Annual American Tax Reports
In contrast to many countries, it’s in fact the great USA that has a very complex tax system, based on a personal and citizenship-based taxation model (rather than the residency model applied in Israel and most Western countries). In practice this means that Israelis who are also US citizens are required to submit annual American tax reports, even if their income and capital is in Israel and they have already paid local taxes.
This unique reporting system that ALL Americans must adhere to involves mainly completing and submitting tax forms, with a lot of personal and financial data, to the IRS. The forms and the information provided must be complete and accurate if the process is to be effective and, hopefully, free you of the need to pay taxes both here in Israel and the US.
Because of the complexity of the tax return process, together with, in some cases, a lack of knowledge, some American citizens living in Israel don’t know they need to submit an annual tax return or simply avoid doing it all together. However, submitting a tax return is a legal requirement and relevant for many people and cases
It’s important to say upfront, that when the process of submitting annual American tax returns is done correctly and effectively, that chances of paying double tax (to the IRS and the Israel tax authorities) is actually very low and most Israeli Americans never pay US tax for income and capital originating in Israel. Tax rates in Israel are generally higher than in the US, so in many cases, nothing is owed to the IRS. Of course, if someone invests financially in the USA, then they do need to pay American tax on revenue and profits generated in the US.
The Boaz Reuven Law Firm specializes in Israeli and international taxation. Over the years we have developed expertise in the complexities of the annual American tax return process and the various issues regarding American taxation for private and business clients.
Which American tax reports are required?
The most basic requirement of the US Internal Revenue Service (IRS) for ALL USA citizens is to submit 2 annual tax reports. The first is the longest and more complicated one and the second is a bit simpler. Normally, these IRS tax reports need to be submitted by April 15th of the following year, but it is possible to ask for an extension until the middle of October.
- Form 1040 – US Individual Tax Return: the main American tax report. It contains the personal information related to your specific tax return and taxation status and a lot of financial data – mainly all the income the taxpayer had in the specific tax year. This information must be provided regardless of where the income was generated. This is a rather complex form to complete, especially for someone not living in the US. The income data needs to include everything – all work income, investment profits, rent, dividends, interest profits, capital gains, money won in lotteries/gambling, pension funds, scholarships and any other income.
Form 1040 must also show all taxes paid in Israel, financial and investment losses and other elements that affect tax liability in the USA.
- FBAR – Annual Capital Report: the IRS requires all American citizens to file an annual report specifying all capital and financial accounts held outside the US. Known as FBAR, it includes all non-US financial accounts that belong to or relate to the submitting taxpayer – but only if the total amount in all the accounts exceeds $10,000. This data includes bank accounts, investment accounts, broker accounts, pension funds etc.
Again, it’s worth noting, in terms of taxation status and calculation of liability, tax rates for various income types, taxations thresholds and many other factors, that the American tax system is quite different from the Israeli tax system. All this highlight why it’s important to submit your American tax reports with the help of a professional and experienced tax lawyer.