Aliyah Diary 19: Taxes for Americans

View All Aliyah Diary Entries

Aliyah Diary

01. Aug 19, 2024: Preparation In America
02. Aug 25, 2024: First Few Days
03. Aug 29, 2024: Moving In
04. Sept 4, 2024: First Day of School
05. Sept 8, 2024: Two Weeks In . . .
06. Sept 16, 2024: Getting Comfortable
07. Sept 22, 2024: Ready for Guests and Yom Tov
08. Sept 25, 2024: Visiting Jerusalem – Kotel and Concert
09. Sept 30, 2024: Nasrallahed All over the Floor
10. Oct 8, 2024: Driver’s License
11. Oct 13, 2024: Packages. (חבילות.)
12. Oct 25, 2024: October Sun and Understanding the Jew
13. Oct 30, 2024: Bureaucracies and Stories
14. Nov 2, 2024: Traveling with the Kindness of Strangers
15. Nov 10, 2024: Safety Fourth
16. Nov 17, 2024: Where People Look Like Us
17. Nov 19, 2024: Jewish Identity and Outlook
18. Nov 24, 2024: Learning Language – l’at, ‘lat — little by little
19. Nov 28, 2024: Taxation for Americans in Israel

Type your email…

Subscribe

Introduction

This diary entry is really being written earlier than it should be – I have a lot more consulting to do and haven’t actually filed any tax returns yet, though I think this is useful for new oleh to understand “what it’s like” and “how it feels” to actually go through with aliyah and where I am, three months in. Also, someone else making aliyah soon who, like me, has a business in the United States, asked me to explain taxes to him. It is surprisingly difficult to find this information with any detail on the internet.

Disclaimers

Disclaimers: I’m a licensed patent and trademark attorney in the United States with a lot of years of experience in that. I don’t handle (much) law outside of that field and what I now about taxation largely comes from a required course in law school which was easily one of the top 5 most useful classes I took because there are practical applications. Nothing I say here is legal advice, accounting advice, or otherwise. As I’m about to write, don’t listen to anyone who isn’t a tax professional and even then, listen critically because there are a lot of different answers to some of the same questions.

The most important advice

The first thing to know about being an American living in Israel is do not listen to “people on the street” regarding taxation in Israel. They’re often plain wrong and will hold to their convictions. My feeling is that there’s a lot of “wishful thinking”, “willful ignorance”, and “taxes can’t interrupt my aliyah euphoria – I’m a hero for overcoming all hurdles and coming here – why would Israel want my money?”

The most egregious tax advice I heard is, “you don’t need to pay taxes for X years” where X is a variable between 1 and 13. I’ve heard 1, 3, 10, and 13 … and spoke to accountants who say those people will be seeing them eventually to fix their tax mess.

The basics

The United States makes citizens pay taxes no matter where they live in the world. States make citizens pay taxes only if they live or do business in the state, e.g. real estate income will still be taxed in that state even if you’re not there whereas your regular income (earned outside the state) will not be. Whether you are a citizen of a state or not depends on the legal test in that state.

Israel taxes you if your primary residence is in Israel – this is divorced from whether or not you are a citizen. This, in fact, seems to be how every country in the Occident (Western World – not the horse whose use helped discover video – no really – it was also a popular Jewish newspaper in the United States for about 50 years – remember, I taught U.S. Jewish history?).

What is not taxed in Israel, for an oleh, is only foreign passive income for 10 years only. Someone will tell you, “oh, they’re going to remove that soon” … no, they’ve been saying that for 20+ years and I doubt they’re removing it. What is foreign passive income? Things like dividends from stocks … is sale of a stock passive? Unclear. I haven’t gotten a clear answer from an accountant on that yet.

Further, there is a “tax treaty” between Israel and the United States … which doesn’t include betuach leumi and social security tax (to oversimplify – the same thing in each country … pays you money when you can’t work or retire after a certain age). This tax is 12.4% of your income in the United States (employer pays half) and, I think, about 15% in Israel. That means if you don’t figure out your taxes you’re paying 27% without even calculating income tax.

The United States does not tax you, when living abroad, until your earnings are over $75k/yr, or if filing jointly, $150k/yr. Does that include social security tax exemption? I’m not sure. Further, if you get a paycheck in Israel, you don’t even file a tax return … it just comes out of your income. It’s an interesting story as to why in the U.S. we have to file tax returns even when the government knows the income of salaried employees, though not for this article.

If you’re selling your primary residence in the United States, there is not 1031 exchange when you buy property in Israel. (Meaning, if you sell an asset and by a like kind asset you can avoid tax in the U.S. until you sell your final house without an exchange.) However, there is still a deduction on capital gains taxes for the first $500k of profit on your house and Israel does not tax this gain at all if sold within 10 years of your date of aliyah … from my understanding.

