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getting your 40 quarters – social security in Israel

davidciani / Free Photos

One of the major financial perks of being an American Oleh is eligibility for Social Security.  In addition to the money you can get from bituach leumi (~₪2,000) and your keren pensia (depending on what you put in) Social Security entitles you to an additional payment upon retirement of anywhere between ~$250 and ~$2,500 a month.  Also, in the unfortunate event of your passing, your spouse (even if he or she is not American) would continue to receive the payment until his or her death.  It’s a huge benefit worth having and it is worthwhile to make sure you are eligible for this benefit.

In order to be eligible to work for Social Security, an American citizen needs to pay in to Social Security enough to earn 40 credits or quarters.  To earn a quarter, one must pay Social Security taxes (FICA, which is 15.3%) on wages earned on $1,130 of income (the amount changes every year in accordance with the national average wage – so it was less in the past and will be more in the future).  You can earn up to 4 quarters a year by paying Social Security taxes on $4,520.  To be clear, even though these are called quarters, you do not have to earn $1,130 during every 3 months, the amount can be spread however you earn money during the course of a calendar year. For example, if you have a summer job where you earned $3,800, you would earn three quarters, even though you only worked 2 months.  You can check how many quarters you have on the website for Social Security by clicking here (http://www.ssa.gov/mystatement/).

It is very common for olim who made aliyah in their 20’s and early 30’s to find that they worked just below the line of 40 quarters and that they are therefore ineligible for Social Security.    But if an oleh finds out about this in advance, he or she can take the necessary steps to ensure that he or she receives this benefit.  As a rule, Israelis do not pay into Social Security unless they work for an American company or are self employed. 

There are four ways to pay into Social Security while working in Israel:

1) Register and work as an atzmai (and thus pay FICA)

2) Work for an American business (and pay American taxes including FICA).  Ask a friend or relative in the states if you can do some seasonal work for them in order to earn your few remaining quarters.

3) Receive payment as sachar sofrim for a one time event.  You’ll have to do a te’um mas (https://www.misim.gov.il/shteummas) and also a te’um bituach leumi (http://www.btl.gov.il/Insurance/Teum/HafakatHishur/Pages/default.aspx), but it counts as if you are an atzmai (and you pay FICA on it.)  Not everyone likes to pay this way.  I asked the people in my billing department to pay an Israeli supplier this way once and they were not happy.

4) You can try to pay taxes on your billing company profit.  While one accountant with whom I spoke said this is possible (he admitted it would raise a red flag, but said it could be fought successfully), two others said that this possibility is entirely out of the question.  One accountant told me “people go to billing companies in order to avoid paying Social Security.  You can’t just pay when it’s convenient for you, claiming you’re independent, and then claim you’re no longer independent when it’s not convenient for you.  Either she’s pregnant or she isn’t.”

As a final note, don’t try to commit fraud.  If you open a tik just to pay yourself the minimum and get your 40 quarters, Social Security will find out.  They actually have an office in Jerusalem whose sole purpose is to look for stuff like this.

Freelancing in Israel: Oved Atzmai vs Billing Company

Congrats, you’re considering starting your own full time business.  Or maybe you’re just looking for a little money on the side.  Sooner or later, someone is going to want a cheshbonit mas (tax receipt) and its time to stop working under the table; it’s time to register as a freelancer.

In Israel, you register as a freelancer or Over Atzmai (hereinafter OA) as either an osek patur or osek murshe.  An osek patur earns less than NIS 76,884 and does not charge VAT for his services.  If an OA makes more than NIS 76,884, he or she registers as an osek murshe.  An osek murshe does charge VAT, but can reclaim VAT on business expenses.  You can change from an osek patur to an osek murshe mid-year (when you come close to the 76,884 line you have to change your status) and once you are an osek murshe, you cannot be an osek patur again for at least two years.  Finally, some professions such as accountants, lawyers and doctors may only register as an osek murshe.  Regardless of what you choose, the process is the same: register at the tax authority, then mas hachnasah, and then bituach leumi   Once you are registered, you have to file regular reports, prepay VAT every so often (for an osek murshe) and file an annual report.

Sounds difficult.  Is there an easier way?

