Filing Israeli Taxes

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Filing Israeli Taxes

Taxation of Individuals in Israel

Taxation based on residency

If a person is a resident of Israel, their worldwide income will be subject to Israel taxation, whether or not they are an Israeli citizen.

For tax purposes, Israel defines a resident as an individual whose center of vital interests are most closely connected with Israel.

Generally, one will be considered a tax resident of Israel if either of the following applies:

An individual spends 183 Days in Israel during any given calendar year (half of the tax year).
An individual spends at least 30 days in the current tax year and 425 cumulative days in the current and two preceding tax years in Israel.

Even if one does not meet the above two tests, Israel can rule that a person’s family, economic and personal ties are closest to Israel and therefore his center of vital interests is Israel; thus being considered a deemed resident of Israel.

Filing an Israeli income tax return

Unlike the United States, in Israel most types of income have taxes withheld at source and as a result filing a tax return is less prevalent. For specific types of income that were subject to Israel tax withholding at source and do not exceed the below thresholds, there is no tax return filing obligation.

2020 filing thresholds:

Wages: 649,000 NIS

Rents/Exempt foreign income/Foreign pension: 337,000 NIS

Interest: 643,000 NIS

Proceeds from sale of securities: 2,522,000 NIS

If an individual has two sources of income from the list above, both of which do not exceed the threshold amount and were subject to tax withholding, he will not be required to file an income tax return. For an income amount above any mentioned threshold, an Israeli income tax return must be filed.

Self-employed individuals, esek patur or esek morsha, [SG1] must file Israeli income tax returns to report business income and expenses.

Passive income from investments held in foreign accounts or from foreign businesses also do not have Israel taxes withheld at source and a return must be filed. (See first ten years post-aliya filing exception).

Form 1301 is the tax return filed with the Israel Tax Authority. Upon processing, the Israel Tax Authority will send the taxpayer a tax assessment, shumat mas. Married filers will be assessed jointly but can request separate assessments, if need be.

Refund request

An individual can opt to file an income tax return and re-assess their tax liability even if they have no obligation to do so. In certain circumstances, a person may be eligible to file a short form, form 0135. This form is intended for taxpayers that do not have a requirement to file and need to reassess their tax liability because of financial expenses or charitable donations made to tax-deductible seif 46 not for profit organizations.

Tax rates

Earned income from either employment or business income is taxed at graduated rates ranging between 10-47% as per below table:

Annual income level (NIS)	2020 tax rate
0 – 75,960	10%
75,961 -108,960	14%
108,961 -174,960	20%
174,961 – 243,120	31%
243,121 – 505,920	35%
over 505,921	47%

Most passive income from interest, dividends, capital gains etc. are subject to flat rates ranging between 10-40%. Other passive income is generally taxed at graduated rates ranging between 31-47%; however, various exceptions may apply. Israeli residential rental income of up to 5,100 NIS per month for 2020 can be exempt from taxation. (See article regarding Israel real estat investments for a more detailed look at Israeli taxation of real property income.)

It is important to note that beginning in 2013, the Israel tax authority introduced an additional tax, mas yesef. This is a flat 3% tax on annual income amounts above 651,600 NIS.

Tax Credits

A person’s tax liability is reduced by credit points, zikuim. For tax year 2020, each credit point is worth 219 NIS per month.

Personal credit points: All residents of Israel are entitled to personal monthly credit points. A man generally speaking receives 2.25 personal tax credit points (thereby reducing his tax by NIS 493/month). A woman receives 2.75 credit points, reducing her tax by NIS 602/month.)
Credit points for children: Fathers are entitled to monthly credit points for children ages 5 and below. Mothers will receive credit points for every child under age 18. The credit points vary depending on the age of the child.
Credit points for new immigrants: Income tax breaks are available for the first three and a half years after immigration as follows: For the first 18 months, new immigrants are entitled to 3 additional monthly credit points, for a total tax break of up to 11,826 NIS. For the next twelve months, new immigrants are entitled to 2 additional monthly credit points for a total tax break of up to 5,256 NIS. For the last twelve months of the three and a half years, new immigrants are entitled to 1 additional monthly credit point for a total potential tax break of up to 2,628 NIS.

Credit points are also available for individuals who are finishing a degree, in active army service/sheirut leumi, divorced, responsible for the care of a special needs or permanently disabled child or residents of certain development cities.

Other Deductions

Donations to recognized Israel public charities, seif 46 organizations, can also help to lower an individual’s tax liability. For every 10 NIS donated, a person’s tax bill will be lowered by 3.5 NIS. Additional deductions could include pension payments, accounting fees, investment management fees or other fees directly related to taxable income.

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