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legal warning: The information here should not be understood legally as financial advice. If you believe anything on this site is in error, please contact me. I am always open to corrections, new ideas, and new opinions...

Freelancers – How to make sure you get the right coverage from your keren pensia

Hi.  It’s been a while.

One of the most common and complicated issues I encounter is assisting freelancers (atzmaiim) in setting up the insurance in their keren pensia.  As I wrote previously regarding the insurance in a keren pensia, one can set up a keren pensia so that he or she will receive up to 75% of their salary in the case of disability and 100% for spouse, kids and dependent parent in the case of death (see this post for more details).  For a salaried worker, the salary which determines the coverage (שכר קובע) is determined by the average recent salary upon which the percentages were paid in, but for a freelancer this is very complicated.  Suppose that a freelancer makes an average of NIS 11,000, but only pays in NIS 500 a month, what kind of coverage will he or she have?

The default for all freelancers paying into a keren pensia meikifa is that whatever the person is paying in is 16% of their salary.  This means that if Joe is earing around NIS 11,000 a month, but only contributing NIS 500 a month to his pension, if he fully disabled, his salary will be calculated as NIS 500 / 16% = NIS 3,125.  He will then get only 75% of that (NIS 2,344) and will have to live with this tiny bit of money for as long as he is disabled.

There is a solution:  You can arrange to set it up so that what you are paying in is as low as 10% of your salary.  In order to do this, you usually need (1) a letter from your accountant that states what your expected annual earning will be (2) to fill out a form from the insurance company.  It is important that you communicate with the company to make sure everything is set up correctly.  As a reminder, once you have an assurance in writing from the company or your agent, they are legally responsible, so make sure to get it.

But returning to our case of Joe above, we see that Joe still does not have enough money to cover him.  In order for Joe to be covered completely, Joe must increase his monthly contributions to NIS 1,100 a month and set it up so that they are calculating is as 10% of his salary.  Remember, just depositing NIS 1,100 isn’t enough, he has to make sure they are calculating it as 10% of his salary, so that if he gets disabled he’ll get NIS 8,250 (75% of NIS 11,000) not NIS 5,156 (75% of NIS 6,875, which is 1,100 / 16%).

This gets complicated for atzmaim who only pay into their pension at the end of the year.  Usually your salary is calculated based on an average of what you’ve paid in over the past 12 months, so it you are an atzmai who pays in a lot at the end of the year, then once the year-end money goes in you will be okay, but until then, you will be underinsured.  You can either speak to the insurance company to make some kind of arrangement or else purchase a private אובדן כושר עבודה to help you bridge those first 12 months.

The important takeaways here:

  • If you are a freelancer with a קרן פנסיה מקיפה, your שכר קובע is a very important issue and you must make sure that you are contributing enough so that it is set up correctly.
  • This is the most common error I have seen with freelancers.
  • It is incumbent of the freelancer, not the agent, nor the company, to make sure this is set up correctly.
  • Always get it in writing – that is the only way you know that you’re covered. Even an e-mail is okay as long as it is from the company or agent and the coverage is stated explicitly.
  • If you are going to pay in a lot at the end of the year, then the first year is a problem. Consider a separate אובדן כושר עבודה policy to cover this period.

2016 Israeli Tax Calculator

I recently updated my tax calculator.  The latest version includes the new tax brackets and credits according to 2016.
You can download the latest calculator here or go to the following site:
https://www.box.com/s/460zksl3t4335018j5hp
The Israeli Tax Calculator allows you to check your paycheck and see that the correct taxes were deducted correctly.  If too much money is being taken out for taxes or insurance, then you should demand back your money through a tax alignment (תאום מס) or an insurance alignment (תאום ביטוח לאומי).  If you need to get money back through an alignment see this post for more details.
Note:  While the amount for insurance should match your paycheck perfectly, the amount you pay for taxes may not.  There are other factors besides the ones mentioned in this spreadsheet that can affect the amount of taxes you pay (how much you got paid over the past 6 years, how often you get paid.)
Use the guide as follows:
If you are paying less in taxes than what is calculated on the sheet:  Find out what kind of benefits you are receiving and how to continue receiving them.
If you are paying more in taxes than what is calculated on the sheet:  Odds are you need to do a tax alignment.  Speak to your HR person and fix up your tax record and then file the appropriate paperwork at מס הכנסה.
As always, if you find any flaws in these excel sheets or have any ideas for improving them, please feel free to contact me.  I’m not perfect and odds are there may be an error or two, especially at the beginning of the year.
Are there any financial tools you would like to see?  Please feel free to either leave some ideas in the comments below or e-mail me at jonnydegani@gmail.com