I know, the reason you became a freelancer was so you wouldn’t have to leave the couch and put on pants; going to so many government offices seems out of the question.  Fear not, there is an alternative; you can register with a billing company.  A billing company is a company that hires you as a worker.  You work as a freelancer, the company does your billing and the company takes a small cut of your revenue and pays you as a worker.  Since you are working under the guise of another company, you pay both the employer and employee side of all taxes and investments.  Billing company freelancers (hereinafter BF) do not issue personal receipts, but send the money to the billing company and then ask their billing company to issue a receipt.   All that the billing companies ask for in return is a small percentage of your revenue.

So which is right for your?

This is a very complicated question that gets to the heart of a very important matter – tax planning, or more honestly, tax avoidance.  With tax rates as high as they are in Israel, saving money on your taxes can mean a world (or at least a paycheck) of difference.

1) Tax deductible expenses:  Expenses are deductible for both OAs and BFs.  The only difference is that OAs can also deduct some living expenses (a portion of arnona, electricity, water and va’ad bayit).  In addition, OAs who are registered as an osek murshe and BFs can also receive back VAT on most expenses (for some such as a car and cell phone, you only get back 2/3 VAT.  Car rental expenses receive no VAT at all).  Click here for a full list of deductible expenses for an OA including VAT reimbursement rates.

2) Charging VAT:  Despite popular belief, VAT is more of a tax on the seller than on the buyer.  Like all taxes, it leaves a tax incidence, but in a world of many suppliers, VAT is really less of a 16% sales tax on the consumer and more of a ~14% tax on the supplier.  An OA is allowed to not pay this tax as long as he is an osek patur.  One he is an osek murshe, then he is in the same boat as the BF, who always charges VAT.

3) Bituach Leumi.  OAs pay 9.82% on all salary below 60% of the average wage (meaning on the first 5,000 of revenue) and 16.23% on all revenue after that.  BFs pay 3.95 on the first portion of revenue and 17.9% afterwards.  This means that until ~ NIS 14,200 revenue BF’s pay less, but after 14,200 revenue, OAs pay less.  All in all, the difference is not that significant until an OA starts making a lot of money.  Another difference is that OAs pay a minimal amount of Bituach Leumi   (NIS 212) every month, whether they receive income or not.  BFs only pay bituach leumi during months they receive income.

4) Pension:  Both BFs and OAs can put aside money for pensions.  BFs can put aside up to 7.5% from the employee side (which means after tax money, but 35% of the deposit is a tax credit, 7.5% from the employer side (tax and bituach leumi exempt money), and up to 8.33% for pitzuyim (also, tax and bituach leumi exempt money).  Note that the percentages from the employer side turn out to always be a bit less than listed above because these are percentages of your declared salary after you remove the deductible and refundable expenses, including the hishtalmut and pension (there is some complicated math in this).  OAs can also put aside money for a pension, 5% from the employee side and 11% from the employer side (both have the same tax deductible policies mentioned for a BF).

5) Hishtalmut:  One of the best ways to get some money past the tax man is by paying to a keren hsihtalmut.  Typically, a keren hishtalmut, allows a worker to pay in 2.5% of his or her income, which the employer matches with 7.5%.  Since BFs are paying both the employer and employee side, this means that they get to pass the 7.5% through tax free and bituach leumi free (Note: like pensions, percentages are a bit less than 2.5% and 7.5% because these are percentages of your declared salary after you remove the deductible and refundable expenses, including the hishtalmut and pension).  Similarly, an OA may deposit 2.5% from the employee side, but only 4.5% from the employer side. 

6) Social Security:  This is where the OA’s have it rough.  If you’re an American and registered as an OA. you’ll have to pay 15.3% of your revenue (before taxes, but after deductibles and bituach leumi) to the US government for social security.  This is sometimes a good thing, because if you’re close to having 40 quarters, being an OA can push you over the edge, but it also means you’re going to be paying a lot of extra taxes.  (For those interested, I plan to have a post discussing the social security issue at length in the near future).  Again, this tax does not apply to BFs at all.

