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Israeli taxes for salaried employees

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					[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

				
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