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American Taxation – US citizens living in Israel

If you thought the Israeli tax system was complex, then the American system will totally “knock your socks off”. The US taxation system is massive and complicated, including federal taxes, state, and even county taxes, all this in a unique citizenship-based tax system. Add to that FATCA laws for disclosing global financial information, the financial data transfer treaty between Israel and the US, and voluntary disclosure procedures, and you could get entangled in a complex and often confusing tax system. In many cases, only professional assistance can help navigate your way safely and efficiently through it.

The Boaz Reuven Law Firm specializes in Israeli and global taxation, including proven experience in USA taxation, Annual IRS form submissions, FBAR procedure, international tax treaties etc. 

Every USA citizen worldwide is obliged to file an annual tax report

The USA operates a unique tax system, it’s a personal taxation mechanism (as in Israel), but with a citizenship-based addition. This means that EVERY American citizen is required to report income and capital to the American IRS annually – regardless of the source of the income and capital and regardless of the country of residency!

This report includes, for example, income accrued from salary, rent, dividends, financial investments, real estate profits, business income and so forth. It also includes the necessity to report on capital held in non-US financial accounts, such as banks, brokers, pension funds, investment firms etc.

Unlike in the past, today this is actually enforced and is a USA federal requirement, also for US citizens living permanently in Israel. Changes in regulations, in tax policy and in public opinion regarding international taxation, led the USA Federal Administration to enact the FATCA laws. These basically require all banks, financial institutions worldwide and, in a way, local tax authorities to share financial and capital data regarding American citizens with the IRS. In addition, Israel and the US have a tax and data transfer treaty that’s very comprehensive in terms of the levels of cooperation between the tax authorities and financial institutions in both countries.

In general, all USA citizens must fill and submit at least 2 tax forms annually: the individual tax and income report (Form 1040) and the FBAR report that specifies all personal non-US financial accounts (when the total exceeds $10,000).

Does double repotting mean double tax?

This is of course a question many ask, and rightfully so. US citizens living in Israel are obliged to report ALL their income and capital to the American IRS. But they must also report this information to the Israeli tax authorities and pay taxes in Israel. So, do you need to pay double the tax, both in Israel and in the US?

The good news is that usually, there isn’t a double tax “penalty” for holding American citizenship. For most people and in most years, Israelis who are also US citizens don’t pay taxes in the US, but only in Israel. This is because of several factors, such as US/Israel tax treaties, IRS tax calculation policies and the fact that taxation rates in Israel are usually higher than in the US. So there isn’t a tax “advantage” that the IRS can use.

US tax forms, and indeed the entire process, are complex and require A LOT of personal and financial data that the applicant needs to gather from various sources in Israel and abroad and then fill in correctly. So, in order to get through the process (and remember, that’s every year!) in the fastest and most  effective way, and without having to pay tax to the IRS in the US, it’s advisable to let a professional tax lawyer or accountant who specializes in American taxation matters, handle it for you.

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