7) Billing company fees and accounting fees.  Billing companies charge a certain percentage of your initial revenue as a fee for its services (the fess is paid on revenue after removing VAT, but before removing expenses.)  This fee covers not only billing, but all Israeli accounting expenses you’ll need throughout the year including deductions, refunds and tax planning (fees range from 4% – 7% with a maximum fee per month).  Similarly, an OA requires the services of an accountant.  I know there are many OAs out there who choose to do it alone, this is often a huge mistake.  The major perk in being an atzmai is the ability to utilize tax exemptions and if a worker is not using an accountant he or she risks either not taking advantages of all the tax advantages at his or her disposal or, conversely, committing fraud.  The cost of an accountant is usually between NIS 1000 and 3,000 a year for preparing an annual report.  Obviously this price varies depending on the extent of the time and service you need from your accountant.

Some final thoughts:

There are a variety of billing companies that can offer you their services (Yeul Sachir, Atzmai Sachir, Autotax, Cheshbonit Sachir, Sveram & Taxpay to name a few.)  When choosing a billing company, it is important not only to look at the fee, but the level of customer service offered.  I have heard good reviews from customers from Yeul Sachir.  If you have worked with any of these companies, please share your experience in the comments below.

Many choose to be an OA because issuing a receipt from one’s own company looks more professional.

Despite what many say, and what I have been told in the past, it is not a big deal to close a tik.  Just speak to your accountant and he or she will probably do the paperwork for you for a small fee.

This is the first time I am posting about this topic and I anticipate feedback and corrections.  I’m going to be on vacation next week, so if there is any problem, please e-mail me and I’ll correct it when I come back.  In the meantime, please enter any comments relevant to this topic below.

withdrawing your pension early

As a general rule, withdrawing your pension early is a terrible idea.  In addition to the natural consequences of using money that will be needed later in life, a worker who withdraws early from his pension will pay a hefty fine and lose the ability to invest the withdrawn money tax free.

But there are times when early withdrawal is justified.  For example, I was recently approached by a client who unfortunately will be leaving Israel.  The client paid into a pension fund for a few years, but realizes that since she has around 40 years until retirement, which she plans to spend in her country of origin, she would be better off taking the money with her abroad.

As I mentioned in part one in my series about pensions, there are three parts to a pension fund: (1) the part that you pay in, (2) the part that your employer pays in & (3) the part that your employer pays in that is set aside for severance.

In order to take out the first two parts, you should contact your pension fund and ask to withdraw the funds.  You will be forced to pay a tax of 35% on this money for early withdrawal, and once you agree to this, the money is yours.

The third category, severance, is a bit different.  The severance part (פיצויים) can be taken out whenever you stop working, whether you quit or if you are fired.  If you are fired though, your employer must pay השלמת פיצויים, which means that they must pay the difference of what they already paid in and your final base salary times the amount of years you worked.  But whether you get השלמת פיצויים or not, you can get your money without paying any additional taxes.

Updated financial tools – Israeli Tax Calculator & Job Payoff Index

Below are updated versions of two financial tools I try to update every once in a while.  The files below are updated using the new tax information for the new year.

1 – The Israeli tax calculator – This tool 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.

New in this version:  In addition to updating the tax brackets and the average wage, I also enterd a line on the bottom for deductions from your paycheck (for example, if you pay for lunch or insurance and the money comes out of your paycheck).

Download the Israeli Tax Calculator here (http://www.box.com/s/460zksl3t4335018j5hp)

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.

2 – The Job Payoff Index – This tool allows you to see the net payoff of any job including social benefits.  If you are offered a high-tech job with great pay and no benefits or a low paying job with government with benefits up the wazoo, you can check and see which is really paying you more (in after tax shekels).

Download the Job Payoff Index here (http://www.box.com/s/460zksl3t4335018j5hp)

I want to thank those who gave suggestions for improving these sheets, including those who found some bugs and those who sent me e-mails thanking me.  Your support is greatly appreciated.

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

5 flaws in the Israeli financial system, what the government SHOULD do about it (but doesn’t) and what you CAN do about it

#5 – tax laws against stay-at-home moms

In Israel, tax deductions for children are only given to the mother, with rare exceptions.  As a result, families where the mother stays at home and the father alone works are unable to receive any sort of tax deduction.  This system makes it harder for larger families, more often poorer families, to make a living, costing the government more in subsidies, which economically speaking, is a tremendous waste of money due to bureaucracy.

