Guide to Paying Income Tax
For the benefit of web surfers, we prepared a detailed easy guide about income tax, and divided the guide according to the following topics:
|* Tax liability
* Credit points
* Tax deductions
* Tax adjustments
* Work grant (negative income tax)
* Double taxation treaty.
In addition to these topics, it is a good idea to peruse our special guides that deal with social security, sick leave, guaranteed income, income support and pension funds. See our Guide to Working in Israel - Employee Rights and Obligations.
Please note: The information provided in this Guide is no substitute for consulting with professionals and experts. If necessary, it is recommended that you turn to a CPA who specializes in the field.
|Definitions and Concepts:|
Tax - a mandatory fee imposed on individuals and corporations who have revenues.
The tax year - begins on January 1 and ends on December 31.
Credit points - reduce the tax charge rate collected from the employee.
Tax deduction - reduces the amount of taxable income on which the payable tax will be calculated.
Income bracket - different sizes of income, each of which has its own fixed rate of tax.
Active income - earned income derived from personal effort such as employee wages, trade, business yields.
Passive income - income that does not require personal effort, such as rent for an apartment, royalties, pensions, interest, linkage differentials, annuities, dividends, patent, etc.
Toddler - A child under the age of four years.
Year of birth (newborn) - tax year in which the child was born.
Year of adulthood - the tax year in which the child reached the age of 18.
Regular army service - service in the IDF, the Border Guard or the Police, and the National Volunteer Service (Sheirut Leumi).
Returning resident (in reference to credit points) - a returning resident who spent six consecutive years abroad and returned to Israel in the period between May 16, 2010 and September 30, 2012.
What is tax liability and the duty to report it?
An individual who is a "resident of Israel", even if he was originally born or grew up abroad, must report all passive or active income and pay tax on it. He will get credits for his income generated abroad due to a double tax treaty, as we will explain below.
The duty to report applies both to an employee and the self-employed. They must submit an annual report to the Income Tax Authority in which they are required to report their personal income, their spouse’s income, and the income of children up to age 18. The report should include the appropriate certification and references.
* Employees - have to fill out Form 101and hand it to their employer by the end of the tax year.
* Self-employed - have to fill out Form 1301and submit it to the Income Tax office near their residence.
Remember! Being exempt from paying taxes does not exempt one from the duty of reporting! You are required to report income even if your income is not high enough to require you to pay income tax. You are also required to report income from abroad. Failure to report foreign income can bring upon you civil and criminal sanctions.
|Calculating the size of the tax bracket:|
There are separate tax brackets which depend on the income amount and each bracket has a different percentage of tax deducted from it.
The tax percentage rate for every income bracket is calculated as following: the tax bracket for a monthly income of up to 6,220 shekels (bracket 1) will have 10% income tax deducted from it. Any additional monthly income between this amount and 8,920 NIS (bracket 2), will be charged a higher tax rate of 14% while the tax rate on the base salary will remain 10%. See the table below.
For instance, if a person makes 10,000 NIS a month, his income up to 6,220 NIS will have a 10% income tax deducted from it, an additional 2,700 NIS (up to 8,920 NIS) will have 14% tax deducted from it and the remaining 1,080 NIS will have 20% deducted from it.
Important! In additional to the general tax rates, an individual is also charged an additional 3% rate for all general income if his income that tax year exceeds an annual 640,000 NIS (53,333 NIS a month). This will bring him to a 50% tax rate as can be seen in the table below.
The size of the tax rate is also determined by the total annual income. For instance, if one worked only half a year and didn’t have income from the first half of the tax year, your tax rate will be determined according to your total annual income as indicated in the table below. In the event that you are entitled to a tax rate lower than your monthly salary indicates, and tax was wrongly taken from it, you can ask for a refund immediately at the end of the year.
The tax bracket rate of a couple is calculated according to the income of each spouse separately.
In addition, there is a difference in tax brackets between earned income generated by personal effort (the person’s job) and income generated from a source other than personal effort (for example: renting an apartment), and the tax rates and the income level rates between the two types of income also differ.
Important! As opposed to an employee, a self-employed person’s income is what is left after all the expenses, deductions, offsets and exemptions he is entitled to are deducted from it.
|Tax Brackets (as of 2017):|
Active Income (earned by personal effort):
|Tax bracket||Annual Income||Monthly Income||Tax percentage rate|
|1||From 1 NIS||to 74,400 NIS||From 1 NIS||to 6,220 NIS||10%|
|2||From 74,401 NIS||to 107,040 NIS||from 6,221 NIS||to 8,920 NIS||14%|
|3||From 107,041 NIS||to 171,840 NIS||from 8,921 NIS||to 14,320 NIS||20%|
|4||From 171,841 NIS||to 238,800 NIS||from 14,321 NIS||to 19,900 NIS||31%|
|5||From 238,801 NIS||to 496,920 NIS||from 19,901 NIS||to 41,410 NIS||35%|
|6||From 496,921 NIS||to 639,996 NIS||from 41,411 NIS||to 53,332 NIS||47%|
|7||From 639,997 NIS||and up||from 53,333 NIS||and up||50%|
Passive income (without personal effort):
This table refers to a person who has not yet attained the age of 60 years. If he will turn 60 in the tax year, his tax status for passive income will be determined according to the table for active income (with personal effort).