Jerusalem or Tel Aviv

This is a bit of a digression – the commercial centers / centers of commerce seem to be Jerusalem and Tel Aviv … that’s where you find the large companies with the first being religious or having a religious character, and the latter having a secular character. Another cultural difference – in Jerusalem if you ask directions you’ll get very broad answers … “go down the road, turn right somewhere nondescript, and hokey pokey counter-clockwise until you see a large ox who will tell you where to go from there.” Tel Aviv is more like … “go down Dizengoff 50 paces, turn right 120 degrees and follow the alley until the fifth door labeled Yakuza and you’ll see a large ox in your path – turn and fire.”

Further, Jerusalem is HUGE. The neighborhoods around Jerusalem – it’s even more HUGE. When in yeshiva it did not seem nearly as big, by bus, as it does when driving … 20 minutes from Sanhedria to Kanfei Nesharim without traffic? I thought that was just because I was on a bus … car isn’t much different … this place is huge. The Old City, which -was- the city for two thousand years, give or take a 1000, is just a small part of a HUGE city now. Wow.

I spoke to an accounting firm in Tel Aviv and … I was put off. I learned from a marketing person with whom I traded services once – that more important than the quality of work is “do you like him.” This firm wrote me back on Shabbos and asked how often I was in Tel Aviv to stop by. I told them where I lived and they thought it must be a neighborhood in Tel Aviv … no … it’s actually an entire town of its own and it’s not in Tel Aviv. I’ve been here three months and I haven’t been to Tel Aviv at all! They couldn’t believe this. New York … maybe … actually, don’t be like that in New York either.

Kind of turned me off – as did the prices. I learned this from dealing with lawyers (NOT recommended) for 15+ years of working in the field … just because you have a fancy office and a lot of people does not make you better. It means you have a lot of overhead, each employee is a dollar sign that gets paid 1/3 or less than they are taking in, and the guys on the top are raking it in. I don’t need to pay for that. (Ask me not on a public blog what my overhead is.)

So … to Jerusalem I go for international banking, accounting, and so on. Dealing with people more like me and I can daven at the kotel before my meeting. … and then it’s like … wait, Jerusalem is a major commercial center? I thought it was just yeshivas. Turns out all those office buildings … there’s a lot lot lot more than I noticed before.

Ways to Avoid Double Taxation

Different accountants will say different things here – again, see the disclaimer above.

Income from an LLC in the United States is considered passive income in Israel – according to some shitas. Thus, form an LLC or use the one you have and have your income go to the LLC to avoid paying beutach leumi in Israel. However, you need to have a reasonable salary from the LLC which – I think – is still double-taxed. (Social security in the U.S. is only paid up until $176k of income in 2025.)

Further, Americans can be an “employee” of an Israeli company whose sole reason for existence is to help Americans avoid double taxation by paying a salary to the American. This works kind of like an American LLC in reverse … if you’re paid this way, you avoid self-employment tax in the U.S. though it is my understanding that you can’t avoid social security tax. However, Americans are eligible for social security benefits even when living in Israel and Israelis with American citizenship (any child born to an American can claim such) will travel to the United States … to some office in Vermont, to claim benefits. Please comment below if you have corrections and addendums to this diary entry.

Further, you can declare, for a long existing business, that you have “good will” in the business which is earned only in the U.S.. People pay you more simply because you’ve been around so long. A lawyer earning $200/yr might say if they started out today they’d have to charge only $125/hr … so that extra $75/yr is earned purely in the United States and has nothing to do with work you’re doing in Israel. Seems lawyers in Israel are also good at finding tax loopholes.

You want to split your income to be derived in U.S. and Israel to have a lower tax bracket in each … or, at least Israel. Not sure if U.S. cares. Also, in the U.S. when you file jointly, you share a tax bracket. My understanding is that is not how it works in Israel – each spouse pays at their individual rate … and women have a lot of deductions for also taking care of kids under 18 that men don’t have. (Realism is a thing over here).

Next, if you contribute to a retirement account (e.g. 401k), that won’t be “seen” by Israel because the tax authority looks at your 1040 – American tax return – and it won’t show up as income at all. There are equivalent retirement plans in the Israel though I’m told they’re not nearly as good … use the American one.

Next, if you form a company in Israel you are taxed … if I remember correctly, 15% on the income off the top. You can then keep the money in the business and invest it in the stock market, etc – which I suppose you can do in the U.S. too … it’s just not as common. You then only pay the rest of the tax when you remove the funds from the company to your personal account and then you pay an additional 33%. However, the accounting required will cost about $400/mo! My numbers don’t seem to be right … again, see the disclaimer, add comments, etc.

Donations

The tax treaty applies to registered charities in the United States and Israel, both ways. The United States will give you a tax deduction. Israel will give you a tax credit. The credit is generally better than the deduction – 35% of what you donate comes off your taxes in Israel while in the United States it will reduce your income based on what you donate. Donations, thus, are very helpful at reducing your taxes.

There is an organization, PEF, where you can pay with a United States credit card for Israeli charities, avoiding having to do a currency conversation / deposit into your bank account in Israel.