What the government could do:  The government could do what almost every other country does – allow for couples to file their taxes jointly and share their tax points, regardless of which parent is working

What you should do now:  Unfortunately, the system is designed for mothers to work for about about ₪ 6,000 – ₪ 7,000 a month.  Short of political protest, the only thing I can think of is for stay at home mother to take part time work, or else remain as they are and note the sacrifice being made in order to stay at home.  At the very least, when weighing working vs. staying at home calculate your take home pay, which will most likely be tax-free.

 

#4 – unclear pensions

As I mentioned in my series on pensions, Israel switched to a defined contribution system, which means that the private consumer is ultimately responsible for handling his pension. At the same time, pensianet is unclear, lacks information on specific investment tracks within a pension, and exerts absolutely no effort to try to explain to people how to choose a pension.  As a result, private people have no idea what they are investing, and when the market falls, bear the responsibility without even being given the tools to have some sense of control.

What the government could do:  Clean up pensianet.  Include information on all of the pension tracks and implement a system to help people choose the pension that is right for them.

What you should do now:  Learn as much as you can to control your money. In my series, I propose a system for choosing a pension.  It is slightly flawed because I lack specific information on every fund, but in the meantime it is the best option I can think of to make sure my money is being handled responsibly.  Take comfort, as I do, that while you cannot be exact, you can be imprecisely right and not precisely wrong.

 

#3 –bureaucratic tax alignments

If you have received an income from more than one place, you know the hell of which I speak.  Going to Mas Hachnasa is a nightmare and Bituach Leumi is no picnic either.  Both offices are immensely understaffed and often cost an entire business day (sometimes two) in order to get money back.  The online option is rarely better.  Recently, my wife tried to do a tax alignment online and Mas Hachnasa just decided on their own to add a number from which they add taxes (the option wasn’t even on the form my wife filled out!).  I spoke to the accountant where she works and as soon as I mentioned she did the alignment online he stopped and said that this was not the first time this happened and that if she wants to get it done right, she has to go there in person (and waste half day’s work.)

What the government should do:  Mas Hachnasa has to clean up their website, as does Bituach Leumi.  The ultimate flaw, of course, is in their information system, which really should be doing automatic calculations on its own.  Every single person is classified by an ID number and a computer should be able to calculate any money owed to the citizen  and credit it to his account, without anyone having to file a single sheet of paper.  Some claim that the government offices cannot do this because they count on people being unable to put up with them, allowing said offices to keep the dishonest money.  My feeling is that the money saved on office space, wasted government officials and the economic benefit to the consumer would more than make up for it.

What you should do now:  Unfortunately, we’re stuck with them.  So do it once and do it right.  Make sure you have a folder with all possible financial documents you could possibly own, find out when the lines are shortest at the government offices (usually in the afternoon) and go there with a book in hand and wait to get it over with.  I once saw a family at Bituach Leumi actually bring a pizza and eat a meal together while waiting on line.  It looked crazy at the time, but now that I think about it, it’s not such a bad idea.

 

#2 – banks that nickel and dime you

Banks use a method of bank fees designed to take as much as they can from those unwilling to make a big deal over it.  Additionally, they “accidentally” take extra bank fees on a regular basis, hoping that you either won’t catch them, or that it won’t be worth your while to ask for it back.

What the government should do:  Break the cartel or control it: either allow foreign banks to enter the private banking market in Israel (banks like HSBC, Citibank, etc) or else regulate the bank fees.

What you should do now:  First, negotiate your bank fees and get everything in writing.  Second, set aside a “money day” once a month where you go through your bank and credit card statements and find the fees that they took illegally.  Call the bank the next day with your paperwork and kindly request your money back.

 

#1 – workers that have no rights

It is said that God does not bring an affliction without first bringing the cure.  In a similar vein, the ministries of finance and labor do not make a law to benefit a worker without creating a tremendous loophole.  There may be a law of minimum wage and benefits, including vacation and a pension, but by writing off a worker as an expense instead of an employee, businesses can hire workers without any such benefits. According to the Jerusalem Post, this trend is spreading rapidly in Israel and has created an unprecedented amount of “working poor” throughout the country. According to the article, cleaners, security guards and clerical workers employed by manpower companies are the most common groups with no rights.  From experience I can tell you that people who work in ganim, storefront workers, and many other jobs in manpower agencies do not offer any benefits as well.  Businesses claim that their workers get a slightly higher salary, and in doing so, cover the cost of these benefits.  In truth, they pay minimum wage (or close to it), and do not cover the costs of these missing benefits (approximately 20% – 25% of a salary).  And if you think it’s just a matter between the businesses and their workers then I have some news for you.  The Israeli government is trying to implement a policy of mandatory pensions which will allow the government to spend less on social security in the years to come.  We are sacrificing our money in the short run to save on government inefficiency and waste in the long run.  But what do you think is going to happen when a generation of exploited workers retires with no pension?   Who is going to foot the bill?  It isn’t going to be the businesses who exploit the workers; it is going to be the average citizens who will pay to cover the costs of these retirees, which ultimately is covering the money saved by these dishonest businesses.

