The 2015 U.S. and Israeli tax-filing season has commenced. In addition to all of the important tax rules and regulations which permeate the U.S. Internal Revenue Code and the Israeli Income Tax Ordinance, herewith new rules for 2016:
a.) Exchange of Tax Information – Under the FACTA Inter-governmental Agreement (IGA) signed between Israel and the United States an exchange of tax information between the two countries is scheduled to begin during 2016. Israeli banks will be required to issue FORM 1099 to U.S. citizens and transmit them directly to the IRS. Reciprocally, in 2017, Israel should begin receiving U.S. tax information on its citizens directly from the U.S.
b.) The new 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 not be revoked.
c.) Taxpayers who exclude earned income, currently up to $100,800 (per taxpayer) on their 2015 joint tax returns will not be eligible to receive a child credit even if only one taxpayer uses the exclusion.
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.
Passive Foreign Investment Company (“PFICs”) 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. In addition, prior year PFIC income is ordinary income and therefore not eligible for capital gain rates. Also, since PFIC losses are limited investing in a PFIC can become an expensive proposition for a taxpayer who has a U.S. filing requirement. Discuss this issue with your tax and investment advisor as there are alternative investments not subject to PFIC rules.
Israeli banks as well as other financial institutions are now requiring a U.S. form W-9 (or W8-BEN for non U.S. citizens) to open or continue banking 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.
Israel 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.). As such, it is imperative that you familiarize yourselves with certain concepts regarding both U.S. and Israeli income tax law and how they may affect your personal situation. Proper tax planning and minimization of your taxes requires an analysis of many important issues, including the interplay between the U.S. and Israeli foreign income tax credit rules, the foreign earned income exclusion rules, and also how the applicable provisions of the U.S. - Israel income tax treaty affects your tax situation.
You can see the full article on ESRA Magazine’s website: www.esra-magazine.com/blog/post/us-israeli-income-tax-184.
Alan (Avraham) Deutsch is a CPA, with over 30 years’ experience. Alan and his associates specialize in income tax planning and compliance as well as in investment consulting. Email: firstname.lastname@example.org. Website: www.ardcpa.com.