[Version 1.22 of 18/06/97] [Changes: miscellaneous small additions to glossary] [Version 1.21 of 14/11/96] [Changes: corrected egregious blunder in section 5 ] [ miscellaneous small corrections ] [Version 1.2 of 13/11/96] [Changes: added comment about "hidden tax break" ] [ added information about charitable donations ] [Version 1.1beta of 6/10/96] [Changes: updated tax brackets and numbers in examples;] [ added eizor pituach clause ] ISRAELI TAXES FOR SALARIED EMPLOYEES by Gershom Martin (mailto:comartin@wicc.weizmann.ac.il) Caveat lector #1: this post is compiled from various extremely helpful messages by Dr. Zachary Barneis (CPA, Israel, mailto:zach@bgumail.bgu.ac.il). IT IS NOT OFFICIAL INFORMATION IN ANY WAY --- just meant to give prospective olim a rough idea of what they are up or not up against. The information below should allow you to calculate, to within perhaps NIS 100, your "take home pay" from a gross salary your prospective Israeli employer may offer you. This really is the main point of this post. For detailed advice on special cases, consult a reliable CPA and/or tax consultant. 1. The Israeli tax system resembles (like many things Israeli) the Western European model much more closely than it does anything in the USA. 2. Every Israeli resident over 18 is theoretically required to file an income tax return. However, salaried employees whose salary is below the gargantuan figure of NIS 30,000/months (1995 figure) are exempt from this requirement and instead have taxes witheld by the employer, after having made an initial statement to the tax authorities on a form provided by the employer. (The most important data on that are those personalia which are required to calculate your tax credit, see below.) In practice, most salaried employees without outside income never *have* to file, although there may be situations (such as having made large contributions to recognized charities) where it is *k'dai (worthwhile)* to do so. If a tax return is filed at all (e.g. because of outside income where no taxes are witheld, or to request a refund), the spouses file on the same return. However, they are permitted to be assessed individually if there is no dependency between their incomes (i.e. neither works in a business owned in whole or in significant part by the other). Because of the way the Israeli tax system works, individual assessment is more advantageous than joint assessment (i.e. cumulated incomes of husband and wife) in almost 100% of cases. Obviously, the situation where each spouse has his/her taxes witheld automatically by his/her respective employers boils down to the same situation as individual assessment. 3. There are very few *significant* opportunities for tax deductions. For example, interest payments on mortgages are NOT deductible (unlike Europe and the USA). Neither is daycare or transportation expenses --- these things are handled differently (by standard tax "credit points", see item 5 below). One exception are supplementary employee payments for bitu'ach menahelim (manager's insurance) or "provident funds", for the purpose of retirement. If the employer pays less than 5% of the actual salary into these funds, the employee can pad it out to 5% by himself and deduct the "padding". Anything which (s)he pays above and beyond the 5% cap is *not* deductible. Another exception are contributions to recognized charities. "Recognized" means that they have an "ishur" (permit) according to article 46 of the Income Tax Ordnance. The minimum amount that a refund (a flat 25%) can be claimed on was NIS 250 in 1995. To obtain a refund, you must file a tax return, accompanied by receipts that clearly state "donation" in English or Hebrew, and include some statement certifying that the organization has an "ishur" according to article 46. If the charity is a very well-known one (e.g. the Israeli Cancer Society or the va'ad le-ma'an ha-chayal (Committee for the Soldier['s welfare])) the latter can be dispensed with. Note that the credit received can never exceed your taxes due. Israel has no negative income tax, as Zachary Barneis put it :-) 4. The base tax is "progressive", as in Europe. That is, the fraction of income below cutoff A is taxed at 15%, the fraction between cutoffs A and B at 30%, that between B and C at 45%, and above C at 50%. These cutoffs are adjusted according to the consumer price index. For August 1996, they were (per month): 0- 3,280 NIS 15% 3,281- 8,630 NIS 30% 8,631-15,640 NIS 45% Above 15,640 NIS 50% Example: Yossi Cohen earns NIS 8800/month as a senior lecturer in laundry administration at Michlelet Chelm. His gross income tax will be: 3280*0.15 + (8630-3280)*0.30 + (8800-8630)*0.45=2173.5 NIS/month 5. From these taxes due, a number of credit points (nekudot zechut) are deducted, yielding the next income tax. In August 1996, one credit point equalled 141 NIS/month, or 141*12=1692 NIS/year. Credit points are assigned as follows: Category MALE FEMALE -------------------------------------------------------- Resident of Israel 2.00 2.00 Transportation 0.25 0.25 Working female 0.00 0.50 Wife not working 1.00 0.00 Children age 1-17 0.00 1.00 per such child Children age 