Avoid getting hit with double social security payments on your income:
U.S. citizens living in Israel and operating an unincorporated business (i.e., working as an (עצמאי are subject to U.S. self-employment tax on net business income, in addition to Israeli Bituach Leumi payments. The reason for that is that although there is an income tax treaty between the US and Israel there is no similar agreement between the two countries regarding social security payments. One way to resolve this problem is to operate your business through an Israeli company. Please contact us if you would like more information.
The Net Investment Income Tax:
Beginning in tax year 2014, an additional 3.8% tax was imposed on certain investment income. This tax applies to income items such as interest, dividends, stock sales, and net rental income (rental income less deductible related expenses). The tax affects single taxpayers with gross income above $200,000, married filing jointly taxpayers with gross income above $250,000 and married filing separately taxpayers with gross income above $125,000.
The tax is calculated by applying the 3.8% tax rate to the lesser of: taxpayer's net investment income, or the excess of gross income above the threshold amount.
This additional tax cannot be offset by any taxes that you paid in Israel. Therefore, from a Unites States tax liability perspective, it may be preferable to choose, when possible, to receive additional income in the form of salary with corresponding foreign tax credits rather than to receive compensation in the form of dividends (which are subject to the investment income tax).
Avoid paying additional tax in the US on certain investments:
The U.S. government wishes to discourage U.S. citizens from making investments in foreign investment companies (i.e. foreign mutual funds). Consequently, they created the PFIC - "Passive foreign investment companies" tax regime that subjects the income from investments in passive foreign investment companies to very high and punitive taxation. Practically all Israeli mutual funds and ETFs (קרנות נאמנות, תעודות סל) fall under this category. Therefore, we strongly recommend that you do not hold such investments. While these investments are very popular in Israel and are subject to lower Israeli taxation, the PFIC taxation in the US is very high and more than cancels out those benefits. Please contact us if you would like to get more information on this important issue. If you already have invested in PFIC investments, we strongly recommend that you sell them as soon as possible to avoid this harsh U.S. taxing regime.
For preparation of US tax returns, US tax consulting, and additional information on the above mentioned subjects please contact:
Ehud Kisch CPA (US, Israel)
BDO US Tax Compliance Dept
BDO Ziv Haft
48 Menachem Begin Rd.
Tel Aviv 6618001