Taxes in Israel

Taxes in Israel are an important factor in Aliyah and daily life. The combined tax burden in Israel is high. Taxes on imported goods, VAT (value added tax), income tax, and real estate transaction taxes are imposed by the state, and municipalities collect taxes on property rentals and ownership.

Israel’s high defense budget and social democratic government policies are often cited as reasons behind the high rates of taxation. The total tax burden can cross 50% of income, and taxes in Israel make the state a partner in every financial transaction conducted legally.

Israel’s Taxes

Taxes on imported goods can make many foreign-made items rather costly. This does have the benefit of supporting local manufacturing, but comes with the burden of higher prices for imports. Different categories carry different levels of taxation, and at the moment there is an exemption for personally imported shipments with contents valued below $75. The total tax on imports can range from 24% and 47.8%, and this is reflected in retail pricing.

VAT (value added tax) is similar to sales tax charged on most financial transactions. Almost nothing is exempted from VAT. Unlike sales taxes in the USA, which are generally lower and not levied on services, you can expect to pay the current 17% rate on almost everything in Israel, including services. The VAT on goods is usually included in the shelf price of consumer goods, as opposed to being added to the purchase total at checkout. Quotes for services often don’t mention the VAT, which will be added to the invoice total.

Income tax. Residents of Israel are taxed on both domestic and foreign income from employment, business, and passive income from savings and investments. Aliyah benefits mentioned below reduce tax rates or exclude certain forms of income. Income is taxed at rates from 10% to 50%, based on income level, with the median household income of about NIS 132,000 taxed at 20%.

Inheritance tax. There is no inheritance tax in Israel, but capital gains, interest, and dividends are taxed at rates between 25% and 32%.

Bituach Liumi (national insurance) is collected to pay for health insurance and social benefits such as unemployment and disability allowances. Employees generally pay 3.5% of income, and employers and self-employed individuals paying an additional 3.55%. The health insurance contributions are transferred to the individual’s Kupat Cholim (healthcare organization) and the balance is managed by the National Insurance Institute of Israel.

Arnona (municipal tax)

Arnona fees fund most public services, including municipal operations, sanitation, and maintenance. The rate is usually calculated based on several factors, including location, type, and size of the property. New immigrants are often granted special discounts on Arnona for one year after Aliyah, which must be handled through the local municipal authority.

US – Israel Taxes for Olim

Benefits for new immigrants and returning citizens affect taxes in Israel, through the following exemptions and reductions:

• Income tax deductions for new immigrants. A points system is used to allocate deductions on income tax obligations for the first three years after Aliyah.
• 10 year tax exemption on overseas earnings. This applies to income generated outside Israel, but certain activities by the individual in Israel may make that income taxable.
• 10 year tax exemption on income generated by a foreign company owned or managed by a new immigrant. Here too, qualified advice is needed to be sure of the status of such income.
• Pension income is exempt for the life of new immigrants, and for 10 years for returning citizens.
• 20 year exemption on interest from foreign currency deposits, provided these source of the deposits is capital possessed prior to immigration, and the deposits are made in an Israeli banking institution.

USA – Israel Taxation

The United States taxes all citizens, regardless of their location and other citizenship, so US citizens who become Israelis be governed by USA tax law and must comply with reporting and taxation requirements for income and foreign holdings. Even for income that is taxable in both countries, you will likely pay all of the tax in one country and receive an exemption in the other country, or pay the lower rate in one country and the difference between that and the higher rate in the other country.

This is a complicated situation which generally requires the guidance of an expert or experts well-versed in the relevant tax codes and methods of structuring and handling income. Social Security taxes and benefits are also part of this situation, so it is wise to consider all aspects of future income, taxation, and retirement benefits as part of your Aliyah research.

Why Bother?

With tax rates so high, and the additional complication after Aliyah for US citizens, it is easy to ask why anyone should bother with Aliyah. The increasing number of former residents of the USA who are living in Israel is testimony to the fact that many consider Aliyah worthwhile even with the taxes. Among the factors that may mitigate the harshness:

• Israel provides a lot for the money they collect, including an extraordinary level of military security and generous social programs including health, education, and other benefits.
• The quality and style of life in Israel appeals to many, and they are willing to accept smaller living space and less luxury in return for living in Israel. You may be living larger in the USA, but you may also be enjoying that life a lot less.
• Ideology can make living in the Jewish homeland an important factor and many Olim are glad to be participating in helping Israel survive and thrive for themselves and all Jews.
• Things may not be so great back home. Increasing challenges of antisemitism, political discord, unlivable cities, inaccessible healthcare, unaffordable education, and more are making lower tax rates and more access to lower-priced consumer goods less appealing to many.

Tax rates and policies mentioned in this article are informational only, and not to be considered or used as tax advice, for which you should always consult a qualified tax professional familiar with the laws of all relevant jurisdictions.

Information on taxes in this article is subject to change, and readers are encouraged to check for updated information at the sources used for this article and from the relevant authorities and documents mentioned below and elsewhere:

Israel Tax Authority
Nefesh b’Nefesh – Taxation in Israel Article
Nefesh b’Nefesh – Guide to US Tax Compliance
Wikipedia – Taxation in Israel
USA-Israel Tax Treaty