U.S. taxes for Americans in Israel: what to file, and how to catch up.
Americans in Israel still file a U.S. return every year, but most owe the IRS little or nothing, because Israeli tax usually covers the U.S. bill. The traps are Israeli savings funds the IRS sees differently, and the years many olim never filed. Most people who fell behind can catch up under the Streamlined procedures, with no penalty if they qualify.
Sound familiar?
- You made aliyah years ago and stopped filing U.S. returns.
- Your Israeli bank asked you to sign a W-9.
- Your employer pays into a keren hishtalmut for you.
- You were born in the U.S. to Israeli parents and moved back as a child.
How does the IRS treat Israeli savings and pension funds?
Every one of these goes on your FBAR. What differs is how the IRS taxes them.
| Account | U.S. treatment | |
|---|---|---|
| Keren hishtalmut | Not a U.S. retirement account, and the treaty doesn’t cover it. Growth, and possibly your employer’s contributions, could be taxable each year, the funds inside may be PFICs, and it could be treated as a foreign trust. | Watch out |
| Pension funds (kupot gemel / pensia) | The treaty doesn’t shelter these funds for U.S. citizens. Depending on the fund type, contributions and growth could be taxable for the U.S. too, not just the payouts. | Check first |
| Kupat gemel l’hashkaa | An investment provident fund. For U.S. purposes it could be treated as an ordinary investment account or a foreign trust, so growth could be taxable as it builds. | Watch out |
| Israeli mutual funds & ETFs | Usually PFICs (Form 8621), with complex reporting and tax rules. | Watch out |
| Bank deposits (pikadon) | Interest is taxable, and the accounts count toward your FBAR total. | Taxable |
| Bituach Leumi | Could be treated as a creditable foreign tax, because the U.S. and Israel have no social security agreement. If you’re self-employed, U.S. self-employment tax can still apply too. | Plan ahead |
| Selling your apartment | Israel’s exemption for a home sale doesn’t carry over. The U.S. excludes $250,000 of gain ($500,000 for couples), and shekel moves change the gain in dollars. | Plan ahead |
Which Israeli investments are PFICs?
Almost any fund based in Israel: mutual funds (kranot ne’emanut), index funds and Israeli ETFs, whether you hold them at the bank or through a trading app. For U.S. tax they’re passive foreign investment companies, or PFICs.
- Each fund needs its own Form 8621 in most years, and gains can be taxed at the top U.S. rate plus an interest charge, unless an election was made in time.
- Not PFICs: shares of individual companies on the Tel Aviv Stock Exchange, Israeli government bonds, and bank deposits.
- Inside a keren hishtalmut or provident fund, whether the investments count as PFICs depends on how the fund itself is treated, which is an unsettled area.
If you’re catching up, the funds go on the returns you file, and we work out the PFIC tax for each one. It’s often the most time-consuming part of an Israeli filing.
What does the U.S.–Israel tax treaty actually say?
The treaty was signed in 1975 and took effect in 1995. For Americans living in Israel, a few parts matter most:
- The saving clause. Like every U.S. treaty, it lets the U.S. tax its citizens as if the treaty didn’t exist, with a few listed exceptions. Most treaty benefits don’t reduce U.S. tax for a U.S. citizen living in Israel.
- Relief from double tax. The U.S. gives a credit for Israeli income tax on the same income, which is why most Americans in Israel owe little U.S. tax on their salary.
- U.S. Social Security. Paid to someone living in Israel, it’s exempt from tax in both countries, even for U.S. citizens.
- Israeli pension savings. The treaty doesn’t defer U.S. tax on pension funds or a keren hishtalmut while they grow, the way some U.S. treaties do for local pensions.
There’s no U.S.–Israel social security agreement, so the treaty doesn’t stop a self-employed American from owing both Bituach Leumi and U.S. self-employment tax. Read the U.S.–Israel tax treaty on IRS.gov.
When are Israeli and U.S. taxes due?
