For US citizens in Israel, tax compliance is uniquely complex. A US-Israel income tax treaty exists and can reduce withholding on investments, but its benefits are limited by a saving clause. Critically, there is no social security totalization agreement, meaning self-employed Americans face mandatory contributions to both US Social Security (via self-employment tax) and Israeli Bituach Leumi, resulting in double taxation.
US filing basics every American abroad must know
US citizens and green-card holders are taxed on worldwide income wherever they live, and usually must file Form 1040 once gross income exceeds the IRS threshold ($15,750 for single filers, $31,500 for married filing jointly, and $23,625 for head of household for 2025), even when no tax is ultimately due. The tools that reduce double taxation are the Foreign Earned Income Exclusion (FEIE, up to $130,000 for 2025 under IRC §911) and the Foreign Tax Credit. Neither is automatic. The FEIE requires a tax home in a foreign country plus either the bona fide residence test or 330 full days abroad in a 12-month period, and it reaches earned income only. The Foreign Tax Credit is figured separately for each income category under IRC §904 and is capped at the US tax on the foreign income in that category, so it reduces double taxation without guaranteeing that none remains.
Two reporting rules catch most filers in Israel: the FBAR (FinCEN Form 114), required when foreign financial accounts exceed $10,000 in aggregate at any point in the year, and Form 8938 (FATCA) for specified foreign assets above the applicable threshold. Both can carry penalties even when no tax is owed. If you are behind, the Streamlined Filing Compliance Procedures are the usual path back for non-willful taxpayers. They run on two tracks: the foreign track carries no offshore penalty but requires meeting the program's non-residency test, and the domestic track carries a 5% offshore penalty but works through amended returns, so it does not fit someone who never filed at all. Tax and interest on the catch-up years are owed whichever route applies.
US tax treaty with Israel
The US-Israel income tax treaty aims to prevent double taxation, but its 'saving clause' (Article 6(3)) allows the United States to tax its citizens as if the treaty did not exist. For non-US citizens residing in Israel, the treaty's primary practical effect is to reduce withholding tax rates on US-source investment income. For US citizens, the Foreign Tax Credit, not the treaty, is the main tool for avoiding double taxation on most income.
Article 12 (Dividends). Specifies the maximum withholding tax rates that one country can impose on dividends paid to a resident of the other country.
Article 13 (Interest). Sets the maximum withholding tax rate on interest payments flowing between the two countries.
Article 6(3) (Saving Clause). The United States reserves the right to tax its citizens and residents on their worldwide income as if the treaty had not come into effect. This clause severely limits the ability of US citizens to use the treaty to reduce their US tax liability.
| Income type | Treaty rate | Statutory rate | Notes |
|---|---|---|---|
| Dividends | 25% | 30% | 12.5% where the recipient is a company that owns at least 10% of the voting shares of the paying company, subject to the treaty conditions. These rates apply only to non-US citizens (NRAs) residing in Israel; US citizens provide Form W-9 and are not subject to NRA withholding. |
| Interest | 17.5% | 30% | 10% on interest paid to financial institutions such as banks and insurance companies; 0% on interest paid to a Contracting State or its instrumentalities. These rates apply only to non-US citizens (NRAs) residing in Israel; US citizens provide Form W-9 and are not subject to NRA withholding. |
| Royalties | 15% | 30% | 15% for industrial royalties; 10% for copyright and film royalties. These rates apply only to non-US citizens (NRAs) residing in Israel; US citizens provide Form W-9 and are not subject to NRA withholding. |
Because of the saving clause, a US citizen in Israel cannot use the treaty to exempt Israeli-earned income from US tax. Its main benefit for US citizens is providing a framework for claiming foreign tax credits.
Israeli Retirement Plans and US Tax
Israeli retirement and savings plans like the Kupat Gemel (provident fund), Keren Hishtalmut (sabbatical fund), and Kupa Pensia (pension fund) create significant US tax complications. These plans are not considered 'qualified' under US tax law.
The IRS generally treats them as foreign trusts or employee benefit plans, which has several consequences:
- Taxable Contributions: Employer contributions are often considered current, taxable compensation on your US return, even though they are not received in cash.
- Taxable Growth: The internal earnings and growth of the fund (interest, dividends, capital gains) may be taxable to you in the US each year, even if they are not distributed.
- Taxable Withdrawals: For withdrawals from a Keren Hishtalmut, which are tax-free in Israel after six years, only the untaxed portion of the withdrawal is taxable as ordinary income in the US, as previously taxed contributions and earnings form your basis.
- PFIC Issues: These funds almost always invest in Israeli mutual funds, which are Passive Foreign Investment Companies (PFICs) for US purposes, triggering punitive tax rules and complex reporting on Form 8621.
