Americans living abroad still need to pay U.S. taxes, so if you are an oleh, it might be a good idea to find an American CPA in Israel.
Why would an American CPA in Israel be better than hiring an American CPA who sits in America?
Yosefa Huber, an American CPA in Israel answers this very question. She helps American citizens living in Israel stay compliant with U.S. tax laws. Yosefa explains why American citizens, even those living abroad, aren’t exempt from filing a U.S. tax return. She also debunks some of the misguided excuses from U.S. expats who think the American tax code doesn’t apply to those living overseas.
(Note that I’m a financial advisor, not a tax advisor. Speak with a professional accountant for tax advice.)
Get your pens ready for a checklist
Doug has created a simple checklist titled Checklist for Americans in Israel to Choose Financial Advisors. The checklist covers all the major questions an American living in Israel (or any other foreign country) should ask before choosing a financial advisor. For more information on choosing a financial advisor, watch Doug’s video How to Choose the Right Financial Advisor for You.
Download free resource: Checklist for Americans in Israel to Choose Financial Advisors
To learn more about Yosef Huber visit her website, or follow her on Twitter @yosefaCPA.
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Watch Why You Need an American CPA Even if You Live in Israel on YouTube.Read the Transcript
Interview with Yosefa Huber
Yosefa Huber is a U.S. Certified Public Accountant specializing in taxation and compliance issues of U.S. citizens living overseas. On her return visit to the show, she discusses important tax matters that American citizens living in Israel need to be aware of and pay attention to when filing tax returns.
Douglas Goldstein: I am very excited to have back on The Goldstein on Gelt Show CPA Yosefa Huber, who is based in Israel. She specializes in taxation and compliance issues of U.S. citizens who live outside the United States. Yosefa, it’s a real pleasure to have you back.
Yosefa Huber: Thanks for having me back.
Douglas Goldstein: After we spoke last time, a number of people, I think very naively, said to me, “Well, it’s very nice you had that accountant on, but I live in Israel now. I don’t really have much of a connection to the U.S. anymore. Do I really have to file a tax return?” What do you say when people ask you that?
Do U.S. Citizens Living outside the United States Have to File a Tax Return?
Yosefa Huber: That's a great question, and it’s an understandable misconception because most countries don’t have this requirement that no matter where you live and how long you've lived out of the country, in the U.S. you still have to keep filing a tax return every single year. Whether you're a U.S. citizen or a Green Card holder, you have to file every year that you have income.
Douglas Goldstein: Let’s see who would be exempt from that. Maybe someone who's lived in Israel for ten years? Twenty years?
Yosefa Huber: Someone who has no income at all.
Douglas Goldstein: Let’s talk about that, actually. Let’s differentiate because there are different types of income that people could have, and some of them might actually not have to file a U.S. tax return. Can you give examples of when someone might have income but wouldn’t have to actually file a tax return?
Yosefa Huber: I can give examples of what people might think they don’t need to file but would still need to file. People sometimes come to me and they say, “I just get paid in cash. I don’t need to file,” things like that. No. If you're making income, if you are doing something and somebody is paying you because you're doing something, that's income. It doesn’t matter if they gave you cash or where the money goes. That's a common misconception. It also doesn’t matter if they're paying into a U.S. or an Israeli bank account. You could be working for a company on Mars and getting paid into a bank account in Timbuktu. You still have to report all income to the U.S. once you meet a very minimum threshold.
What U.S. Tax Laws Say about Declaration of Taxes
Douglas Goldstein: Let’s drive this point home a little more. How about people who say, “Well, I don’t have to report because taxes are withheld at source because I do my investing through my Israeli bank account. I recently signed a W9 with them, which they required me to do in order to have an account. They're withholding tax, so why do I have to file in America?”
Yosefa Huber: I want to break that down into two different parts. First of all, why do you have to file? The U.S. requires that you report all of your income, and the default, if you don’t do anything, is that you're going to owe taxes on all of your income. Therefore, one of the reasons you're filing is actually to say, “Hey U.S., this is how much money I made, and this is why I don’t owe taxes.”
There are two different issues: Do you owe taxes, and do you have a requirement to tell the U.S. something? Most people that I work with don’t owe taxes. I would say most of my clients actually are getting refunds.
Even if they don’t want their refunds, that's not relevant. They're required to tell the U.S., “This is how much money I made, and these are all the reasons I don’t owe money.” There are a couple ways that you can exempt your income or get credit for taxes you pay to Israel. But you have to tell the U.S., “This is what I made, and this is why I don’t owe money.”