What the Israeli government should do:  All money paid for any service should have a pension amount taken out automatically, no matter what the sum.  Even bonuses should have a portion taken out and put into a pension fund (I am not saying the employer should have to match it, but there should be some level of automatic savings.)  If this is too much, businesses should be required by law to reveal what the hourly wage is without a pension (-10%) and without vacation days (about 10 – 15%).  This would allow workers to see the truth behind the salaries and make intelligent decisions when choosing a job.  Finally, a realistic number should be set for minimum wage without benefits.

What you should do now:  If you are a worker without benefits, begin setting aside money for your pension now.  The government is planning on cutting the cord, so you may as well be ready.  Also, try to save up enough money to quit your job and find one that pays honest wages and benefits.  For those job hunting, when comparing a job without benefits, realize that you are really getting the equivalent of 25% less with benefits.  Also, take extra precaution when signing on with a manpower agency.

when the government owes YOU money

If you worked more than one job in the past seven years then you are probably owed some money by the government and bituach leumi.

When you work more than one job, you are taxed at the highest income bracket, without any deductions for points. Instead, the government leaves it up to you to demand your money back.

Let’s say Bob, a single man, works two jobs and earns ₪ 5,000 at each one.  His gross pay would be ₪ 10,000 and he’d pay ₪ 4,600 (46%) in taxes.  Once Bob does a tax alignment, it would be clear that Bob should only have paid ~₪ 956.  As a result, the tax authority would pay ~₪ 3,644 to Bob. (click here for more information including form 116 for a tax alignment).

But what most people do not know if that there is also such a thing as an insurance alignment as well.  In Bob’s case, his employers took off 12% from his paycheck for his insurance.  Once Bob does his insurance alignment, he would find out that he deserves ~₪ 409 back for overpaid insurance (click here for the for more information including the forms for an insurance alignment).

As you can see, this is not a small amount of money.  In our simple case, Bob paid ₪ 5,800 in taxes on insurance on his paycheck when it should have been ₪ 1,748.  58%, when it should only have been 17%.

As I mentioned above, you need to start the process to get your money; no one is going to magically send you money.  Could we have an advanced system where this is done automatically?  Yes.  Should we?  Of course.  If you get a chance to meet anyone in the ministry of finance, tell them that this is much more important that setting price a price floor for children’s books.  In the mean time, you need to be active – no one cares about your money more than you.

choosing a keren hishtalmut with gemel net

The site that measures providence funds in Israel is called gemelnet.  This site is run by the ministry of finance in order to give accurate information about providence funds.  Begin by entering the site. Noe:  this site only works in internet explorer.

Okay, now you see a screen that will allow you to select what you want to compare.  In our case, we will select all of the kranot hishtalmut.  Next, select the purple button that reads “hatzag doch” in the bottom left hand corner of the screen.  Wait for the new page to load.  Now click on the button that says “Excel” on the right side, across from the “hatzag doch” button.  Save the excel file to your desktop and close the internet browser.

Now open the excel file.  You should see the following columns:

A – this is the reference number within gemelnet for the providence fund

B –the name of the providence fund

C – the period we are reviewing in this document.  Because we did not change the setting on the original web page, this file tells us how well the funds did for the last 12 months

D – this is the return (interest earned) on the fund during the period we requested – including compound interest.