- Reporting Requirements: The balances in these accounts must be reported on the FBAR (FinCEN Form 114) and Form 8938 (FATCA) if you meet the filing thresholds. Failure to report can lead to severe penalties.
Investments, property, and capital gains in Israel
Many common Israeli investments are treated punitively under US tax law. Israeli mutual funds (Kranot Ne'emanut), ETFs, and savings policies are typically considered Passive Foreign Investment Companies (PFICs). This requires filing Form 8621 for each fund and can subject gains to extremely high tax rates and interest charges unless specific, timely elections are made. For capital gains on other assets, Israel taxes the gain as the country of residence, generally at 25%, and Israeli tax on it can support a foreign tax credit. That credit is computed separately for the passive category and capped at the US tax on foreign-source income in it, and it does not reduce the 3.8% net investment income tax. An Israeli company (a Chevra Ba'am) is a Controlled Foreign Corporation (CFC) when US shareholders who each own 10% or more together hold more than 50% of it by vote or by value, counting only those 10% US shareholders. That triggers an annual Form 5471 filing requirement and may result in current US tax on the company's profits under the GILTI regime, even if no profits are distributed. Israel's headline corporate tax rate of 23% sits above the 18.9% effective rate the GILTI high-tax exclusion requires, so the exclusion can be available, but it is elected at the CFC level by the controlling US shareholders and tested on each tested unit's effective rate rather than the headline rate, and Israel's preferred-enterprise regimes can pull that effective rate well below the threshold.
Self-employment and companies in Israel
There is no US-Israel social security totalization agreement. This is a critical fact for self-employed US citizens in Israel. A US citizen operating as a sole proprietor (Osek Murshe) is subject to two separate social security systems on the same income. You must pay the full US self-employment tax to the IRS: 15.3% on 92.35% of net earnings, with the 12.4% Social Security portion stopping once that base reaches the annual wage base ($176,100 for 2025) and the 2.9% Medicare portion continuing without a cap, plus a further 0.9% Additional Medicare Tax on combined Medicare-taxed wages and self-employment income above $200,000 for a single, head-of-household or qualifying-surviving-spouse filer, $250,000 for a married couple filing jointly, or $125,000 for a married person filing separately. Simultaneously, you must also pay Israeli National Insurance (Bituach Leumi) contributions. A Certificate of Coverage, which prevents this double taxation in other countries, is not available for Israel. The Foreign Earned Income Exclusion does not reduce your US self-employment tax liability, and the Foreign Tax Credit cannot offset it.
Worked examples
Self-employed consultant in Tel Aviv (2025)
Sarah is a US citizen working as a self-employed marketing consultant (Osek Murshe) in Tel Aviv. She has net earnings of $150,000. Because there is no totalization agreement, Sarah faces social security taxes in both countries. For her US return, she owes self-employment tax calculated as $150,000 * 92.35% * 15.3% = $21,194. This is paid to the IRS regardless of any Israeli taxes paid. She also pays her mandatory Bituach Leumi in Israel. For income tax, she can use the Israeli income tax she pays on her $150,000 profit as a foreign tax credit against the US income tax on that same general-category profit, capped at that US tax, which at Israeli rates usually leaves nothing to pay. The US self-employment tax remains.
Salaried employee at an Israeli tech firm (2025)
David is a US citizen employed by an Israeli company, earning a salary of ILS 450,000 (about $120,000). His employer contributes to a Keren Hishtalmut and a pension fund (Kupa Pensia) on his behalf. For US tax purposes, David's employer's contributions are added to his taxable wages. The funds themselves are likely PFICs, meaning their internal growth may be taxable annually in the US. He must report both accounts on his FBAR and Form 8938. While the high Israeli income tax on his salary supports a Foreign Tax Credit that, capped at the US tax on that same general-category income, usually leaves nothing to pay on the salary, he still has a complex US filing due to the treatment of his Israeli retirement accounts.
Retiree with Israeli investments (2025)
Rachel is a US citizen retired in Jerusalem. She has a portfolio that includes a US brokerage account and an Israeli mutual fund (Keren Ne'emanut). She sells stock from her US account for a $20,000 gain, which is subject to standard US capital gains tax. She also sells her Israeli mutual fund for a $10,000 gain. Because the Israeli fund is a PFIC and she made no prior elections, the gain is treated as an 'excess distribution'. The IRS allocates the gain over her holding period, applies the highest ordinary income tax rate for each year, and charges underpayment interest. Her US tax on the $10,000 PFIC gain could easily be over 50% of the gain itself, and she must file the complex Form 8621. This demonstrates how Israeli investments can create unexpected and punitive US tax outcomes.