Both tax years run January to December, so each Israeli year lines up with one U.S. return. Your Tofes 106, the year-end salary statement from your employer, gives most of what the U.S. return needs.
| Israel | United States | |
|---|---|---|
| Tax year | January to December | January to December |
| Annual return | April 30, if you have to file, often extended for online filers. Many salaried employees don’t file one at all. | April 15, moved to June 15 automatically when you live abroad, or October 15 with an extension |
| Paying the tax | Withheld from your salary each month | April 15, even if you file later |
| Foreign accounts | No separate report for most residents | The FBAR, due October 15, filed online |
Foreign tax credit or exclusion: which wins in Israel?
For most salaried Americans in Israel, the foreign tax credit. Israeli tax rates climb to 47%, plus a surtax on high incomes, so Israeli tax on a mid-career salary is usually more than the U.S. tax on it. The credit wipes out the U.S. tax, and the unused credit carries forward for up to 10 years.
- The exclusion can win at lower incomes, where Israeli credit points (nekudot zikui) keep Israeli tax low. It covers up to $130,000 of earned income for 2025, but nothing else.
- Families with children often do best with the credit, because it keeps the refundable part of the child tax credit: up to $1,700 per child for 2025. The exclusion gives that up.
- Olim’s 10-year exemption: Israel doesn’t tax new immigrants’ foreign income for their first 10 years. That means U.S. income, like rent from an apartment in the U.S., has no Israeli tax to credit, and stays fully taxable in the U.S.
We run your returns both ways before choosing. How we compare the exclusion and the credit.
A worked example: a family in Modiin
Noa and Daniel live in Modiin with three children, all U.S. citizens with Social Security numbers. Daniel earns ₪420,000 a year in high-tech and Noa ₪150,000 as a teacher. Each has a keren hishtalmut, and they hold two Israeli index funds. They haven’t filed U.S. returns since their aliyah.
| Item | How it’s handled |
|---|---|
| Salaries | Israeli tax is higher than the U.S. tax on them, so with the foreign tax credit their U.S. income tax is $0. |
| Children | Using the credit, not the exclusion, the refundable child tax credit can pay up to $1,700 per child: up to $5,100 a year, for the years still open for a refund. |
| Keren hishtalmut | On the FBAR, and on Form 8938 if they’re over its threshold. How the growth is taxed depends on the fund, which we check from their statements. |
| Index funds | PFICs: a Form 8621 for each fund, in each year filed. |
| Catching up | Three years of returns and six FBARs under the Streamlined procedures, with no penalty if they qualify. |
Catching up from Israel
Most Americans in Israel who fell behind without meaning to can catch up under the Streamlined Foreign Offshore Procedures: three years of returns, six years of FBARs and, if you qualify, no penalties. If only FBARs are missing, or you’ve moved back to the U.S., another route may fit better. See every IRS catch-up option for expats, compared.
Common questions
I made aliyah and never filed. Is it too late?
No. Plenty of our clients in Israel have never filed. Under the Streamlined Foreign Offshore Procedures you usually file the most recent three returns and six FBARs.
Is my keren hishtalmut taxable in the U.S.?
Often, at least in part. The treaty doesn’t cover it, and it could be treated as a foreign trust or as an ordinary investment account. How we report it depends on the fund and its investments. We’ll look at your statements and show you the options.
Is my U.S. Social Security taxed if I live in Israel?
No. Under the U.S.-Israel tax treaty, it’s exempt from tax in both countries while you live in Israel, even though you’re a U.S. citizen.
I’m self-employed in Israel. Do I owe U.S. self-employment tax?
Usually, yes. With no U.S.-Israel social security agreement, a self-employed U.S. citizen can owe U.S. self-employment tax on top of Bituach Leumi, and the foreign tax credit doesn’t reduce it. Self-employment tax abroad.
Do my Israeli pension funds go on the FBAR?
Yes. Pension funds, kupot gemel and a keren hishtalmut all count as foreign financial accounts for the FBAR, and may need to go on Form 8938 too.
How do you handle shekel amounts?
We convert using the correct IRS exchange rates for each year and account. It’s routine for us.
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