E –the average annual rate of return on the fund over the last 3 years

F – the average annual rate of return on the fund over the last 5 years

G – sharpe ratio – this tells us how much of the return on investment was from risk and how much was from management of risk.  The higher the number, the more the return is a result of risk management, the lower the number, the more it is a result or risk.  If a fund has a huge return on investment, but a low sharpe ratio, then it is probably very risky.  On the other hand, if a fund has a low return on investment, but a high sharpe ratio, then maybe it is too conservative.  If the return is high and so is the sharpe, then it looks like a good deal (but be warned, the sharpe ratio is not perfect.  This article in wikipedia deals with the strengths and weaknesses of using this ratio.) According to the file I downloaded today, the average sharpe ratio was .49.  This number really reflects your comfort with risk, so educate yourself and decide what level of risk management is too little for you to withstand and do not choose anything below what you are willing to live with.

H – Average finance fee – how much of your interest you have to pay to the providence fund provider.  Since every single person pays a different fee, this means nothing.

I – How much money is in the fund, or market capitalization – in theory, a huge fund is a stable place to keep your money.  I say “in theory”, because I was not born yesterday.  Sometimes managers of big funds make stupid mistakes.  But if all the other numbers look right, this number could be a measure of stability.  The larger funds are called large cap(italization)  or “blue chip,” named for the most expensive chip in a poker game.  Medium sized funds are called mid-cap, and the little funds are called small cap.  There is no technical cutoff for these, and if there is, it is different in Israel, where the market is much smaller.  For our purposes, I would say that anything over a billion is large-cap, anything over 400 million is a mid-cap and anything less is small-cap.

J – Net accumulation – this tells us how much money has either gone into or left the fund during the period we are reviewing.  Money goes in when (1) people put in more money and (2) the funds gains value.  Money goes out when (1) people take out their money (2) the funds lose value and (3) finance charges are taken by the fund managers.  This number should look normal compared to the market cap.  If a fund is loosing ₪ 100 million, but it is an ₪ 8 billion fund, then it could just be that some people took out their savings the past month.  Look at this number along with the return on investment numbers to try to figure out why the money is going in or out.  If you notice everyone is jumping ship on a fund, ask why.  It doesn’t mean you should leave the fund, but it could be a red flag.  Alternatively, if this number is huge, see why it is doing so well – it could be a sign of a successful management, but it could also be the result of a bunch of people blindly put their money there because someone mentioned the fund in an article in the paper.

K – liquidity index – When a fund invests in less liquid assets, it is harder to value the assets exactly.  This means that the information about the company’s profit (used for the interest rates, sharpe etc) may not be as accurate.  Ideally this number should be as high as possible.  If you want to be a real pessimist, then this number could be taken as a margin of error for the reported income.  Realistically, the margin of error is usually much less.

L – The name of the fund again – because this file has so many columns that you may forget what fund you’re looking at as you go from column to column.

I used the following method when I looked for my first conservative, general fund keren hishtalmut:  For starters, I need my money at the end of six years, so I am not ready to experiment with a new fund; I like to see a proven track record.  Whatever does not have a track record of 5 years was eliminated.  This excel file is a bit messed up, so let me explain how to do this.  (1) Add a line above the first providence fund (below the titles for the columns) and then (2) highlight all of the 5 year averages and choose “sort descending” (there is a problem with the file because even then, it will sort everything except the first line.  You’ll just have to live with it and look at that fund separately).  Whatever does not have a number for a five year average is eliminated.  In fact, whatever was less than the market average for a five year return is eliminated as well. If you’re wondering – I do not do the same with the one year average, so as to not discount conservative funds.  Some of the more conservative funds with more risk management (usually with a higher sharpe), did not go on such a roller coaster ride these past few years. Since they did not go down so much in 2008, they did not go up as much this past year. Many of the funds that made over 30% this past year, started with -15% and then made it to a normal 10 – 15% return; whereas some more stable funds began at 12% and made it to 15%, so their return for the past year is not as high.  (This is one of many examples of why choosing a kupat gemel or keren hishtalmut must also take into account when you are doing it.)

Next I checked the sharpe ratio.  In the current economic climate, I am personally am okay with anything above .5 (you may not be – remember, you are risking your money here), so I sorted again and deleted any funds with a sharpe ratio less than .5.  I am now down to around 40 funds.  Not bad after starting off with several hundreds.

Next was the market cap.  I know, it may not be the greatest of ideas, but I am fairly conservative and will not go for anything less than a mid-cap.  Now I am down to 20.

