Over one year ago, I wrote a post titled Receiving a US-based Salary in Israel the Right Way, in which I detailed the ways in which I was addressing my tax situation as a US citizen living in Israel, working on contracts for US-based companies. Since then, my situation has changed. I am no longer working by contract for a US-based company. I am now working as a full-time employee for this same company. As my scenario has changed, so has my tax strategy. Here is what I am doing now:
Previously, when I was working by contract, I had been signed up as an employee of an Israeli corporation. My income would come into this Israeli corporation, they would handle Israel tax deductions and benefits for me, and I would be paid out of the proceeds. The advantage of this is that since I was employed by an Israeli company, I did not have to pay any Social Security or Medicare (over 5% of my pre-tax wages).

Now that I am no longer working by contract, this setup is not so feasible. As a full-time employee of the US-based company, I am now receiving my salary directly into my bank account in the US. Social Security and Medicare are deducted as part of my pay check. I can take part in the 401K. And I still have to pay Israeli taxes (since starting a few years ago, all Israeli citizens are required to report and pay taxes on global income).

(In theory, I could have gone on as before, either as part of the Israeli corporation, or by forming my own Israeli corporation. However, part of the reason that my company wanted me full-time was to simplify their own accounting and end the necessity of international wire transfers. Thus, that option was out).

I have no way to legally exempt myselft from Social Security (which, in theory, I could one day collect, assuming that it is still solvent in 40 years, and they are still paying out benefits to overseas recipients) and Medicare (which I will probably never collect, since you can only use it in the US and I now live in Israel). Oh well. My loss (5+% of my salary, coming out taxable income. Not fun).

As a citizen of Israel, I have to pay taxes to Mas hachNassah (the Israeli IRS). Although I have heard different opinions on how this should be done, my accountant advised me to do this as if I was an independent worker. I am registered as an atzma’i (independent worker). Every month or so, I make income tax pre-payments based on a formula provided by Mas hachNassah (this changes year-to-year, based on my reported income from two years before, which is the most recently tax year for which I have filed an income tax return). I also pay bituach Leumi every month, also as an atzmai. At the end of the year (or to be precise, the end of January for the following year), all of my taxes are due. This does not mean that I have to have already filed my income tax return. It means that I should pay the difference between the sum of my tax pre-payments for the previous year, and what I (or my accountant) estimates to be my full tax liability. If in the end (ie: my tax return is completed and filed) I underestimate this and have not paid up fully by the end of January, I will owe the difference plus interest. If I overpay, I will get back the difference (with interest). All of these payments can be done online through my bank (or in person at the post office).

One good thing (or at least, something that is not bad) is that any pre-tax deductions that I make off of my salary in the US (like 401k) is also pre-tax for Israel, since my Israeli income is based on my reported US-taxable income. So it pays for me to make a large deduction or 401k, since it will end up being a pre-tax deduction for both Social Security/Medicare, as well as Israeli taxes (if I signed up for an Israeli pension plan as an independent worker, this would also be pre-tax for Israeli taxes, but not for SS/M).

Unfortunately, from what I have heard, I can’t get any Israeli tax deductions for working from home, without jumping through hoops and inviting an audit. For expenses, the best thing to do is to get directly reimbursed by your employer.

Something to keep an eye on that could change things drastically from a tax liability situation: Currently, all Israeli citizens, including olim, have to pay Israeli taxes on global income. In my situation, this means that I need to pay Israeli taxes on my income earned in the US (described above). As the Israeli income tax rate is significantly higher than the US-rate for the same income, I end up paying thousands of dollars more in income tax to Israel than I would to the IRS. However, there is a proposed law before the knesset right now that if passed will exempt new immigrants from having to pay taxes on any non-Israel sourced income for a ten year period post-aliyah. And even if this passes, it is not yet clear whether or not this will apply to me retroactively for the duration of my first ten years in Israel. If it does pass, and it would apply to me, then I would not have to pay Israeli income tax for my main salary. Though I would have to pay the IRS, the lower rate in the US would save me thousands of dollars a year. (This would be nice, but I am not getting my hopes up – however, for those of you considering aliyah, this is something to pay attention to).

That’s all for now on this topic. And of course, I am not an accountant, don’t come to me for tax advice, etc, etc.