Relocating to the United States is an exciting step filled with opportunity. However, alongside the excitement and logistical preparations, there is one critical, complex subject that must never be left to the last minute: international taxation.
The tax systems in Israel and the US operate on fundamentally different principles. A lack of advance tax planning can result in double taxation, severe financial penalties, or retroactive reporting liabilities in both jurisdictions. To ensure you arrive fully prepared, we have outlined the key tax considerations for US relocation below.
1. The Israeli Residency Test: When Do You Cease Paying Israeli Tax?
The State of Israel taxes its citizens based on residency (rather than citizenship alone). This means that as long as you are classified as an “Israeli Tax Resident” by the Israel Tax Authority, you remain obligated to report and pay taxes in Israel on your worldwide income—including income earned in the US.
To establish that your “center of vital interests” has shifted to the US, you must satisfy two primary tests:
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- The Days of Presence Test (Technical Test): Did you spend 182 days or more in Israel during the tax year? Alternatively, did you spend 30 days or more in Israel during the current tax year, with a cumulative total of 425 days or more across the current and preceding two tax years?
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- The Center of Vital Interests Test (Substantive Test): Where is your permanent home located? Where does your immediate family reside? Where are your primary economic and personal ties maintained?
Pro Relocation Tip: Terminating Israeli tax residency is not an automatic or instantaneous event. It is advisable to execute proactive steps—such as canceling local subscriptions, transferring banking activities, and submitting appropriate exit filings—to unequivocally demonstrate the relocation of your center of life.
2. The US Tax System: Understanding IRS Compliance
Unlike Israel, the US taxes its citizens and Green Card holders on a citizenship basis (requiring perpetual annual filings regardless of physical residence). However, for Israeli expats moving on non-immigrant work visas (such as L-1, H-1B, or E-2), US tax residency status is determined by the Substantial Presence Test.
Once you become a US Tax Resident:
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- You are legally required to report your worldwide income to the Internal Revenue Service (IRS).
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- If you retain active bank accounts, financial assets, or savings products in Israel, you become subject to strict disclosure obligations, including FBAR and FATCA reporting.
3. The PFIC Trap: What Happens to Your Israeli Investments?
One of the most frequent oversight errors made by Israelis relocating to the US involves retained investment portfolios and foreign funds. US tax law maintains strict provisions regarding Passive Foreign Investment Companies (PFICs).
From an IRS perspective, almost all Israeli pooled investment vehicles are classified as PFICs, including:
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- Israeli mutual funds (Kranot Ne’emanut).
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- Exchange-Traded Funds (ETFs).
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- Provident investment funds (Kupot Gemel Le’Hashkaa) and investment-linked life insurance policies.
The Issue: US taxation of PFIC assets is highly punitive, exceptionally complex, and can result in top-tier marginal tax rates and interest charges that severely erode portfolio gains.
Recommendation: Prior to your departure, conduct a comprehensive review of your Israeli financial portfolio with a international tax advisor. Restructuring or liquidating local mutual funds in favor of tax-efficient US-compliant instruments prior to establishing US residency is often beneficial.
4. Exit Tax Regulations (Section 100 of the Israeli Income Tax Ordinance)
If you terminate your Israeli tax residency while holding capital assets (such as stocks, unvested/vested equity options, or real estate), the Israel Tax Authority treats those assets under a deemed sale rule as if they were sold the day prior to your departure.
This does not necessarily require immediate tax payment upon departure; Israeli tax law allows for the deferral of the tax liability until actual future realization. However, proper registration, valuation, and election forms at the time of departure are imperative to prevent future double taxation or compliance issues.
US Relocation – Quick Tax Comparison
| Tax Aspect | Israel (Israeli Resident) | US (US Tax Resident) |
| Tax Base | Personal / Center of Life | Territorial + Citizenship / Tax Residency |
| Worldwide Income Taxation | Yes (applies to all global income) | Yes (includes retained Israeli assets & accounts) |
| Tax Year | Calendar Year (Jan – Dec) | Calendar Year (Jan – Dec) |
| Foreign Account Reporting | Required under specific criteria | Strictly enforced (FBAR starting at $10,000 aggregate) |
The Bottom Line: Proactive Planning is Essential
While the US-Israel Income Tax Treaty exists to prevent double taxation, it does not automatically resolve complex filing requirements or structure your affairs for optimal tax efficiency. Strategic pre-departure tax planning can save tens of thousands of dollars and mitigate regulatory friction with tax authorities in both countries.
Planning a relocation to the US? Do not leave your tax structure to chance. Contact our cross-border tax advisory team today to schedule a tailored consultation and transition with complete confidence!