Now I have to analyze until I find what is right for me.  I check the net accumulation.  Any red flags?  Anything stand out for the good?  I analyze why.  Next, I go to the first columns and compare the 1, 3, and 5 year averages with the sharpe index to learn the story of each one.  Some have too much risk and not enough management to justify it.  Some are too conservative; I am willing to take the ride, even if it is only the teacup and not the roller coaster.  In the end, I am down to about 4 or 5 funds.  In this case, I have to either find a way to look into the companies further (who has less finance fees, which name sounds nicer, which fund managers brake for small animals etc.) or just pick one.  No fund is *perfect*, but if it fits the bill and is what I am looking for, then I am comfortable with the decision.  Remember, decisions are judged on the knowledge one has at the time.  Even if it does not turn out well, it is still the right decision.

So, there you have it.  This is my plan; you may disagree.  You may only stick with a sharpe of .7, or not eliminate anything without a 5 year track record.  the most important thing is that you have a plan that you understand and agree with. Remember, never take financial advice blindly; always make sure you understand where your money is.  No one cares about your money more than you.

what kind of lifestyle does our tax system encourage?

A tax is not only a way to collect money; it is also a way to encourage a lifestyle. For example, a cigarette tax is not given to compensate people who suffer the effects of smoking involuntarily; it is used to discourage smoking. A gas tax not only collects money for energy use, but is also used to encourage alternative forms of transportation. So it should be no shock if I tell you that a system of income tax can be used not only to collect tax on income, but to encourage a particular lifestyle as well. The following post will analyze the lifestyle encouraged by our tax system and what that means for Israelis.

As a rule, the Israeli tax system encourages both partners in a marriage to work. Let me bring two examples:

In the case of a married couple, a woman should try to earn at least ₪4793 and the man ₪4000, so as to maximize the benefit from not paying taxes. If the man made all this money alone, then the household would clear ₪901 less income (₪7581 instead of ₪8482). Or to put this into another perspective, in order for a man to clear the amount that both partners would clear in the above case, he would have to have a salary of ₪10,150, ₪1,357 above the combined total for a couple mentioned at the beginning of this paragraph. What this means is that the Israeli tax system not only rewards both partners for working; it makes it harder for a single supporter to clear income.

Generally speaking, the tax system is structured so that couples benefit the most when one partner is no further than one tax bracket away from his partner. After that point, the marginal rate of taxes will rise more than the amount saved by the lower earner. Okay, now in English. If I move into a higher tax bracket and take on more hours as my partner works less, I will pay more. For example, let’s say my wife and I are making ₪11,000 (gross profit) a piece. Now as we have kids I decide to take on more work and have her do less, so I work to make ₪17,000 and she makes ₪5,000 – I would loose an additional ₪586 due to taxes. And if we were to divide the burden even more, say, ₪19,000 and ₪3,000 – I would make ₪1,360 less!

So it seems clear that the Israeli tax system wants both partners working; staying at home with the kids is punished. Now, I am completely in favor of both men and women working with equal rights and opportunities, but playing reward and punishment in order to push a certain lifestyle is wrong; Israeli women should have the right to choose to work or spend time with the kids (men too for that matter.) The sad truth is that Israel’s tax system reflects a kibbutz mentality where the parents are not available to raise their kids and state sponsored socialized education is used as the moral compass.

The good news is that this problem could be easily remedied. Were Israel to adopt a tax system whereby the marginal rate was determined by joint income (the amount the husband and wife make together – no matter how much each one makes individually), then Israel would indeed reward family life and allow the couple to choose if having both partners working or having one partner spend time at home is better for the family.

So, how can we turn this situation practical? First, maximize the ability for both partners to work, certainly when you need the money. Second, do not give in to the pressure of the tax system; if one parent wants to only work half a job or stay at home with a child, they should do so; only appreciate even more the sacrifice you are making for your child and how important it is. Finally, spread this article and bring this to the attention of anyone you can, especially those in the government. This country has come a long way and hopefully, as we continue to thrive, the decision to divide work and family life will be left with the only people who can make such a decision, the individual citizens.

The Israeli Tax System explained – salaried worker

The following is an updated version of the previous post explaining the tax system for a salaried worker.  Hopefully every year or two, I try to look back and update similar articles to ensure that their information is up to date.