Accounting Procedures

Obamacare included a provision to have business report their receipts on a monthly basis and even those less than $600. Republicans fought to get rid of that provision and Obama agreed … rather, acquiesced. It would have brought in more revenue by making it harder to hide income. The U.S. is largely supported by selling debt to foreign countries who subsidize the country and so the U.S. can overspend with no real consequences.

In Israel, it’s different and so they make you, if you’re running your own business (e.g. self-employed) and earn more than 120k NIS a year report receipts and have an audit every two months! This can be avoided by having your money go into one of the companies described above which is used to avoid double taxation / self-employment tax in the U.S. However, such companies also take 10 to 15% of your income off the top…. I’ve heard. Or you pay an accountant about $400/mo for the paperwork required in Israel!

As someone who has a tax residence in Israel, from Israeli payers you are also required to collect 18% VAT (as of 2025; VAT is ‘value added tax’ or, they call it, “MOM” around here). This tax is on a whole lot of things that it isn’t on in the United States … it’s kind of like a sales tax triple as high as in the United States. Therapist? Lawyer? You have to collect VAT. What if it’s an American business and an American who lives in Israel is paying you? You have to collect VAT. (My LLC is setup such that I’m not the majority owner which may help… I don’t know yet – I have a lot of unanswered questions.)

Income Tax

Income tax brackets in Israel go from 10% to 47% … the highest tax bracket starts at 700k NIS a year. As a resident of Israel it is my understanding that Israel gets the tax first and the overage goes to the United States which usually doesn’t happen because Israel’s income tax is higher. Does this include tax include the betuach leumi tax? I don’t know at this time. Can you pay to the United States first? I’ve heard that you can … I don’t know for sure. I’d rather pay Israel and then again, I’d rather not have to complicate things when my business and money are in the United States in dollars.

Is it Worth It?

Quality of life – yes, absolutely. There’s no question. Life is better here. Someone needs help picking oranges because they’re short on workers? That’s immensely more meaningful here than any apple I ever picked at a ‘pick your own’ in the U.S. Not just comparing apples and oranges here (sorry) because …

Financially – I think I’m actually better off financially in Israel. Everyone’s situation is different though in my case had I stayed in America this school year, I’d be paying about $100k in tuition for my kids, and about $35k (maybe more) for healthcare for my family. The next big child expense is food which is about 17% cheaper in Israel, says the internet.

My property taxes were about 3.5x more in New Jersey compared to comparable living in Israel – and New Jersey state income taxes were an additional 3 to 5%. I received money for two cars in the United States which paid for one of them in Israel so I got some value out of that. (One was totaled by an Uber driver not looking and I had the car fully insured – thanks Uber!) Had I replaced it, it would have been with another minivan for all the carpools and whatnot. In Israel, I got a sedan so I didn’t actually spend that much more than I would have in the United States … on that car. Here, the kids can and do take buses around the country so there’s also less driving to do which goes towards saving money and quality of life.

When my kids go to university, that’s where the real savings begin. Assuming they go in Israel, as an oleh my children go to college for free. If they go to a private university (I do not know which are ‘public’ and which are ‘private’) they pay only the cost beyond what a public university costs. Even if you were paying for college in Israel it’s a joke – at the Technion … Israel’s MIT … full tuition is $15000 + ~$5000 in housing and other fees.

Actual MIT in Cambridge, MA lists their price at over $280,000 over four years if you’re paying full tuition! At Rutgers, a public university in New Jersey, even an in-state resident pays about $140,000 over four years. Multiply that by each of your kids and that’s … a big number.

Plus – in Israel college is 3 years vs. 4 … tachlis – they don’t waste time … and there’s a year of national service for religious girls which forces them to be givers and they don’t “lose out” on a year of their life.

Our income has gone down because we can’t see people in person though again … quality of life. I work American hours in the evenings so have many of my days free to enjoy.

Aliyah Diary

01. Aug 19, 2024: Preparation In America
02. Aug 25, 2024: First Few Days
03. Aug 29, 2024: Moving In
04. Sept 4, 2024: First Day of School
05. Sept 8, 2024: Two Weeks In . . .
06. Sept 16, 2024: Getting Comfortable
07. Sept 22, 2024: Ready for Guests and Yom Tov
08. Sept 25, 2024: Visiting Jerusalem – Kotel and Concert
09. Sept 30, 2024: Nasrallahed All over the Floor
10. Oct 8, 2024: Driver’s License
11. Oct 13, 2024: Packages. (חבילות.)
12. Oct 25, 2024: October Sun and Understanding the Jew
13. Oct 30, 2024: Bureaucracies and Stories
14. Nov 2, 2024: Traveling with the Kindness of Strangers
15. Nov 10, 2024: Safety Fourth
16. Nov 17, 2024: Where People Look Like Us
17. Nov 19, 2024: Jewish Identity and Outlook
18. Nov 24, 2024: Learning Language – l’at, ‘lat — little by little
19. Nov 28, 2024: Taxation for Americans in Israel