Are You a U.S. Citizen? Here's How That Affects Your Israeli Finances
Many Israelis who also hold U.S. citizenship discover that what looks like a pure advantage, visa-free entry to the U.S., can turn into a real financial burden. The good news: most of the damage comes from finding out too late. Here are the areas where we see the most surprises.
Why American taxes follow you here
The U.S. taxes its citizens on their worldwide income, wherever they live, something almost no other country does. As a U.S. citizen living in Israel, you generally must file a U.S. return that reports all your income, including income earned entirely in Israel. You may also need to report Israeli bank accounts (FBAR) and certain foreign financial assets (Form 8938) once the reporting thresholds are met.
The U.S. and Israel do have an income tax treaty, and foreign tax credits often reduce or eliminate U.S. income tax on income already taxed in Israel. But the treaty includes a "saving clause" that lets the U.S. tax its own citizens largely as if the treaty didn't exist, with specific exceptions. That's why the issues below can still arise.
National Insurance: two systems, no agreement between them
Two different agreements are easy to confuse:
- Income tax treaty: the U.S. and Israel have one. It deals with income tax.
- Totalization (Social Security) agreement: the U.S. and Israel do not have one. Israel is not on the U.S. Social Security Administration's list of agreement countries. These agreements are what normally stop people from paying social security in two countries on the same work.
As a result, a U.S. citizen who is self-employed in Israel (osek patur or osek murshe) may owe both:
- In Israel, National Insurance and health insurance: for 2026, a self-employed person generally pays a combined 7.7% on income up to NIS 7,703 a month and 18% on income above that, up to a ceiling of NIS 51,910 a month. Part of the National Insurance portion is deductible for Israeli income tax.
- In the U.S., self-employment tax: generally calculated on 92.35% of net self-employment earnings (once they reach $400). It combines 12.4% Social Security tax, up to the Social Security wage base ($184,500 for 2026), and 2.9% Medicare tax with no cap. An Additional Medicare Tax of 0.9% applies above $200,000 of combined wages and self-employment income ($250,000 married filing jointly; $125,000 married filing separately).
Foreign tax credits and the foreign earned income exclusion can reduce U.S. income tax, but they generally do not reduce U.S. self-employment tax. So the combined cost depends on your profit level, your Israeli bracket and whether your earnings exceed the U.S. wage base.
Not everyone is in the same position. Salaried employees of an Israeli employer are generally not subject to U.S. Social Security tax on that salary; working for an American employer can be different.
A possible mitigation: operating through an Israeli company and paying yourself a salary can change this picture, because wages from a foreign employer are generally outside U.S. Social Security tax. But a U.S. citizen who owns an Israeli company faces its own U.S. rules, including controlled foreign corporation reporting (Form 5471) and possible current U.S. tax on the company's profits, alongside Israeli corporate and dividend tax. It requires a joint Israeli–U.S. review before you incorporate.
Israeli investments and the PFIC rules
The U.S. has a special, harsh regime for "passive foreign investment companies" (PFICs). A foreign corporation is a PFIC if 75% or more of its gross income is passive, or if at least 50% of its assets produce passive income. Many Israeli mutual funds (kranot ne'emanut) and non-U.S. ETFs are commonly treated as PFICs.
Not every Israeli savings product is a PFIC. Classification depends on the legal structure. A keren hishtalmut, provident fund (kupat gemel) or pension fund is generally organized as a savings or pension arrangement rather than as a foreign corporation. How the U.S. treats these arrangements, and the investments inside them, is a separate question (see the pensions section below).
Where the PFIC rules do apply, depending on your circumstances:
- Default "excess distribution" regime: gain on a sale, and unusually large distributions, are not taxed as regular capital gains. The amount is spread over the years you held the fund; amounts allocated to earlier years are taxed at the highest ordinary rate for each of those years (currently 37%) plus an interest charge, and the current-year portion is taxed as ordinary income.
- Elections can change the result: a QEF election (which requires annual information from the fund that Israeli funds rarely provide) or a mark-to-market election for regularly traded shares, under which annual gains are taxed as ordinary income and losses are deductible only up to gains previously included.
- Losses: because PFIC gains are generally taxed as ordinary income, a loss on one fund usually can't offset a gain on another the way ordinary capital gains and losses do.