0 or 18* 0.00 0.50 per such child Children over 18 0.00 0.00 (*) that is, in the tax years of their birth or 18th birthday In addition olim chadashim get additional credit points: 3 in months 1 through 18 after aliya 2 in months 19 through 30 after aliya 1 in months 31 through 42 after aliya Example: Yossi Cohen earns 8800 NIS and his gross taxes are 2173.5 NIS/month. He is an oleh chadash in his 1st year, his wife does not work, and he has 4 children. He therefore is entitled to 2.00+0.25+1.00+3.00=6.25 points. NOTE HE GETS NOTHING FOR THE CHILDREN! Therefore his net taxes due are 2173.5 - 6.25*141=1292.25 NIS/month. If his wife (again, 4 children) were making exactly the same money, she would have 2.00+0.25+0.50+4.00+3.00=9.75 points. Her net taxes due would be only 798.75 NIS/month. And again, no negative income tax --- if credit points exceed gross taxes due you *do not* receive extra pocket money from the Treasury :-) 5b. If you are living in an "eizor pituach alef", or "development area A" (in practice, the Negev except for Be'er-Sheva and surroundings, the Upper Galilee, a kibbutz, or the sh'tachim), an additional tax credit of 7% applies to the portion of your income in the 15% and 30% brackets. Just deduct 7% from the gross taxes on that slice BEFORE applying any credit points. Certain of these localities entitle you to even bigger discounts. Most notably, a person living in Mitzpe Ramon who derives all of his/her income from that area is entitled to a tax break of no less than 25%. Example: if our friend Yossi Cohen were living in the Negev town S'de Tzohorayim, his net taxes would be 2173.5-6.25*141-146.79=1145.46, which represents a reduction of NIS 146.79 per month. 5c. One "hidden" oleh chadash break that some of you may not be aware of is that, while the taxes on your income are witheld *monthly*, the assessment is apparently made on an *annual* basis (over a fiscal year that coincides with the secular [Gregorian calendar] year). The story is that if you start working in the middle or near the end of the tax year, your income is still assessed for the entire tax year (with your salary in the preceding months being taken as NIS 0.00). Hence you end up in a low tax bracket, and the gross taxes due are less than your nekudot zechut (credit points). B'sach ha-kol (the bottom line is that) you end up not having income tax witheld until January of the next year. For those of us lucky enough to earn a salary that olim owe significant income tax on, this *is* a nice break... However, some employers withold taxes anyway. In this case, you should explicitly file a tax return the next year after you receive your "tofes me'a v-shesh" (form 106) from your employer and should get a tax refund for the amount that was overpaid. (Thanks to Ralph Birnbaum, mailto:r.birnbaum@ic.ac.uk, for pointing this out.) Nothwithstanding the above, you *still* owe mas bitu'ach le'umi (National Insurance Tax) and mas bitu'ach b'riut (Health Insurance Tax), which apparently are assessed on a month-to-month basis. 6. Note that low-income jobs for recent olim often hardly have taxes due at all. For example, Moshe Levy earns a measly NIS 4200 as a bank teller at Bank HaGanav. He is a oleh in his first year, but his wife is working. With separate filing, his story is: gross taxes: 768 NIS/month credit points: 2.00+0.25+3.00=5.25 tax credit: 5.25*141=740.25 NIS/month net tax: 27.75 NIS/month (yes, a lousy 28 shach!) Hence the often-repeated half-truth: "olim don't pay taxes in the first years". In fact, the better paid you are, the more your take-home pay resembles that of a veteran Israeli. 7. Aside from income tax, your employer will withold dues for: - bitu'ach le'umi ("national insurance", i.e. what the US calls Social Security) - kupat cholim ("sick fund", i.e. mandatory health insurance) Again, the witholdings for this are "progressive". At the time of writing, the brackets are 0- 2,444 NIS 5.76% (i.e. 2.66% bitu'ach le'umi, 3.10% kupat cholim) 2,445-19,548 NIS 9.70% (i.e. 4.90% bitu'ach le'umi, 4.80% kupat cholim) Above 19,548 NIS 0.00% (nothing, for reasons beyond my little brain) The two cutoffs appear to be calculated as half the national average salary (4887 NIS at the time of writing) and four times the national average salary, respectively. Example: on our friend Yossi Cohen's 8800 NIS salary at Michlelet Chelm, the social security/health insurance witholdings are: 2444*0.0576 + (8800-2444)*0.0970= 757.33 NIS, corresponding to an effective witholding rate of 8.61% On Moshe Levi's measly NIS 4200 at Bank HaGanav, the witholdings are 2444*0.0576 + (4200-2444)*0.0970= 311.13 NIS, corresponding to an effective witholding rate of only 7.41% 8. Pension witholdings are usually 5%, with the employer often making additional payments on your behalf. E.g. at the Weizmann Institute, deduction is 5.5%, with the employer putting in an extra 12%. The payments are calculated on your *gross* salary. Deducting taxes, bituach le'umi/b'riut, and pension fund leads to the "take home pay" minus perks. Assuming 5% pension deduction, our friend Yossi Cohen will take home 8800-1292.25-757.33-440=6310.42 NIS. Moshe Levy, on the other hand, takes home 4200-27.75-311.13-210=3651.12 NIS. Note that the former corresponds to an overall direct taxation rate of about 28.3%, and the latter to only about 13.1%. What with really high salaries? OK, here goes: Roni Yisrael earns NIS 16,000 per month as a senior systems programmer for Shlepper and Klumnik Furniture ba"m. He is married but his wife works. Gross salary: 16000.00 NIS Gross taxes: 5431.50 NIS Tax credit: 141*5.25= 740.25 NIS Net taxes: 4691.25 NIS bituach le'umi+kupat cholim: 1455.73 NIS Take-home pay: 9053.02 NIS This corresponds to an effective witholding rate of 43.40%. If he were living in a Development Area A, the net taxes would be reduced by 7% of the gross ones, or NIS 380.21/month. 