2015 Israeli Tax Calculator

I recently updated my tax calculator.  The latest version includes the new tax brackets and credits according to 2016.
You can download the latest calculator here or go to the following site:
https://www.box.com/s/460zksl3t4335018j5hp
The Israeli Tax Calculator allows you to check your paycheck and see that the correct taxes were deducted correctly.  If too much money is being taken out for taxes or insurance, then you should demand back your money through a tax alignment (תאום מס) or an insurance alignment (תאום ביטוח לאומי).  If you need to get money back through an alignment see this post for more details.
Note:  While the amount for insurance should match your paycheck perfectly, the amount you pay for taxes may not.  There are other factors besides the ones mentioned in this spreadsheet that can affect the amount of taxes you pay (how much you got paid over the past 6 years, how often you get paid.)
Use the guide as follows:
If you are paying less in taxes than what is calculated on the sheet:  Find out what kind of benefits you are receiving and how to continue receiving them.
If you are paying more in taxes than what is calculated on the sheet:  Odds are you need to do a tax alignment.  Speak to your HR person and fix up your tax record and then file the appropriate paperwork at מס הכנסה.
As always, if you find any flaws in these excel sheets or have any ideas for improving them, please feel free to contact me.  I’m not perfect and odds are there may be an error or two, especially at the beginning of the year.
Are there any financial tools you would like to see?  Please feel free to either leave some ideas in the comments below or e-mail me at jonnydegani@gmail.com

Pensions: What Does and Doesn’t Matter

The Biggest Mistake Most People Make in Choosing a Pension and The Best Opportunity to Save Hundreds of Thousands of Shekels
A long time ago, when Daniel Kahneman, future nobel laureate in economics, was teaching a group of Israeli Air Force officers about effective training and positive reinforcement, he was challenged by one officer.  “On many occasions, I have praised flight cadets for their clean execution of some aerobatic maneuver.  The next time they try the same maneuver, they usually do worse.  On the other hand, I have often screamed into a cadet’s earphone for bad execution, and in general he does better on the next try.  So please don’t tell me that reward works and punishment does not, because the opposite is the case.”
A powerful challenge, no doubt, and one I think we can all sympathize with in some of our personal and business relationships.
But the truth behind this challenge is explained by Kahneman using statistical principle called regression toward the mean.  In various situations where luck is present, you are always more likely to go toward your average.  If a variable is extreme on its first measurement, it will tend to be closer to the average on its second measurement—and, paradoxically, if it is extreme on its second measurement, it will tend to have been closer to the average on its first.
Take these pilots for example.  Let’s say that one a scale of 1 to 5, a pilot named Yosef flies a 3 on average.  Yosef flew a 2, for which his commander screamed at him.  Since Yosef on average flies a 3, the next time he is more likely to do better, irrespective of the yelling.  Similarly, if Yosef flew a 4 and was given a hearty shkeyach from his commander, the odds are still that he will do worse next time, since he flies a 3 on average and 3 is worse than 4.  Positive reinforcement is proven to work in the long run, but in the short run, specifically in a situation where luck is a major factor, regression toward the mean is king.
I bring up this to demonstrate what is in my opinion is the biggest mistake people make when choosing a pension, or making any investment for that matter.  People I have met tend to focus on the past performance of a fund or company to choose the right investment.  But if there is one thing that past performance has shown, it is that it is a never good indicator of future returns.  Also, due to regression toward the mean, people who choose the better performing funds are almost always disappointed within a year or so since, as regression analysis proves, the next year is more likely to be more toward the average return, which for anyone starting from a point above average, is worse.
Now that the year has ended, you will likely be bombarded by company after company showing off their past performance, as if it means anything.  Their salesmen and agents will admit that past performance doesn’t guarantee future returns, but they’ll end the sentence while pulling out a nice graph showing how well they did over the past five years. They’ll jokingly admit that their stock pickers are no better than chimps with darts, but still find a way to make them look prophetic.  You need to ignore these people and follow the science.
What does matter in choosing a pension is (1) getting a significant discount for the rest of your life and (2) that the company has the proper range of options available for investments for the rest of your life.  When you are young, or at least in good health, pension funds are more likely to offer discounts and if you succeed in getting a discount for life.  But when you get older, and especially if your health deteriorates, most pension companies won’t want you since your being in the fund will cause damage to the actuarial balance all pension funds must maintain.  And even if they do accept you, the chance of you getting a huge discount on fees is very slim since, as far as they’re concerned, you’re no longer a long term investment for them.  Remember, in your 50s and 60s you have the most money in your pension you’re ever going to have and having a significant discount on fees during this time will likely save you hundreds of thousands of shekels, on accumulation fees.  It’s up to you to take advantage of your youth,  health, and work connections to make sure you save this money before it’s too late.
Focusing on options is also important since you will need to solidify your investments as you reach retirement and unless the company that has given you a discount has the proper investment options, you could be left with the terrible choice of either settling on having too much risk or else moving your money to a new fund, potentially forgoing any discount and losing tens of thousands of shekels in fees.
Concentrating on investment options and fees doesn’t mean you should ignore פנסיה נט completely; you should have an idea how your fund is doing compared to the market and how it is performing and invested.  It means that you should take such information with a grain of salt and be less concerned with statistically insignificant issues such as how well the fund performed over a single year and more concerned with issues that will save you hundreds of thousands of shekels such as the investment options available by the company and the fees you’re paying.
Jonathan Degani is a licensed pension consultant by the Ministry of Finance.  If you’re looking for help choosing or reviewing a pension, please feel free to call 052-790-6824.
The anecdote at the beginning of the article above is taken from Daniel Kahneman’s book, Thinking, Fast and Slow.  The definition for regression toward the mean is taken from wikipedia.