The following article will explain the Israeli tax system for a salaried worker and how to calculate your נטו (net pay) from your ברוטו (gross pay).

Let’s begin with a base salary.  In the following article, Bob, a worker at The Rubber Duck Factory earns ₪5000 as his base salary.

Next we need to deduct taxes.  When calculating taxes, there are some items that are automatically tax deductible and other benefits that are taxed.  For example, the money you pay into your pension is tax deductible.  In our example, Bob pays in 5% (5000 x 5% = 250) of his base salary into his pension.

Now let’s add the extra things that are taxed, for example, the basic transportation expense to get to work that is reimbursed. Bob is reimbursed for ₪350 of his transportation to work.  This means that the taxable amount will now be ₪5,000 – ₪250 + ₪350 = ₪5,100.

Now we can calculate Bob’s taxes.  Israel has a progressive system, so Bob will pay 10% for the first ₪ 5070 and 15% of the remaining amount.

Monthly Income

Tax rate

up to ₪5,070

10 %

from ₪5,071 to ₪8,660

14 %

from ₪8,661 to ₪14,070

23 %

from ₪14,071 to ₪21,240

30 %

from ₪21,24, to ₪40,230

33 %

from each additional shekel

45 %

In this case my taxes would be 10% (₪5,070) + 15% (₪30) = ₪511.20

But wait!  There are tax points that we all get.  The value of the tax points changes every year.  In 2011, each point entitles us to save ₪209 a month on our taxes:

Every man begins with 2.25 points (2.75 for woman).  Then there are additional points for serving in the army, having completed a degree, and having children. Click here for a translation of the tax authority’s page of all the additional points. Let’s leave it simple in our case, no extra points.  Bob gets 2.25 points equal to ₪470.25.  This means that his total taxes are ₪511.20 – ₪470.25 = ₪40.95

Note:  there are other issues that affect you taxes, such as additional taxed items, additional tax deductible items and you average salary over the past several years.  This is a very simplified example.

3)  Now we have to take off for insurance.  Warning: the calculations are a bit crazy, so bear with me.

When calculating your insurance tax, you need to calculate your base pay and add all the extra things you pay for.  But while you pay extra taxes for all your benefits, none of you deductibles come into play (I know, it’s not fair.  I could rant for hours about ביטוח לאומי, but this is not the place…)  In our case, Bob will be paying insurance taxes on his base pay of ₪5,000 plus the additional ₪350 given to him for transportation.

The next thing we have to do is calculate 60% of the average salary.  According to ביטוח לאומי the average salary for 2011 pay checks is ₪8,307, so 60% of the average salary is ₪4984.20.

For the portion of you salary equal to 60% of the average salary, you pay:

National insurance (disability, unemployment etc.): 0.40% & Health insurance: 3.10%

From the rest of the money you make:

National insurance: 7.00% & Health insurance: 5.00%

So for National insurance: 0.40%(₪4984.20) + 7.0%(₪5350-₪4984.20) = ₪45.54.  And for Health insurance: 3.1%(₪4984.20) + 5.0%(₪5350-₪4984.20) = ₪172.80 The total amount Bob will pay for insurance is ₪218.34

Now Bob can deduct his investments from his gross pay.  In our example, Bob pays 5% into his pension and has no other investments that he pays into.  So we deduct 5% x ₪5,000 = ₪250 from his salary.

Let’s see what we have left:

₪5000 + ₪350 (transportation) – ₪40.95 (taxes) – ₪218.34 (insurance) – ₪250 (investments) = ₪4,840.71

Just to give you an idea of how much you need to make in order to bring home what you want, I made the following table.  The table represents a working man (not oleh chadash, no other points) and how much he would take home from his salary based on the conditions and benefits outlined above

Salary → Brings Home

  • ₪6,000 → ₪5,537.71
  • ₪8,000 → ₪6,931.71
  • ₪10,000 → ₪8212.61
  • ₪12,000 → ₪9441.61

To summarize, taxes stink, ביטוח לאומי stinks even more, and you’re not making as much as you think you do.  The most important thing though is to take the proactive step and realize how much you make when budgeting.  While the גמרא teaches us that a person’s salary is ordained by heaven, how he or she spends it is his or her own choice.

If you want to plug in your own salary, you can download the Israel Tax Calculator here.