Common mistakes for Americans in Israel
- For self-employed individuals, assuming that paying Israeli Bituach Leumi exempts them from US self-employment tax. It does not.
- Believing that a Keren Hishtalmut withdrawal is entirely tax-free in the US just because it is tax-free in Israel after six years, ignoring that the untaxed portion remains taxable.
- Failing to report employer contributions to Israeli pension and savings funds as current income on a US tax return.
- Ignoring the PFIC rules for Israeli mutual funds, ETFs, and savings policies, leading to severe tax consequences upon sale.
- Forgetting to include Israeli retirement and savings accounts (Kupat Gemel, Keren Hishtalmut) on the FBAR and Form 8938.
- Assuming the US-Israel tax treaty eliminates the need to file a US tax return or report worldwide income.
- Failing to file Form 5471 for a controlled Israeli company (Chevra Ba'am), which carries a $10,000 penalty per year.
- Treating Israeli retirement plans like US 401(k)s, incorrectly assuming tax deferral on contributions and growth.
Israel tax FAQ
Can I avoid paying both US self-employment tax and Israeli Bituach Leumi?
No. Because there is no US-Israel social security totalization agreement, a self-employed US citizen in Israel is legally required to pay into both systems on the same income. There is no exemption or certificate of coverage available to prevent this.
Is my Keren Hishtalmut withdrawal tax-free on my US return?
No. Even though a withdrawal from a Keren Hishtalmut is tax-free in Israel after six years, the IRS considers the untaxed portion to be taxable income. Because your previously taxed contributions and earnings form your basis, only the untaxed growth is taxed as ordinary income in the US upon withdrawal.
Do I have to report my Israeli mutual funds to the IRS?
Yes, absolutely. Israeli mutual funds (Kranot Ne'emanut) are considered Passive Foreign Investment Companies (PFICs). You must report them on Form 8621, and their balances contribute to your FBAR and Form 8938 filing thresholds. Failure to handle them correctly can result in extremely high taxes.
Are my employer's contributions to my Israeli pension tax-free in the US?
No. Unlike in a US 401(k), employer contributions to Israeli retirement plans like a Kupat Gemel or Keren Hishtalmut are generally considered taxable wages by the IRS in the year they are made. You must add this amount to your income on your US tax return.
Does the US-Israel tax treaty mean I don't have to file a US tax return?
No. The treaty's 'saving clause' allows the US to tax its citizens on their worldwide income regardless of the treaty's other provisions. All US citizens who meet the filing threshold must file a US tax return and report all income, no matter where they live or where the income is earned.
Do I have to report my Israeli pension accounts on an FBAR?
Yes. Israeli retirement and savings accounts, including Kupat Gemel, Keren Hishtalmut, and Kupa Pensia, are considered foreign financial accounts. Their value must be included when determining if you meet the $10,000 aggregate threshold for filing the Report of Foreign Bank and Financial Accounts (FBAR).
I own a small Israeli company. Are there special US reporting rules?
Yes. The company is a Controlled Foreign Corporation (CFC) when US shareholders who each own 10% or more together hold more than 50% of it by vote or by value, counting only those 10% US shareholders. If that describes the company and you are one of those shareholders, you must file the very complex Form 5471 each year, which carries a $10,000 penalty for failure to file plus continuation penalties.
How can I avoid double income tax if Israeli taxes are high?
You can use the Foreign Tax Credit. You calculate your US tax on your Israeli income, and then you can claim a credit for the income taxes you paid to Israel on that same income. The credit is computed separately for each income category and capped at the US tax on foreign-source income in that category. Since Israeli income tax rates are generally higher than US rates, it often leaves no US income tax on your Israeli earnings. It does not apply to US self-employment tax.
Sources and last reviewed
- IRS, Israel tax treaty documents (verified 2026-06-07)
- IRS, Tax Treaty Tables (verified 2026-06-07)
- SSA, Totalization Agreements Overview (verified 2026-06-07)
- US Treasury, Tax Treaties (verified 2026-06-07)
Reviewed by Ilya Fayerman, Esq. (NY Bar) on
Common services needed by expats in Israel
Most Americans abroad in Israel need help with at least one of the following core compliance areas, which frequently interact:
- US expat tax returns, Form 1040 with FEIE, FTC, treaty positions, and any required state returns.
- FBAR reporting, FinCEN Form 114 for foreign financial accounts exceeding $10,000 aggregate at any time during the year.
- Form 8938 (FATCA), IRS disclosure of specified foreign financial assets when thresholds are met.
- Streamlined catch-up filing, For eligible non-willful taxpayers with prior unfiled years.
Related country guides
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- US expat tax in Kuwait
- US expat tax in Bahrain
- US expat tax in Iraq