US tax and reporting: what do you need to know?

Most countries, including Israel, use a residence-based tax system. In other words, you pay tax to the country where the center of your life is located.

The United States, by contrast, uses citizenship-based taxation. From the IRS's perspective, if you are a US citizen or a Green Card holder, you are a US taxpayer even when you live outside the United States.

Your annual US filing must reflect your worldwide income, including:

• Income from work: Salary as an employee or income from a self-employed business in Israel.
• Passive income: Rent, capital gains from the stock market, dividends and interestThe "price of money" – the amount paid for the use of someone else’s money, as income to the depositor or as a cost to the borrower..
• Long-term assets and products: Pensions, Kupot Gemel (קופות גמל) and Keren HishtalmutA medium-term savings product (six years) that benefits from a tax exemption on investment gains up to the applicable contribution limit. funds (קרנות השתלמות).

To understand the central obligations, it helps to separate two tracks: reporting income and reporting financial accounts.

1. Annual income tax return—Form 1040

This is the returnThe profit (or loss) from an investment over a certain period, usually expressed as a percentage of the original amount invested. that brings together all the income you received during the tax year.

• What do you report? Salary, business income, rental income, investment gains, dividends, interest, pensionA monthly payment made to a person after retirement from work in order to help maintain their standard of living. income and other income.
• Filing date: The official US deadline is April 15. US citizens living outside the United States receive an automatic extension until June 15 and may request an additional extension until October 15.

2. Report of foreign financial accounts—FBAR, FinCEN Form 114

This report is filed with FinCEN, the Financial Crimes Enforcement Network of the US Department of the Treasury, rather than with the IRS. It does not concern the amount of your income; it concerns financial accounts you hold outside the United States.

• When does the filing obligation apply? When the combined value of all your financial accounts outside the United States exceeded $10,000 at any point during the year.
• Which accounts are included? Current accounts, trading and investment accounts, Keren Hishtalmut funds, Kupot Gemel, Bituach MenahalimA savings product based on an individual contract between the saver and the insurance company, combining a savings component and insurance coverage. (ביטוחי מנהלים) and pensions.
• Joint accounts and signature authority: A joint account with a spouse who is not a US person, or an account over which you have signature authority, may also be included in the calculation.
• Filing date: The deadline is April 15, with an automatic extension until October 15.

When you open a bank account, join an investment house or open a Kupat Gemel (קופת גמל), you may be asked whether you are a US citizen or otherwise connected to the United States.

The reason is a 2010 US law called FATCA, the Foreign Account Tax Compliance Act.

The law is intended to prevent US citizens from hiding money in accounts outside the United States. Under the international agreements that were signed, Israeli financial institutions must identify customers with a US connection and report their accounts and balances to the Israel Tax Authority (רשות המסים בישראל). The information is then transferred in consolidated form to the IRS.

You will generally be asked to:

1. Sign designated forms, such as Form W-9.
2. Provide your SSN or TIN.
3. Confirm your US tax status.

Not necessarily.

In many cases, tax credits and other arrangements reduce or prevent double taxation between Israel and the United States. A person who paid tax in Israel may owe no additional US tax on the same income, or may owe a reduced amount.

In the era of FATCA and information transfers between financial institutions and tax authorities, assuming that the IRS does not know about your accounts in Israel can be dangerous.

Failure to report, or incomplete reporting, may lead to:

• Significant penalties: Penalties for failing to file an FBAR can be high, including in some cases when the error was made in good faith.
• Interest and related liabilities: Unpaid or unreported tax liabilities may accumulate interest and additions over time.
• Administrative restrictions: In extreme cases involving significant tax debts, the US government may restrict the validity of a US passport.

If you have only now discovered that you should have filed reports but did not do so for several years, programs exist that allow people living outside the United States to bring past filings into compliance.

One program mentioned in the source is the Streamlined Foreign Offshore Procedures. It can be used to file returns for previous years and, in some cases, obtain relief from penalties when the failure to file is shown to have been non-willful.

• Locate your SSN: Make sure your US Social SecurityA general term for a tradable financial asset (such as a share, bond, or unit in a fund) that represents a right to an asset or to profits. number is available. You need it to file returns and complete financial forms.
• Map your accounts once a year: Gather the highest balance held in each current account, investment account, pension, Kupat Gemel and Keren Hishtalmut.
• Check the FBAR threshold: Determine whether the combined balances exceeded $10,000 at any point during the year.
• Do not ignore messages from financial institutions: Did you receive a form or letter concerning FATCA? Complete the details and return the documents on time.
• Check whether your investment portfolio is suitable: Before buying Israeli financial products, examine the US reporting and tax implications, including the PFIC issue.
• Choose the right professional: Look for a CPA or Enrolled Agent who understands both Israeli and US taxation and the interaction between them.