- Reporting: Form 8621 is generally required for each PFIC, with limited exceptions for small holdings. Missing forms can keep your U.S. return open to IRS review.
A practical approach: check how an investment will be treated in the U.S. before you buy it. For many U.S. citizens, U.S.-domiciled funds avoid PFIC issues, but they raise their own Israeli tax and estate considerations, so the right mix depends on your situation.
Rental income
In Israel, an individual renting out an apartment for residential use in Israel can usually choose between tracks: a full or partial exemption up to a monthly ceiling, a flat 10% tax on gross rent (with no deductions or depreciation, paid within 30 days after year-end), or regular tax on net income. Each track has eligibility conditions. For example, the exemption ceiling counts rent from all the apartments of you and your spouse, and rental activity on a business scale is excluded.
In the U.S., rent from an Israeli property is reportable. You report the rent, deduct eligible expenses and depreciation (foreign residential property is generally depreciated over a longer period than U.S. property), and can usually claim Israeli tax paid as a foreign tax credit, subject to limits. Where Israeli tax is low or zero, for example under the exemption track, there may be little credit available and U.S. tax can remain.
Higher earners may also be subject to the Net Investment Income Tax: a separate 3.8% tax on net investment income, including net rental income, when modified adjusted gross income exceeds $200,000 ($250,000 married filing jointly; $125,000 married filing separately). It is not the Medicare payroll tax, and under the IRS's position foreign tax credits cannot reduce it.
What about registering property in a non-U.S. spouse's name? It is not a general solution. The U.S. looks at who actually owns the property and receives its income, not only at whose name is on the registration. Transferring property to a non-citizen spouse can be a gift subject to annual limits and U.S. reporting, and Israeli law, including spousal property rights and real estate taxes, also comes into play. It should only be considered after a joint Israeli–U.S. review, ideally before you buy.
Selling real estate
The U.S. offers an exclusion on the sale of a main home: up to $250,000 of gain, or $500,000 for a married couple filing jointly. To qualify, you generally must have owned the home and lived in it as your main home for at least two of the five years before the sale, and not have used the exclusion in the previous two years. For the $500,000 exclusion, both spouses must meet the use test. Periods when the home was rented out can affect the result.
The U.S. gain is calculated in dollars: the purchase price at the exchange rate when you bought, the sale price at the rate when you sold. Exchange-rate movements alone can create, enlarge or shrink a U.S. gain. Repaying a shekel mortgage can also produce a separate currency gain, while a currency loss on a personal mortgage generally isn't deductible.
Israeli and U.S. treatment can differ sharply. A sale that is exempt from Israeli mas shevach may still be taxable in the U.S., with no Israeli tax available to credit, and gain above the exclusion may also be subject to the 3.8% Net Investment Income Tax. Planning before a sale, not after, is what makes the difference.
Israeli pensions, keren hishtalmut and provident funds
A withdrawal that is tax-free in Israel, such as a keren hishtalmut withdrawal after the required period, is not automatically tax-free in the U.S. Israeli pension and savings arrangements are not all treated alike. The U.S. treatment may depend on:
- How the arrangement is classified for U.S. purposes: as a pension plan, a foreign trust, or an investment account.
- Employer and employee contributions: who contributed, and whether contributions and growth are taxed currently or only on withdrawal.
- The type of account: pension fund, kupat gemel, keren hishtalmut or managers' insurance policy.
- The treaty: the U.S.–Israel treaty assigns pension taxation to the country of residence, but the saving clause generally preserves the U.S. right to tax its citizens. Some treaty benefits are preserved for U.S. citizens and others are not.
- Timing and form of the withdrawal: lump sum or annuity, and when it is taken.
Reporting may include FBAR and Form 8938, and in some cases foreign trust forms. The IRS exempts certain qualifying tax-favored foreign retirement and savings arrangements from the foreign trust forms, but not from income tax or other reporting. Because there is no single answer for every product, have your specific accounts reviewed, ideally before a large withdrawal.
American citizenship means navigating two tax systems at once: two social security systems with no agreement between them, and U.S. tax exposure on investments and assets that are perfectly normal in Israel. Every situation is different, and with the right planning and the right advice on both sides, that burden can often be significantly reduced. At Mas Tov we handle the Israeli side, and we're happy to coordinate with your accountant abroad so the two sides line up.