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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

2013 Israeli Tax Calculator

I recently updated my tax calculator.  The latest version includes the new tax brackets and credits according to 2013.

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

Israeli Investing 101

I’ll be blunt.  When it comes to investing, most people have no idea what the hell they’re doing.  But it doesn’t have to be that way.  Israel’s financial system has a fantastic system in place in order to help people invest safely and wisely.  And the best part is that quality, objective financial advice is usually free.

Before you need to invest, you need to know why you are investing.  Investing in order to save for a down payment on a mortgage is not the same as investing in order to preserve the value of money, nor is it the same as investing for retirement. Each of theses goals has a specific rationale behind it that impacts the risk one is willing to take, the amount of investment and the oversight required.

Once you know why you are investing and how much you are looking to invest, the next step is to find someone to help guide your investments.  In Israel, the person to look for is a yoetz hashkaot, a certified investment advisor.  This is not the same as a meshavek hashkaot­, someone licensed to sell investments.  Only a yoetz hashkaot is entirely objective, a term with significant legal ramifications.  Buying investments from a meshavek hashkaot is like buying a second hand car and relying on the car salesman for a fair assessment.  I am not saying that the meshavek hashkaot is lying, but his goal is to sell you the best financial option that he has to offer, not necessarily the best financial option from among all the options available.

Finding a yoetz hashkaot is easier than you think; just go to your bank and ask for one.  Speaking with your yoetz hashkaot at the bank and receiving his advice an analysis is free, although the bank does take a commission of 0.4% – 0.7% on buying and maintaining some investments.  Some banks do not offer investment counseling unless you have a lot of money.  If you have a bank like this, I suggest speaking with the manager or telling your banker to #&@% off; many banks offer free advice, regardless of how much money is being invested.  I bank at Mercantile, and I received free investment counseling even though I began with only NIS 7,000 (I am not sure if the policy of offering and limiting investment counseling depends on the bank or the specific branch.)

Alternatively, you can look for a private yoetz hashkaot who will take a different commission (or maybe just a fee for his advice and analysis) and will do the buying and selling of investments for you or show you how to do it yourself.  If your Hebrew isn’t that great and your bank doesn’t have someone who can speak English, it may be worthwhile to find a yoetz hashkaot who speaks English.  Also, if you’re not comfortable with your bank’s yoetz, you should find a private one.  Just make sure that the person you find is a yoetz hashkaot, not a meshavek hashkaot.

Once you know why you’re investing and you have a yoetz hashkaot, you’re almost ready to go.  The yoetz will begin by explaining his liability to you and then give you some simulations to test how you feel about risk.  In most cases, your yoetz will take a few minutes to talk you out of investing in the currency market and begin to direct you to mutual funds (as a Dave Ramsey fan, I appreciate this).  Depending on your adversity to risk, the yoetz will find a few funds that match your preference.  Finally, you’ll compare funds by discussing the risk, the sharpe, and fees.

A good yoetz hashkaot is not just someone who can give you good advice, but is also someone who holds your hand and explains everything to you clearly so that you can make a decision.   Let me say that again – so that you can make a decision, not him.  Don’t invest anything if your not 100% comfortable with the decision.

What has your experience been investing in Israel?  Is there a bank or yoetz hashkaot that you recommend?

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.

Import duties and the Israeli Laffer curve

If you’re like most Americans, you tell your relatives who send you packages not to declare that anything is new or has a value over $5.  You do this because one time a relative sent you something and the post office held it hostage until you paid some sort of ridiculously large tax/fine/payment that is calculated using what I can only assume is some sort of mixture between random numbers and witchcraft.  Well, a tiny bit of that is about to change.

As of January 30th, Yuval Steinitz signed a reformation of two import taxes.

– No import taxes on anything ordered by the internet up to ₪ 1,200, although you’ll still have to pay 16% for VAT.

– No taxes (even VAT) on personal packages valued at $75 (up from $50).

The first reform is a great piece of legislation that decreases the cost of alternatives and fosters more competition.  The ₪ 1,200 limit means that the increased competition will only affect lower end items, not luxuries.  I would be interested to know why the government chose such a low number (why not, let’s say ₪ 2,000), but I agree with the idea.

The second price of legislation is also a step in the right direction, but is telling of the government’s ignorance of the issue at hand.  When someone does not declare the full value on the package, he is really only giving up the insurance on the package in the case of loss or destruction.  The value of something is what you pay to get it and I am not willing to pay customs duties in order to receive insurance on the package sent.  This legislation is not going to make any difference to me on any packages valued over $75 because the cost of customs is still too much for me to declare the items.

If the government want to both maximize tax revenue and help its citizens, it should analyze how much people would be willing to pay for insurance on packages and lower the import duty to that level.

Ronald Reagan won the 1980 election by using the Laffer curve to prove that he could raise government revenue by reducing certain taxes.  For those who are not economics nerds, the Laffer curve is a curve that shows the relationship between tax revenue and the various possible rates of taxation.  History shows us that his application was entirely incorrect, but the theory stills holds.  It seems that this is one of those very rare cases when tax cuts along the Laffer curve could be very useful.

Do you instruct your relatives declare the value of items that are sent to Israel?  If not, how low would the tax have to drop in order for you to tell them to declare the true value?