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Taxes

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Overview of Israeli Personal Taxes

In Israeli, expect to pay the following significant taxes:

Income Tax (Mas Hachnasah)
Social Security Tax (Bituach Leumi)
Health Tax (Dmay Briyut)
Property Tax (Arnona)  WARNING, applies to Renters also!
Sales / Vat Tax
Other Taxes of Note
Tax Breaks
Advice

Tax Summary at the end.

Note, 100% accuracy of information is not guaranteed.   The information is presented here to "give you an idea" of the situation in Israel.  Before making any major financial decisions based on this information consult an Israeli tax expert.

This page has not been updated since the year 2000. Somebody sent me this link (in 2006) summarizing new phased tax reductions for 2005 - 2010 : link here.

Israeli Income Tax

Israeli Definition of Taxable Income

All income and "benefits" received from an employer are taxable as income.  Examples include:

Salary
Overtime Pay
Lunch in the company cafeteria (the value thereof, if subsidized the value of the subsidy)
Company car (the government defined monthly value thereof)
Employee Stock Purchase Plan (the estimated profit from)
Stock Options (the profit when sold)

Things that are NOT income (and are not taxed):

Earned Interest (from a bank)
Stock Profits
Foreign Pension Received
Severance Pay (significantly reduced, not eliminated, taxes)

Income Tax Rates

Income tax ranges from 10% to 50%.  The curve is pretty steep with anyone making decent wages paying 30% and anyone making a good wage paying 45% on the top end of his income.

Current Israeli income tax tables can be viewed at www.mof.gov.il/itc/h4/d_text.htm.   Since the page is in Hebrew, here's a translation to English and into a U.S. (IRS) style tax table (valid as of Feb. 21, 1999):

(Note, all values are in New Israeli Shekels)

From To Tax Rate Tax at This Rate Total Tax So Far
0 1920 10% 192 192
1921 3830 20% 382 574
3831 10100 30% 1880 2454
10101 18300 45% 3690 6144
18301 + 50% + +

Year 2000 update: As of March, 2000 there is an additional 3% tax on income over NIS 24,000 per month.

Income Tax Deductions / Reductions / Exemptions

The Israeli income tax system offers tax credits, that is direct reductions in the amount taxed.  These credits are called "points" (nekudot).

There are NO credits for children/dependents (as in the U.S. with a deduction per number of dependents) for fathers, working mothers will receive a deduction.

There are deductions for being a new immigrant (valid for your first 42 months in Israel only [3 1/2 years]).  For the first 18 months, 3 credit points are given, for the next 12 months, 2 points, for the last 12 months, 1 credit point.

A deduction if married and wife is not working.

As of 1999, each point was worth a tax credit of 165 NIS from the monthly income tax (subtracted from the tax bill).  There are a variety of rules that apply besides those above, such as a deduction if living in a "development" town, settlements, or the Golan.   Since I can't put all of them here (nor am I an expert) I can only present a reasonable example.

A Reasonable Example: 

A new immigrant, married with children, non-working wife, 3rd year in Israel, living in a coastal town, will receive 4.25 points (or a tax reduction of 701 NIS).

Sample Calculation:

Salary = 15,932,   Tax Points (reductions) = 4.25
Income Tax = 4377

Now, a new immigrant in their first year in Israel with a lower income may avoid taxes altogether.  This depends on your level of income and tax status - single, married (and whether your spouse is working or not).  A single immigrant or a married one with wife working can earn up to NIS 4800 before paying any taxes.  With wife not working, up to NIS 5350.

Income Tax Payment

Income tax is deduced from every paycheck.  At the end of the year, the employer hands you a tax summary of what was deducted during the year.  If something is incorrect (for example they took too much because you were unemployed during some months), you can file for a refund.  Otherwise, no  filing of any kind is necessaryThis is one real advantage of the Israeli tax system.  No filing, no record keeping (no trying to figure out if you can amortize the solar water heater into a 5 year tax deduction).  (Exception, if you are self employed or operate a business, bi-monthly and/or monthly filing is necessary which requires the use of a government certified tax accountant and significant record keeping.)

However, it is worth noting that the employer (actually, his accountant) can make mistakes.  Further, complications such as changing jobs, periods of unemployment, working multiple jobs (or having some other side incomes) can cause mistakes in the amount taken.  In this case filing is required to recover overpayment (and there is a tax industry which lives off getting it back for you for a percentage).

Its Not As Bad As It Seems...

A note from an editor at Arutz-7 Israel Radio:

"Sometimes when you just repeat the bare facts, as this page does, it makes things more frightening than they need be. For instance, this page emphasizes that the taxes are taken on every aspect of one's salary.

This, of course, sounds foreboding.  But, the taxes are taken off automatically from the the entire salary, such that one does not "suddenly get hit" with extra taxes or have his family budget messed up as a result of the extra costs.   When a person gets a job, he asks how much he'll make; they give him a gross salary figure, then the two of them approximate the net (including all taxes above), then they'll up the gross a little to compensate, and that's it.

This page may make it sound it sound like there's a little guy with spectacles taking the last pennies out of the poor immigrant's hands...that's not the case.

Further, it would seem that Kitzvat Yeladim (national child subsidy payments paid by the government to parents) would belong on this page to offset the fears.  This can be quite a sum, especially for a young couple where the husband does even a few weeks of army service and then has a few kids.  And how about Kitzvat Bigud (clothing allowance for jobs that require a uniform) and Dmei Havra'ah (required employer vacation monitary allowance) and other such national assistance payments?"  (Meaning, much of that tax money comes back around via various government services and programs and/or government mandated payments to employees.)