Freelancing Finance Part 1: Pensions and Hishtalmut

Shomer Shekalim offers free workshops to help freelancers understand and take control of their fiances.  If you’re interested in organizing such an event for a small group of freelancers (4–10 people) please e-mail me at jonnydegani@gmail.com or call me at 052-790-6824.

Unlike salaried workers, freelancers (עצמאים) have no minimum they must set aside for their pension.  Unfortunately, this leaves freelancers with the responsibility of making sure that they have money for retirement in addition to the appropriate level of life and disability insurance. 

But there is some good news.  Freelancers have significant tax benefits to saving through a pension and keren hishtalmut

Pension:  An עצמאי can deposit up to 16% of his salary into a pension.  Of this 16%, 5% gets you a 35% tax credit and 11% is tax deductible.  OK, now in English:  Lets say you make NIS 100,000 a year.  If you deposit NIS 16,000 in your pension, you get back 35% of NIS 5,000 = NIS 1,750.  Also, the other 11% is tax deductible, so at the end of the year, you’ll pay taxes on NIS 89,000 instead of NIS 100,000.

In addition, a freelancer can give himself a keren hishtalmut, a mutual fund that grows tax free and becomes liquid after six year.  A freelancer can set aside up to 7% of his salary, 4.5% is a tax deduction.

Freelancer CalculatorThis is a link to a calculator from beinleumi that calculates how much you can put aside for a keren pensia and keren hishtalmut and the subsequent tax breaks you’ll receive.  To be clear:  a זיכוי is a credit which means 35% of it is money back in your pocket.  ניכוי means a tax deduction, which means that it is as if you never made that money for the purposes of your paying taxes. For your convenience, I translated the calculator in the image here (click to enlarge).

For help understanding the pension system, see my series on pensions in Israel.  If you’re interested in choosing a pension or hishtalmut, please contact me at jonnydegani@gmail.com or 052-790-6824.

In my next post, I’ll make sense of the barrage of insurance offers that atzmaiim receive from insurance companies and agents and discuss what is more important, what is less, and what should be completely ignored.

FATCA and US Financial Reporting

By Chaim Korn

The 2010 United States Foreign Account Tax Compliance Act, better known as FATCA, requires foreign financial institutions to report to the IRS the names of their U.S. account holders.  This will most probably begin in July 2014.

Banks and other financial institutions in most countries, including Israel, have indicated that they will comply with FATCA.

U.S. taxpayers worldwide have always been required to report their foreign accounts on their annual FBAR (FinCEN 114) report.  In addition, since 2011, similar information is reported on Form 8938 (attached to Form 1040) for higher account balances.

US Persons (US citizens and green card holders) who are required to submit an FBAR or 8938, but haven’t, can face severe fines and even criminal charges in extreme cases.

Who is required to report?

FBAR:  US Persons, who at any time during the year had more than $10,000 in all non-US financial institutions combined, must file the FBAR Report.  Financial institutions include banks, brokerage accounts, certain pension funds and “keren hishtalmut” funds.  Accounts include those owned jointly and even accounts owned by others for which you have signatory power over.  The FBAR is an annual report due June 30th with regard to accounts during the previous calendar year.  In contrast to tax returns, there are no extensions allowed for reporting the FBAR.  The FBAR must be filed electronically.

Form 8938:  US Persons living abroad who are required to file tax returns will have to add Form 8938 to their 1040 if the total account balance of all non-US financial institutions combined exceeds $200,000 at year end, or, more than  $300,000 at any time during the year..  These amounts are double for married couples filing a joint return.  Amounts are substantially lower for US residents.

Penalties:  Penalties for failure to file the FBAR or Form 8938 are severe and can, in extreme situations, even include criminal sanctions.

If the IRS considers the failure to file an FBAR as non-willful, the fine can reach as high as $10,000 for each year that the report was not filed.  The penalty for willful failure to file is the greater of $100,000 or 50% of the maximum amount held in all non-U.S. accounts during the year.  For example, if a taxpayer has $200,000 in foreign accounts for six years and does not file the FBAR form or report income earned by the account each year, the IRS could assess a $600,000 FBAR penalty.

