptions on their income tax returns if they provided at least half the support of the grandchild and the grandchild lived with the grandparent.
In order to qualify for future U.S. Social Security retirement benefits a taxpayer must pay in to the U.S. Social Security system a minimum of 40 quarters (credits). These credits can be earned even while residing in Israel. One can accrue a maximum of 4 quarters per year by earning in excess of $5,500 annually. This is primarily accomplished by:
i) Being self-employed in Israel and reporting Israeli self-employment income on your U.S. income tax return,
ii) Working in Israel for a U.S. entity and receiving a Form W-2 (employee) or Form 1099 (independent contractor),
iii) Traveling to the U.S. to work as an employee (W-2) or as a self-employed individual (1099).
Automatic Extension, Estimate Tax Payments and Automatic Withdrawal:
Automatic income tax return extensions are available until June 15, 2017 for U.S. taxpayers, who reside outside of the U.S. If there is a balance due with your tax return, interest will be accrued from April 15, 2017 while penalties will begin to accrue after June 15, 2017. Filing an extension will extend the time to file until October 15, 2017. An additional extension may be granted until December 15, 2017 but certain restrictions may apply. It is strongly recommended that taxpayers who owe income tax but do not file by June 15Th should make a payment with their extension. For the upcoming year, it is imperative that taxpayers pay estimated taxes on a timely basis in order to avoid underpayment of estimated tax penalties. Our office can assist you in setting up electronic payments with the IRS using the Electronic Federal Tax Payment System (EFTPS) via automatic withdrawal from your U.S. bank or other financial account.
Tax Retirement Plans/Required Minimum Distributions (“RMD”):
Within 60 days of a distribution from an Individual Retirement Plan (“IRA”) a taxpayer can roll over the distribution to another retirement plan tax free. If no rollover is made within 60 days the taxpayer is required to pay tax on the distribution at ordinary income tax rates. Once you reach age 70 1/2 you generally must begin to withdraw funds from traditional IRAs on an annual basis and pay the required income tax. The amount of your RMD is calculated by using the IRS life expectancy tables. In addition, conversion to a Roth IRA can be a valuable tax planning tool for both U.S. and Israeli tax purposes. Your tax and pension advisor should be contacted in this regard.
Avoiding Early Withdrawal Penalties from Retirement Funds:
An early IRA distribution may be made without being subject to the 10% early withdrawal penalty provided the funds are used to purchase a first home even in Israel. The distribution amount is limited to $10,000 per taxpayer and/or spouse from each individual's account. The early withdrawal penalty will also not apply in certain circumstances such as medical premium payments or higher educational expenses.
Higher Education Credit:
The American Opportunity credit (“AOC”) can be claimed for qualified tuition and related expenses for any of the first four years of a college or university degree. The credit is up to $2,500 for those paying $4,000 or more in qualifying expenses for an eligible student. Forty percent of the credit is refundable which allows a taxpayer to receive up to $1,000 cash back for each eligible student claimed on the tax return, even if no income tax is due. You cannot claim the credit and the tuition and fees deduction for the same student. The credit is generally available for U.S. universities and for certain foreign universities (please contact our office for the list of eligible Israeli universities). The credit begins to phase out at $80,000 for taxpayers filing single or $160,000 for taxpayers filing jointly. To claim the AOC a student must receive a Form 1098-T or equvilent that contains the Tax Identification Number of the university. We do not know at this time if all the accredited Isaeli universiites will be issuing Form 1098-T’s.
Corporations, LLC’s and Trusts and Form 5471:
Corporations may be excellent tax planning vehicles, especially for taxpayers working outside Israel and in light of Israeli tax reform. "C" Corporation tax rates are 15% on taxable income up to $50,000, 25% from $50,001 - $75,000 and 34% from $75,001 - $100,000, with higher rates for higher taxable incomes. "S" Corporations, Limited Liability Companies ("LLC's") and certain Trusts are called pass-through entities. The pro-rata share of the pass-through entity's income must be reported on the taxpayer's personal income tax return and is taxed at the individual's personal income tax bracket. If you have a foreign corporation, you will be required to file form 5471 (Information Return of U.S. Persons with Respect to Certain Foreign Corporations) with your tax return (please contact our office for more details).
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 firstname.lastname@example.org. Please visit his website at www.ardcpa.com for more information.