Jerusalem — Whether or not they voted for Donald Trump, the overwhelming majority of Americans living in Israel hope his tax reforms, unveiled last week, will ease what they consider to be an unfair tax burden on American expatriates.
American Israelis, including so-called Accidental Americans (who inherited their citizenship) “are a key part of the fight to change Citizenship-Based Taxation to Territorial Based Taxation for Individuals,” according to Keith Redmond, an American overseas global advocate who is at the forefront of expat tax reform efforts.
If successful, individual expatriates would no longer have to report and pay tax on income generated outside the U.S. But they would still have to pay tax on that income in their adopted country.
According to The New York Times, the Trump administration’s tax proposal aims to end worldwide taxation on U.S. multinational corporations. Expats insist this provision should also apply to individuals.
Some of the lobbying, via an online petition and a letter-writing campaign to the president and congressional lawmakers, is being led by the Republicans Overseas International.
Mark Zell, the organization’s Jerusalem-based vice president and one of the most vocal advocates for expatriate tax reform, says changes are long overdue.
The U.S., he noted, is one of only three countries (Eritrea and North Korea being the others) whose tax is based on citizenship and not where citizens live.
“If you’re a Canadian living in Israel you don’t have to pay Canadian income tax on your Israel-sourced income, whether from a salary, capital gains or stock dividends. Why should Americans bear this burden?” Zell said.
Zell emphasized that his organization “isn’t opposed” to paying tax on income that’s actually derived from the U.S.
“Let’s say you’re a citizen residing in Israel and you might have some stock portfolio or real estate there. If those assets are income-producing, we agree to taxing those assets.”
Zell said Israel has one of the largest populations in the world of U.S. expatriates, so the proposed changes are of particular keen interest here.
“We have roughly 400,000 Americans living here permanently and who have maintained their U.S. citizenship.” This is in contrast to many other countries, where most of the Americans living there are serving in the military or sent by a company or NGO, and who will ultimately return home.
“I, for one, have no income from the U.S., but I’m still required to pay tax on my worldwide income,” Zell said, clearly frustrated.
Americans in Israel also hope the Trump administration will repeal FATCA, the Foreign Account Tax Compliance Act that Congress passed in 2010 to prevent tax evasion abroad. Under the act, banks and other financial institutions are required to provide the IRS with account information. Banks and firms that don’t want to deal with the extensive paperwork can and do refuse to take on clients with U.S. citizenship.
Leah Roth, an American-Israeli freelancer, said tax reform can’t come soon enough.
“My income is drastically reduced due to the 15.3 percent Self-Employment Social Security tax I have to pay on top of Bituach Leumi,” the Israeli equivalent, Roth said. Self-employed Americans in Israel are required to pay SESS because Israel and the U.S. have never signed a treaty that prevents double Social Security taxation.
If the U.S. adopts a territorial tax system, there will presumably no longer be a requirement to pay into SESS, tax experts say.
Roth noted that many of the best Israeli investment vehicles, such as many high-performing pensions plans, mutual funds and some savings plans (including those that are tax-free in Israel), are considered PFICs (passive foreign investment company), and taxed at a very high rate by the IRS.
When the Israeli government recently introduced a savings plan for all Israeli children, most U.S. tax experts advised Roth and other American-Israelis to choose the lowest-yield savings plan to avoid PFIC taxation.
And just as American IRAs are taxed in Israel, private Israeli pensions are taxed by the IRS.
“If I don’t pay tax in one country, I often have to pay tax in the other. One just doesn’t get a break,” Roth said wearily.
Finally, she said, the need to pay two accountants and “the constant need to turn to an accountant to ask questions about how this and that will affect me as an American citizen, and the limited options we have as a result, is wearing me down.”
Tzivia, who immigrated to Israel at the age of 12, said she has no business in or income from the U.S. and has never worked in the U.S.
“Yet, because of FACTA I needed to get a Social Security number for my bank and have to hand in a yearly financial report to the IRS. I’m not worried that I may need to pay taxes, but why should I be burdened with this and pay a CPA each and every year to prepare this report that discloses all our financial details?”
Tzivia, who asked that her full name not be used because she is discussing her personal finances, said she would like to revoke her U.S. citizenship but “I’d need to pay a fine, and it will be expensive.”
Ruthie, a Tel-Aviv based American-Israeli who is employed full-time by a New York-based company, said she was shocked to learn she must pay at least some taxes in both countries. (She asked that her full name not be used because she was discussing her private financial situation.)
“It seems that my tax dollars should go to the country where I’m using the resources that are paid for with tax dollars. I use the healthcare system, the transportation system, the health care system in Israel, but I’m giving money to America?”
Ruthie said she is especially irked that she has to pay Social Security (the employee part) in the U.S. as well as in Israel, and that she has to pay into Medicare “even though Medicare covers you only when you’re physically in the U.S.”
“If, God forbid, I find that I have to move back to America, I’m prepared to pay taxes when I get there. In the meantime,” she said, “no thanks.”