9. In addition many employers optionally withold payments for a keren hishtalmut (study fund, actually a tax-sheltered savings fund). Normally, 2.5% of gross is witheld, with the employer putting in an extra 7.5%. 10. In most European countries, an additional percentage is witheld for provincial or municipal taxes. In Israel, instead a municipal tax (arnona) is levied on the square meterage of your residence. How much depends on the municipality: a conservative estimate would be $1/sq. meter/month. Olim chadashim are entitled to a 90% discount on the first 100 sq. meters, and 50% on the rest, in any 12-month period of their choice within the first two years of aliya. (If you spend most of the first year in mercaz klita, you don't want to use the arnona break that year, nachon?) 11. Tosafot v'hatavot ("additions", i.e. perks, and benefits) Tosafot ("additions", i.e. perks) generally are taxable, with certain exceptions. For example, the use of a company car from the fleet of your employer for work-related driving is not taxable. If you get a car at your disposal for all use (including private), this is regarded as "imputed income" (i.e. "this would otherwise cost you x money, hence this is an imputed income of x"), on which you pay tax, social security, ... as if the employer paid you the extra money instead. Many employers simply add the amount of the taxes on "imputed income" to the gross paycheck so the "take home pay" stays the same. This is definitely something worth bargaining for at the time of hiring. As for expense accounts: food is tax-free up to the unrealistically low amounts of NIS 1 for breakfast, NIS 4 for lunch, and NIS 2 for dinner, all with receipts. (Without receipts, subtract NIS 1 each from lunch and dinner.) The rest is considered "imputed income" with the tax paid either by employer or by employee, depending on what you were able to negotiate with your employer. Per-diem allowance for travel outside the country is tax-free up to US$45/day (not including lodging). 12. Miscellaneous * an invited foreign expert (who conceivably may have to leave at the drop of a hat so no assessment is possible) on a "working tourist" visa has a flat 25% tax witheld. Working tourists are required to carry health insurance, either through a private company such as Shiloach-Harel or through a kupat cholim that allows working tourists (to my knowledge both Maccabi and Me'uchedet do). * other "working tourists" pay like Israelis, but (except in certain special cases, such as the Black Hebrews who clearly have the "intent" of staying in Israel), are not considered residents for tax purposes and therefore are not entitled to any credit points. They also pay a nominal bitu'ach le'umi contribution (less than 0.1%). The same remarks about health insurance apply: note that health insurance payments for working tourists are tax-deductible (unlike for olim and native Israelis). * people on fellowships (e.g. doctoral students and postdocs at Israeli universities, researchers) from certain countries that have tax treaties with Israel (e.g. the US, the Netherlands) generally do not pay taxes, at least in the first two years. Consult a tax specialist for details. 13. Useful vocabulary maskoret salary tosafot perks hatavot benefits sakhir salaried worker atzma'i self-employed (professional or small business owner) t'lush maskoret salary slip mas hachnasa income tax mas rechisha (real estate) purchase tax mas rechush (real estate) property tax mas k'niya purchase tax (e.g. on appliances) meches customs; import duties ma"m [mas erekh musaf] VAT [value added tax] arnona city tax (based on housing square meterage) bitu'ach b'riut [mamlachtit] [state] health insurance bitu'ach le'umi nat'l insurance (kind-of-like US Social Security) bitu'ach menahelim "managers insurance" of senior-level employees kupat cholim sick fund, i.e. health insurance carrier keren pensia pension fund nekudot zechut credit points madad index, usually short for CPI madad hamechirim l'tzarchan CPI (consumer price index) computed and published by the Central Bureau of Statistics (lishka ha-mercazit l'statistika) available on the WWW at http://www.cbs.gov.il/madad.htm (in Hebrew) http://www.cbs.gov.il/madad-en.htm (English) madad hat'sumot bniya building materials (price) index. Some rents are linked to it rather than the dollar rechev tzamud company car at your disposal for all use, including private. eizor pituach alef development area A