The second thing you mentioned is the W9, which is the form that you sign with the bank. Sometimes people come to me and they say, “I signed a W9 so I fulfilled my obligation of reporting some form, and the IRS knows about me. I don’t need to do anything else.” It doesn’t work that way. The form that you sign at the bank gives the bank permission and the information they need to share your information with the IRS.
You still have an obligation to report two things. One is your income, if it met the minimum threshold. The other thing is that you are required to report your bank accounts on this form that you referred to as an FBAR, which is an acronym for Foreign Bank Account Report.
It’s two separate reports that most U.S. citizens living outside the U.S. are required to report every single year. Green Card holders as well, even if your Green Card expires.
Douglas Goldstein: I think one of the fears that a lot of people have is, it just seems so overwhelming because if you live in the U.S., it’s normal that you file a tax return and get your 1099 or your W9 from work. You fill it in your TurboTax, or one of these things, and you're done. It seems a little bit overwhelming here. Is it difficult to file if you live in Israel?
Yosefa Huber: It’s usually pretty difficult to file correctly if you are trying to use one of the IRS’s many sources for free filing. Most of their sources, including TurboTax and H&R Block online, may get very difficult to correctly report everything that you're supposed to report.
In addition, all of the things you need to report aren’t necessarily logical. I usually highly recommend that all U.S. citizens have a U.S. CPA in Israel. By having a CPA in Israel—I am one of them, but there are many qualified U.S. CPAs throughout Israel—they will know exactly what information to collect from you, which makes it much simpler, so you don’t have to guess what's reportable. They’ll also be able to keep up with all the laws, which probably is not on your radar.
Most people who don’t talk to accountants don’t know anything about the requirements to report for their bank accounts, and the laws are constantly changing. Therefore, having a U.S. accountant here to help you file your tax returns is, in my opinion, a necessity.
Douglas Goldstein: I agree with that, actually, because just like many people, when I moved to Israel twenty-three, twenty-four years ago, I also used TurboTax, and I was trying to do it myself. One day I said, “Well, now I am a money professional—I deal in investments, a cross-border kind of guy. But this is just kind of a whole new thing, and it’s not obvious.”
Then, of course, you have the other issue, which is a lot of times the statements you get from your Israeli banks are in Hebrew. What do you do with that?
Yosefa Huber: I know a lot of people who, for many years, keep using their accountant in the U.S. They either don’t think there's another way or they think they're saving money, or they're just loyal. I meet so many people that really want to be loyal to their old family accountant or maybe their uncles doing their taxes.
By the time I take over, their accountant in the U.S. says, “Oh thank God, finally. We've been waiting for them to find someone in Israel.” Usually what happens is if someone’s using an accountant in the U.S., they're saying to them, “This is how much money I made.” They don’t have any details, and there are so many intricacies. Therefore, it’s really recommended.
On the other hand, with something like your FBAR, you really can do your FBAR yourself. If you want to save money, or if you want to take control of your own reporting, go ahead and file your own FBAR. But the tax return is complicated, and, in my opinion, you should really use a professional.
The Double Taxation Question
Douglas Goldstein: Just to wrap up on this one question, which is this common belief that there is no such thing as double taxation because of the tax treaty. People say, “Listen, I pay taxes in Israel, so I am done. Why are they wrong?
Yosefa Huber: Generally speaking, there isn’t double taxation; for example, you pay Mas Hachnasa. Whatever money you pay Mas Hachnasa, you can potentially get a credit back from the U.S. You have to actually file a tax return to claim that credit. That's number one. You also have something called an Extra Earned Foreign Exclusion. Some people misunderstand the exclusion, and they think if they're making under the inclusion now, which is around $100,000 a year, that they don’t have to file it again. You actually need to file to claim the exclusion.
That's two things. The other thing is that the two main reasons why people might not actually owe taxes to the U.S. are if they're self-employed, or Atzmai as they say in Israel, or if they have rental property in Israel. Rental properties have a very low rate of tax in Israel, but in the U.S. they have regular tax rates.
Those are the two most common ways I see people owe money. Most other people who are employed have to file to claim the tax credit and the exclusion. The double taxation is coming from Social Security, which often must be paid for self-employed people.
Follow Yosefa Huber
Douglas Goldstein: Yosefa, we've really covered a lot today. Unfortunately, we are just about out of time. In the last few seconds, tell people how can they follow you.
Douglas Goldstein: Yosefa Huber, thanks again for coming back.
Yosefa Huber: Thank you for having me.