Social Security Tax

Social Security (called Bituach Leumi in Hebrew) includes an old-age/retirement pension, unemployment insurance, welfare and disability assistance.

The tax is a straight 5% of taxable income (more or less, some benefits may not be taxed under this tax).  It is deducted from every paycheck.

Exceptions: This tax is ~2 1/2% for income that is "under 1/2 the average national wage" and has a cap at "4 times the national wage".  Unfortunately, I have been unable to determine exactly what this is, here's a best guess: 1/2 is somewhere around NIS 3,500 per month and 4 times is somewhere around NIS 24,000 per month.

Health Tax

Health Tax (Dmay Briyut) pays for your national health insurance (for details on what this covers, see the Medical page).

This tax is also a straight 5% of taxable income (again, more or less).  It is deducted from every paycheck.

Property Tax

Property Tax, actually Residency Tax (Arnona in Hebrew) is charged on all property in Israel.  This tax is levied by the local government (city, town, village, or community).  The tax is paid by the current resident of the property.  So, whether you buy, rent or open a store, you pay the tax.  The price charged is determined by square footage (actually square meters in Israel) versus the per-meter rate of the building and the multiplier rate of the zone.  (Zone is an area quality factor.)

The resulting rate can go as high as 25% of the monthly rent or loan payment (actually, I'm not aware of there being any limit, that's just the worst I've heard of).  From my personal experience, 15-20% seems to be normal (personally I'm paying 19%).

I don't know if the payment method is the same for all locations.  In the city where I live, I receive a yearly bill, which if paid gets a 10% discount.  Otherwise they bill bi-monthly.

Sales / VAT Tax

In the U.S. there is "sales tax", a percentage you pay when you buy things.   In Europe and Israel, there is a VAT tax (Value Added Tax).  This covers products and services.  So, besides paying tax when you buy things, you also pay tax to the plumber, dentist, lawyer, even insurance.  (If you get in an accident, you must even pay VAT tax on the insurance deductible.)

Currently the VAT tax rate is 17%.

Other Taxes of Note

These taxes may or may not apply, depending on your lifestyle and business:

TV Tax : There is a yearly tax for any household which owns 1 or more televisions.  A new immigrant is exempt for their first year.  I think the tax is around NIS 600 per year.  Note that the tax is charged whether or not the TV works or has an antenna connection (so a TV that is just a monitor connected to a VCR is still liable for this tax).

Tax Summary

So, here's a summary of Israeli taxes:

On your income:
- 35%            Income Tax total on a medium to high income.
-  5%             Social Security.
-  5%             Health Tax.

Housing, add 20% to the cost.

Sales & Services, add 17% to the cost of everything.

Tax Discounts / Breaks

The bad news is, for the average working person there really are no major tax breaks.   But, depending on circumstances, these may apply:

Working mothers do get tax credits per child (but the husband will lose deductions for a working wife).

Living in a development town or a settlement (or the Golan) gets additional income tax deductions.  (Note that this may depend on current political positions, some governments raise these discounts, others lower them.)

Smaller towns, development towns and settlements may have much lower property taxes (maybe 60% less than Tel Aviv for example.)

New Immigrant Discounts:
Income Tax - 3 year diminishing reduction.
Property Tax - 1 year, 50-80% reduction depending on the city.

Pensioner Property Tax Discount (20% I think).

Poverty Property Tax Discount (if family income is less than 5,000 NIS per month).   The discount ranges from 10-80%, depending on income versus family size.

Interest Income and Stock Profits, in Israel, are NOT taxable.  So, if you have some savings, that money can make you money tax free.  (Note, foreign stock profits, such as US market transactions, are taxed at a very low rate as well, though US taxes may be due on them also.)

Advice

Obviously, compared to the U.S., Israeli taxes are high, very high.  So, how can the impact be offset?  Here are a few ideas:

Check the Making a Living page for discussion of Israeli employee benefits (pension plan, savings plan, etc.) to see how some of these tax-free benefits offset some of the taxes.  Further, many employers offer "allowances" depending on your type of job.  This may include a transportation allowance and/or a clothing allowance.

Taxes for foreign unearned income (investments, stocks, mutual funds, pensions, interest income) fall into 3 categories: none, 5%, or "a gray area".  These pages are not the place to go into detail on these items (nor is the author an international tax expert).  But note there is no current requirement for you to bring your assets to Israel.  Leave your investments overseas!  After coming to Israel you can sit down with an accountant to determine the best way to earn a return and avoid/reduce Israeli or U.S. taxes on your investments.

There are some fortunate individuals that are working for or receiving income (or pay) from foreign (non-Israeli) companies (or divisions/departments of a company outside of Israel).  In this situation, if the person maintains a residence outside of Israel (in the U.S.), it may be possible (and legal) to choose your "tax home".   You can then determine which tax system will result in lower taxes and choose your tax home appropriately.

As mentioned in the It's Not As Bad As It Seems section above, much of this tax money comes back around as benefits.  Examples include national child payments per child every month, free schooling (including religious), full health coverage with (virtually) no deductables, and more.  So, some of the costliest items that are part of a Jewish family's budget in the US may have little or no cost here.

Relevant Links:

Ministry of Finance Primary Web Page:       www.mof.gov.il/englishframe.htm
Current Israeli income tax tables (Hebrew): www.mof.gov.il/itc/h4/d_text.htm
Israeli Business News:                                   www.globes.co.il


Last Updated: 22-01-2000
Copyright 1999-2001 by Akiva M
E-mail to akivam .a.t. gmail 'd'o't com with questions/comments.