The penalty for failure to file Form 8938 is generally $10,000 per year.

The good news, however, is that if you can show reasonable cause for failure to file the reports, then the penalties can often be abated.

What should you do if you haven’t reported in the past

There are several approaches one can take in dealing with their overdue obligation with the IRS:

  • Offshore Voluntary Disclosure Program
  • Streamline Procedure
  • Quiet Disclosure

The Offshore Voluntary Disclosure Program

Beginning in 2009, the IRS established a series of “Offshore Voluntary Disclosure Programs” to encourage taxpayers to come forward and disclose their non-U.S. accounts, pay reduced penalties, and avoid criminal prosecution. The current program requires taxpayers to file delinquent FBARs and amended income tax returns including income which was not previously declared (i.e., interest, dividend and capital profit), if any, and pay tax and penalties going back eight years. In order to be eligible for this program, a request for participation in the program must be filed before the IRS contacts the taxpayer regarding delinquent returns, and before a foreign financial institution reports to the IRS.

Taxpayers must also pay a single FBAR penalty equal to 27.5 percent of the highest aggregate balance held outside of the U.S. over the previous eight years. In addition, while the normal FBAR penalty applies only to non-U.S. financial accounts, the voluntary disclosure penalty applies to the value of any foreign assets that either produced undeclared income or were purchased with undeclared funds. For example, if the taxpayer has rental property overseas and did not declare the rental income, the value of the rental property will be included in the penalty calculation.

As the penalty under the voluntary disclosure program applies only once, rather than each year, it may significantly reduce the taxpayer’s potential FBAR penalties.

The Streamline Procedure

The Streamline process allows “low risk” taxpayers who have not lived in the US at any time since the beginning of 2009, to apply for a reduced reporting requirement which includes tax returns for the past three years and FBAR reports for the past six years. 

Low risk refers to most taxpayers who owe less than $1,500 of tax per year.  There are other criteria, as well, that must be checked before submitting reports using the Streamline procedure.

Quiet Disclosure

This method is simply filing all tax returns and FBARs that are delinquent.  The advantage to this is that for taxpayers who either owe no tax or small amounts of tax, it will probably not raise any red flags.  The downside of this approach is that it does not provide any protections that the formal voluntary disclosure program might provide, or any built-in compromise to reduced FBAR penalties.

Which Method is Best for You?

Taxpayers Should Act Quickly to Evaluate which Approach Best Suites Their Needs

FATCA will force most non-U.S. financial institutions worldwide to disclose account information on their account holders who are US citizens beginning in this summer.  These U.S. taxpayers, many of whom may not even be aware of their obligation to disclose the accounts, may be running out of time to take appropriate action before the IRS takes its own.  Remember, once your bank reports to the IRS, it will be too late to use the Voluntary Disclosure or Streamline reporting options.  The quiet approach, as well, will likely be more risky.

Time is running out.  If you haven’t been compliant in your reporting to the US, the best course of action in order to avoid potentially heavy fines from the IRS is to begin reporting immediately. Your tax professional can help you decide the best approach to take, but the most important piece of advice is to NOT procrastinate.

Chaim Korn is a Certified Public Accountant from New York with over 30 years experience.  His offices are located in Ra’anana and Ginot Shomron and can be contacted at: chaim@tax-usa.co.il   www.tax-usa.co.il

2014 Israeli Tax Calculator

I recently updated my tax calculator.  The latest version includes the new tax brackets and credits according to 2014.

You can download the latest calculator here or go to the following site:

https://www.box.com/s/460zksl3t4335018j5hp

The Israeli Tax Calculator allows you to check your paycheck and see that the correct taxes were deducted correctly.  If too much money is being taken out for taxes or insurance, then you should demand back your money through a tax alignment (תאום מס) or an insurance alignment (תאום ביטוח לאומי).  If you need to get money back through an alignment see this post for more details.

Note:  While the amount for insurance should match your paycheck perfectly, the amount you pay for taxes may not.  There are other factors besides the ones mentioned in this spreadsheet that can affect the amount of taxes you pay (how much you got paid over the past 6 years, how often you get paid.)

Use the guide as follows:

If you are paying less in taxes than what is calculated on the sheet:  Find out what kind of benefits you are receiving and how to continue receiving them.

If you are paying more in taxes than what is calculated on the sheet:  Odds are you need to do a tax alignment.  Speak to your HR person and fix up your tax record and then file the appropriate paperwork at מס הכנסה.

As always, if you find any flaws in these excel sheets or have any ideas for improving them, please feel free to contact me.

Are there any financial tools you would like to see?  Please feel free to either leave some ideas in the comments below or e-mail me at jonnydegani@gmail.com