Jews Making Aliyah Beware: The Tax Man Cometh
American Jews contemplating aliyah (immigration) to Israel may want to do some serious financial research before taking the plunge. This article assumes that the new immigrant (olei hadash) has or will acquire dual Israeli-U.S. citizenship.
There are several U.S. laws which will impact on olim (immigrants). Olim will need not only to be aware of these laws, but also to act upon them. I will mention these laws but will not go into them in great detail, as space will not allow. Full disclosure: I must point out that I am neither an attorney nor an accountant, but I am a dual citizen of Israel and the U.S. who is personally responding to several of these laws, and therefore I feel an obligation to help disseminate this information. The reader should research the subject and determine which, if any, of these laws apply to him.
The Agreement
On May 1, 2014 the Finance Ministry of Israel and the U.S. Internal Revenue Service (yes, the IRS) arrived at an agreement to turn over information on U.S. citizens’ bank accounts held in Israeli banks. There are, as of this writing, 28 other countries which are cooperating with the IRS in this manner.
There are several U.S. laws which will, if applicable, necessitate a response by Americans living in Israel who have an Israeli bank account and/or who have earned money in Israel.
Tax Form 1040
This may come as a surprise to most American citizens living abroad, especially to olim, but according to U.S. law they are required to file their income tax with the IRS each year with a 1040 series Tax Form.
FBAR
There exists something called the Report of Foreign Financial Bank Accounts (FBAR). According to the U.S. Bank Secrecy Act, a “Foreign Bank Account Report” must be e-mailed annually to the U.S. Treasury when certain conditions apply. In a nutshell, it affects bank accounts which exceed $10,000 or its equivalent in foreign currency. This quote from the IRS web site on FBAR gives a brief overview:
“If you have a financial interest in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account, exceeding certain thresholds, the Bank Secrecy Act may require you to report the account yearly to the Internal Revenue Service by filing electronically a Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR). See the ‘Who Must File an FBAR’ section below for additional criteria.”
FATCA
Then there is FATCA. The purpose of this U.S. law is to find American citizens who are evading paying their taxes. This law is referred to, affectionately, as The 2010 Foreign Account Tax Compliance Act (FATCA). An IRS “User’s Guide” of this law can be reviewed in PDF format on the IRS website. Below is a quote from their page:
“FATCA was enacted in 2010 by Congress to target non-compliance by U.S. taxpayers using foreign accounts. FATCA requires foreign financial institutions (FFIs) to report to the IRS information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. Here you will find links to many documents related to FATCA and its implementation.”
It appears that FATCA takes off where FBAR stops, relative to the amount of money one has in his foreign bank account. This law targets accounts which greatly exceed $10,000 or it’s equivalent. Nevertheless, according to information associated with FATCA compliance, filing FATCA does not cancel out the filing of FBAR, even though the two laws appear to be redundant.
WEP
This one is a killer. It is my favorite. More than likely the Windfall Elimination Provision (WEP) is the cause of most of the flight of capital from Israeli banks (see below). But that is just a guess. This law mainly goes after U.S. citizens who have worked or who are currently working in Israel and earning a salary, but did not pay American taxes on that salary earned. Please click here for the official explanation of WEP.
But it gets even better. If that person is receiving, or will receive, retirement benefits in another country, the U.S. Social Security benefits could be drastically reduced. It is all based on some of the strangest calculated sliding scales of doublespeak I have ever read. This law must be studied along with a printout of your lifetime earnings per year – your Social Security Statement Earnings Record may be requested from www.socialsecurity.gov – alongside their WEP graph of something called your “substantial earnings”, to determine where you fit into their scheme. A quote from their page may – or may not – help:
“The Windfall Elimination Provision primarily affects you if you earned a pension in any job where you did not pay Social Security Taxes and you also worked in other jobs long enough to qualify for a Social Security retirement or disability benefit.”
The very name of this law (Windfall Elimination Provision) tells you what their intent really is. God forbid that you should work hard, wherever you live, and pay your taxes where you live, and reap the “windfall” of the benefits for your labor. This must, at all costs, be eliminated!
That you might receive your Social Security benefits from America where you paid in for many years of hard work, and also dare to work in another country which was the beneficiary of your labor, is just too much for the IRS to absorb. They want to tax all the money you earned whether it was earned in America, Israel or on Klingon.
They threaten you by going after your bank account and by threatening your Social Security benefits. And they are very serious.
As of May 2014, with several of the deadlines for compliance fast approaching or already past, it is estimated that U.S. citizens have already withdrawn between $4 and $5 billion dollars from Israeli banks.
There may be several variations on this WEP idea. If for example, a person worked in Israel long enough to receive Bituach Leumi (National Insurance), which is somewhat like a Social Security program, and is also receiving or will receive U.S. Social Security benefits, then the amount of U.S. Social Security benefits may be substantially reduced. It is all based on a sliding scale of your past dollar earnings and your earnings in Israel, matched against their very special formula which they concocted. The devil is in the details.
Casting a Net
What all of these laws have in common is that the U.S. government is casting a huge net across the globe to find “tax cheats” who are living abroad and hiding their money. Unfortunately, they are making the life of the average U.S. citizen living abroad a bureaucratic nightmare, not only in Israel. The IRS threatens to either assess penalties or fines, or withhold, reduce or seriously alter U.S. Social Security payments to U.S. citizens who do not comply with their requirements. If I understood correctly, they can even attach your Israeli bank account in light of the recent agreement with Israel and its banks. However, their language regarding this is quite cryptic and it may be that they can only peek to see how and if they want to proceed against you. It would be best to check with a tax attorney regarding your personal situation.
As of May 2014, with several of the deadlines for compliance fast approaching or already past, it is estimated that U.S. citizens have already withdrawn between $4 and $5 billion dollars from Israeli banks.
It is recommended that these laws be studied and dealt with, without delay, by olim and by those contemplating aliyah, as these laws have timelines for their compliance. Some have extensions. Their forms are available online and there is a lot of information about them online to help as well.
For Americans, and especially retirees, living abroad, these laws can be devastating if not dealt with appropriately. This is serious stuff, especially for those like myself who are already retired and receiving their S.S. benefits. I suggest that when making aliyah, you leave the bulk of your assets in the U.S. until you understand these laws adequately to protect yourself; and then proceed cautiously with your finances.
Mika’el ben David made Aliyah in 2004 from Florida, USA. He is a published author of several books on religious subjects and currently lives near Be’er Sheva in southern Israel. You can visit his website at: http://www.wix.com/mikaelll/seed-covenant.
