Tuesday, April 12, 2016
A Few Tax Notes for US -Israel Dual Citizens
As April 15 approaches it is a good time to note some tax related matters specific to US Israeli Dual Citizens and their taxes.
· New immigrants are exempt from Israeli taxes on investment income for the first 10 years after Aliya. Of course the investments are still subject to US taxes. But because of the provisions of tax law which allow the deduction of Israeli tax paid from US taxes, many dual citizens find themselves in the 10% or 15% tax bracket in the US. That means that their capital gains and dividend income are not subject to tax in the US.
· The dreaded PFIC issue. US law categorizes most foreign mutual funds including those in Israel as Passive Foreign Investment Companies. This means that the tax on those funds is far higher than on US mutual funds and exchange traded funds. The PFIC rules mean that even if one buys an Israeli S+P 500 Index fund it is a PFIC while the US fund with the identical strategy is not and would be taxed at far lower rates. The tax on PFICs can reach as high as 50% while for many US citizens none of their capital gains would be subject to tax.
· The PFIC solution: the solution to the PFIC issue is relatively straightforward purchase of US ETFs either through a US brokerage accounts (clearly the preferred solution for those in the exemption period or in an Israeli brokerage account)
· US Mutual Funds and Brokerage Firms and Foreign Residents: It is true that because of potential reporting requirements many US brokerage firms no longer will hold accounts for US citizens with foreign addresses many will. Many US mutual fund companies no longer accept investments in their funds from firms with foreign addresses. The solution to that is very straightforward and in most cases the preferred choice for all investors. A portfolio of low cost US exchange traded funds (ETFs)