Written by Avraham R. Deutsch CPA (US), MBA, APC & Associates.
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Avraham R. Deutsch CPA (US), MBA, APC & Associates,
M.A.A.D. Business Services, Ltd.
In order to engage in proper tax planning, it is important that you familiarize yourselves with both U.S. and Israeli income tax matters and how they affect your personal situation. Minimizing your taxes requires an analysis of many issues, including 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 you. Outlined below are some areas of current U.S. tax law, which
may affect your U.S. tax filings due in 2007. Please make special note that under the U.S. child credit rules, you may be eligible to receive FREE, up to $1000 per child per year. (Please be advised that restrictions may apply and a tax advisor should be consulted in order to plan properly).
U.S. Child Tax Credit potentially results in FREE money to you courtesy of the U.S. government. Up to $1000 per eligible child is available after the regular child tax credit has been computed. Taxpayers must have reportable earned income (from wages or self-employment) from Israel or the U.S. in excess of $11,000 and the incomes of both husband and wife can be combined even if one spouse is NOT a U.S. citizen. (Please note however, that the non-citizen spouse requires a U.S. tax identification number). 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 and this money is available to you even if no U.S. tax is due. Amended returns may be filed back to the tax year 2003 (2003 amended returns must generally be filed by April 15, 2007).
Foreign Tax Credits may be utilized when Israeli or other non-U.S. earned income exceeds the U.S. foreign earned income exclusion, on Israeli investment income that is also taxed in the U.S. (and vice versa), or if you are filing for the Child Tax Credit. Conversely, since Israel now also taxes worldwide income, Israel will generally provide you with a foreign tax credit on income that was sourced and first taxed in the U.S.
Alternative Minimum Tax in 2005 (AMT) rules were changed. In certain situations, those who previously were paying AMT, may now be able to claim a U.S. income tax credit for 100% (previously the credit was for 90%)of the foreign tax they paid, thereby reducing or eliminating their AMT liability.
Foreign Earned Income Exclusion rises to $82,400 per taxpayer. Thus, married taxpayers filing jointly, who meet certain requirements, may potentially exclude up to $164,800 of foreign earned income per return. However, one spouse may not utilize the unused portion of the exclusion of the other spouse and by electing the exclusion you may prevent eligibility for the additional child credit (see above). Please note that this exclusion does NOT apply to pension or investment income.
U.S. - Israel Income Tax Treaty states that U.S. citizens living as residents in Israel are generally eligible to exclude U.S. Social Security benefits received from their adjusted gross income. This provision may result in substantial tax savings and even REFUNDS on prior years' tax returns if you included Social Security benefits as taxable. Refunds may generally be claimed on the 3 prior years tax returns.
Self-employed Individuals need 40 quarters in order to qualify for future U.S. Social Security Retirement benefits. These quarters can be earned even while living in Israel. This is primarily accomplished by:
i) being self-employed in Israel,
ii) going to the U.S. to work as an employee or as a self-employed individual,
iii) working in Israel for a U.S. entity.
State and Local Tax Refunds may be available for taxpayers who may be unnecessarily filing Resident income tax returns after they moved to Israel. Please be advised that a bank account, brokerage account or driver�s license maintained in a particular State does not necessitate a tax filing in that State. If you have real estate, a business, or any other activity considered a nexus (strong connection), to a State you should generally only file a non-resident income tax return in that State. Big refunds may be available in these cases.
Long Term Capital Gains apply to certain assets held for more than one year. The maximum tax rate is 15% (5% for taxpayers in the 10% or 15% bracket). Capital losses are still fully deductible against capital gains, and any capital losses in excess of capital gains may fully offset up to $3,000 of ordinary income. Net capital losses in excess of $3,000 may be carried over indefinitely to future
years. A balanced portfolio, which can be discussed in conjunction with your overall tax planning, is an excellent way to ride out the ups and downs of market cycles.
Qualified Dividends are taxed at 5% or 15%, the same as long-term capital gains. Generally, U.S. taxes paid on U.S. investment income may be used to offset Israeli taxes (and vice versa) thus potentially avoiding double taxation.
Corporations are potentially excellent tax planning vehicles, especially in light of Israeli tax reform. "C" Corporation tax rates are still 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 incomes. "S" Corporations and Limited Liability Companies ("LLC's") are pass-thru entities whose income is taxed at the individual level.
U.S. Tax Rates are 10%, 15%, 25%, 28%, 33% and 35% respectively. The lower rates of 10% and 15% are available for the following taxable income levels: Single: up to $30,650; Married Filing Joint: up to $61,300.
Standard Deductions have been increased as follows: Single - $5,150; Married filing jointly - $10,300. Taxpayers over the age of 65 may claim an additional deduction of $1,000 each, if married, or $1,250 if single. Anyone with deductions in excess of these amounts may itemize their deductions. Please note that mortgage interest, real estate tax (arnona) and certain charitable contributions paid in Israel may be deductible.
Personal Exemptions have been increased to $3,300. In some cases, such as when you provide at least half the support of the dependent, grandparents may even claim their grandchildren as exemptions on their tax returns. Certain limitations may apply.
Gifting of $12,000 per donee is an effective way to potentially reduce the value of your U.S. taxable estate, as well as future U.S. estate taxes. The gift limit is $24,000 if your spouse joins you in making the gift. The exclusion amount on taxable estates is $2,000,000 for 2006, 2007 and 2008 and $3,500,000 for 2009.
"First Time" Homebuyers may still make an IRA withdrawal of up to $10,000 if single, and $20,000 on a jointly filed return ($10,000 for each spouse�s account) and not be subject to the 10% early withdrawal penalty. The penalty will generally not apply if the funds are used within 120 days to buy,
construct, or reconstruct a personal residence. (In addition, there are other situations, such as for medical reasons and schooling where penalties may also be avoided).
Tax Retirement Plans still exist in the form of traditional IRA�s and Roth IRAs, as well as other types of savings plans. Traditional and Roth IRA's allow for contributions of up to $4,000 per year ($5,000 if age 50 or over). Contributions to Roth IRAs can be made even after age 70 1/2. Roth IRA withdrawals are generally tax free if certain conditions are met and include a 5-year holding period and an age requirement of 59 1/2. Please note that potentially deductible IRA contributions can be made for those reporting compensation on their U.S. income tax return, including those who are filing for the Additional Child Credit (some exceptions apply).
Automatic Extensions for taxpayers, who reside overseas, are available until June 15, 2007. Interest is charged, however, from April 15, 2007 if there is a balance due and penalties are charged from June 15, 2007. It is recommended that taxpayers who do not file by June 15th and owe tax, pay the estimated balance due by said date, along with filing an extension. In addition, it is imperative, that taxpayers who owe estimated taxes, pay them on a timely basis in order to avoid estimated tax penalties.
Avraham Deutsch is a CPA, with over 25 years experience, specializing in income tax planning and compliance as well as investment consulting. Avraham has four office locations and can be reached at 02-999-2104, 03-527-3254, 09-746-0623 or 052-274-9999, or e-mail him at [email protected].
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