Income Tax in Israel: An In-Depth Guide
Israel’s income tax system is built on a progressive framework, meaning the higher your income, the higher the tax rate. This comprehensive guide delves into the specifics of how income tax is calculated, who is liable, the different tax brackets, and the various deductions, credits, and benefits available to residents, including special provisions for new immigrants (olim) and returning residents.
1. Tax Residency and Scope of Taxation
Israel taxes individuals based on their residency status:
Israeli Residents: Subject to tax on worldwide income, meaning any income earned globally, regardless of where it originates, is subject to Israeli tax.
Non-Residents: Only taxed on income derived from Israeli sources, such as employment, real estate, or business income in Israel.
Determining Residency
The “center of life” test is used to determine residency. Factors include:
Personal and family connections: Where your spouse and children live.
Economic ties: Where your employment, business, or investments are located.
Social connections: Memberships in organizations and activities in Israel. You are considered a resident if your center of life is in Israel. Residency can also be determined by physical presence: if you stay in Israel for 183 days or more in a tax year, you are presumed to be a resident unless proven otherwise.
2. Tax Brackets and Rates for 2024
Israel employs a progressive income tax system, meaning higher incomes are taxed at higher rates. For 2024, the individual income tax brackets are as follows:
Annual Income (NIS)Marginal Tax Rate (%)0 - 79,56010%79,561 - 114,12014%114,121 - 177,36020%177,361 - 247,44031%247,441 - 514,92035%514,921 - 663,24047%Above 663,24150%
These tax rates apply to taxable income, which is gross income minus eligible deductions and exemptions.
Employment Income
Salaries, wages, and bonuses are taxed at these progressive rates, with tax withheld at source by the employer. Employees generally have no need to file a tax return unless they have additional sources of income or are claiming certain deductions or credits.
Self-Employment and Business Income
Self-employed individuals are taxed similarly to salaried employees, but they must calculate their net income (gross revenue minus deductible business expenses) and make periodic payments to the Israeli Tax Authority (ITA). Taxes are paid quarterly, and an annual tax return must be filed.
3. Additional Social Contributions
In addition to income tax, Israeli residents must pay National Insurance (Bituach Leumi) and health insurancecontributions, which fund Israel’s social welfare and healthcare systems.
National Insurance Contributions
National Insurance is paid on all forms of income, including wages and self-employment earnings. The rates are:
3.5% on monthly incomes up to NIS 7,122.
12% on monthly incomes above NIS 7,122.
Health Insurance Contributions
Health insurance contributions are levied at:
3.1% on monthly incomes up to NIS 7,122.
5% on monthly incomes above NIS 7,122.
These contributions are withheld directly from salaries or, for self-employed individuals, paid alongside their quarterly income tax payments.
4. Categories of Income and Tax Treatment
Income in Israel is categorized into several types, each treated differently for tax purposes. Here’s a detailed breakdown of how different forms of income are taxed:
Employment Income
Employment income includes wages, salaries, benefits, and bonuses. Employers withhold tax at source according to progressive rates, and employees can receive tax credits to reduce their overall tax burden. Some employer-provided benefits, such as certain pension contributions, are tax-deductible or exempt up to specified limits.
Self-Employment and Business Income
Business income is taxable on a net basis, after allowable expenses are deducted. Self-employed individuals can deduct business-related expenses, such as rent, utilities, employee wages, and office supplies. The taxable income is then subject to the same progressive rates as employment income.
Passive Income
Passive income includes dividends, interest, rental income, and royalties. Each type of passive income has different tax rates:
Rental Income: Income from renting residential properties can be taxed at a flat 10% rate if the rental income does not exceed NIS 5,471 per month. If the income exceeds this threshold or the individual opts out of the flat rate, the standard progressive tax rates apply. Taxpayers can also deduct expenses related to the rental property, such as maintenance and depreciation.
Interest Income: Interest from bank accounts or bonds is typically taxed at a 15% rate for standard interest and 25% for substantial interest (for shareholders with a significant stake in the company paying the interest).
Dividends: Dividends received from Israeli companies are taxed at 25% for shareholders without a controlling interest and 30% for those with a controlling interest (holding 10% or more of the company).
Capital Gains
Capital gains from the sale of property or investments are taxed at preferential rates:
25% for regular capital gains.
30% for controlling shareholders.
This applies to both Israeli and foreign assets, though foreign gains may benefit from exemptions or lower rates under Israel’s tax treaties with other countries.
5. Deductions, Exemptions, and Credits
Israeli tax law provides a variety of deductions and credits that reduce your overall taxable income. These include:
Deductions
Pension Contributions: Contributions to an approved Israeli pension plan are tax-deductible up to specified limits, both for employees and the self-employed.
Charitable Donations: Donations to recognized Israeli charities are eligible for a tax credit worth up to 35% of the donation amount, provided the donation exceeds NIS 190.
Business Expenses: Self-employed individuals can deduct ordinary business expenses, such as office rent, travel, and utilities. Certain professional expenses, like training and certification, may also be deductible.
Tax Credits
Tax credits directly reduce the amount of tax owed. They are expressed in points (each point is worth approximately NIS 2,796 annually in 2024). Some common credits include:
Basic Credits: Every Israeli resident is entitled to 2.25 credit points.
Children: Parents can claim credits for each child under 18, with higher credits for younger children. For example, parents of children under six receive additional credits.
Women: Female employees receive an additional 0.5 credit points.
Olim (New Immigrants): New immigrants are entitled to special tax credits for their first three and a half years in Israel. The credits are:
3 points in the first year.
2 points in the second year.
1 point in the third and a half year.
Mortgage Interest
Homeowners can deduct a portion of the interest paid on mortgages for their primary residence. This deduction is capped and subject to specific qualifying criteria.
6. Special Tax Benefits for New Immigrants (Olim Hadashim)
One of the most significant benefits for new immigrants (olim hadashim) is the 10-year tax exemption on foreign income, including income from employment, investments, and pensions. This exemption is designed to ease the transition into the Israeli tax system and provide olim time to adjust financially.
Key Features of the 10-Year Exemption:
No tax on foreign income: Olim are exempt from paying taxes on income earned outside of Israel for the first 10 years of residency.
No reporting requirement: During the exemption period, olim do not need to report foreign income to the Israeli Tax Authority.
Applies to all income types: This exemption covers employment income, dividends, capital gains, rental income, and pensions, as long as the income originates outside of Israel.
In addition, returning residents who have lived abroad for at least 10 consecutive years are also eligible for this tax exemption.
7. Filing Requirements and Deadlines
Israel’s tax year runs from January 1 to December 31, and tax returns must generally be filed by May 31 of the following year. Extensions are available upon request, especially for individuals filing more complex returns.
Who Must File a Return?
Self-employed individuals: Must file an annual return detailing their income and expenses.
Employees: Typically, employees do not need to file a return unless they have additional sources of income, claim certain deductions, or wish to adjust their tax liability.
Individuals with Foreign Income: Anyone receiving income from outside Israel is required to file an annual return, even if the income is exempt from taxation during the 10-year olim period.
8. Tax Treaties and Avoiding Double Taxation
Israel has entered into double tax treaties with over 50 countries, including the United States, the United Kingdom, Canada, and many European nations. These treaties prevent double taxation of income.