|Tax bracket||Annual income||Monthly income||Tax percentage rate|
|1||From 1 NIS||to 238 800 NIS||from 1 NIS||up to 19,900 NIS||31%|
|2||From 238,800 NIS||to 496,920 NIS||from 19,901 NIS||to 41,410 NIS||35%|
|3||From 496,921 NIS||to 639,996 NIS||from 41,411 NIS||to 53,332 NIS||47%|
|4||From 639,997 NIS||and up||from 53,333 NIS||and up||50%|
Important! Although the table shows that the tax ceiling of the lowest level of passive income (without personal effort) is 31%, nevertheless there are exceptional cases and tracks with certain conditions where the tax charges are even lower, such as renting an apartment or getting dividendsImportant! Although the table shows that the tax ceiling of the lowest level of passive income (without personal effort) is 31%, nevertheless there are exceptional cases and tracks with certain conditions where the tax charges are even lower for personal passive income, such as renting an apartment or getting dividends. Please refer to our Guide to Tax for Apartment Rental.
A person who owns three or more properties that bring him income, has to pay a supplementary tax beyond what his tax bracket mandates. Please refer to our Guide to Tax for Apartment Rental.
|What are credit points?|
The rate of the tax charge is determined by a person's income. You can reduce the size of the tax rate through the various credit points you are entitled to. The more credit points you have, the lower your tax charge.
If a person’s accumulated points equal his tax charge, he may even receive a full tax exemption.
Each criteria you are eligible for gives you additional credit points. For instance, one receives credit points for each of the following situations that apply to him: single-parent families, discharged soldiers, new immigrants, families with incapacitated children or with any disability preventing one of the spouses from working, students who are paying tuition, residents of development or border towns, paying child support, and the like. The list detailing who is eligible for credit points appears below.
The credit points only offset active income tax liability (for personal effort) as opposed to a tax deduction.
You can ask for a retroactive tax refund up to six years back. Beyond that, a statute of limitations on credit points apply, and one can not request tax returns for them. The process of getting a refund takes up to three months.
A tax credit point is calculated based on yearly income (the tax year begins on January 1 and ends on December 31).
Note: Only those defined by law as Israeli residents are eligible for credit points (except in the case of credit points for a woman).
|Maximum value of credit points:|
A credit point, as of 2017, is valued at 215 NIS per month, which is 2,580 per NIS a year.
Those eligible for credit points, the conditions of their eligibility, and their eligibility rate:
| * An Israeli resident — any Israeli resident who works is entitled to two and a quarter points per month (two points for being a resident of Israel, and an additional quarter of a point for having to travel to his / her place of work).
* A woman - a woman who works is entitled to half a point per month.
* A teenager - a worker between the ages of 16 or17, or their spouse aged 16 or 17 who is a resident of Israel, is entitled to one credit point per month (not eligible for one who is self-employed).
* Credit points for children - a parent who is an Israeli resident is eligible for credit points per child as follows:
* A single parent - an Israeli resident whose spouse (the second parent) died, or his identity is unknown in the population registry, is entitled to one credit point per month for every child, irrespective of the number of children.
* A parent living separate (divorced or separated from his spouse) - an Israeli resident who is raising any of his children (under the age of 18) and they are in his custody, is entitled to an extra point per month regardless of the number of children. If both parents are jointly providing for their children, the credit points will be divided proportionally, and sometimes both will be eligible for one point.
* Divorced father - a resident of Israel who divorced and remarried, and he/she or his/her spouse is paying child support to his/her former spouse is entitled to a point per month.
* A spouse who is not working due to disability or retirement - Israeli citizens who are responsible for his/her spouse’s support and the spouse has no income due to disability (which was legally recognized), blindness, or has reached retirement age (as stipulated by law), is entitled to a point per month.
* An incapacitated child - Israeli residents who are parents of a child (or an adult over the age of 18) who suffers from paralysis, blindness, or retardation (whether it was congenital or due to a disease) is entitled to two credit points in their tax calculation for every such child.
The eligibility for an incapacitated child depends on the size of one’s income. If your annual income is above 167,000 shekels, or, if you are married, and the joint annual income of both parents together exceeds NIS 268,000, you are not eligible.
* Immigrants and returning citizens - Immigrants and returning citizens are eligible for a monthly credit point for the 42 months after immigrating to Israel.
For their first 18 months, they get three credit points for each month. In the 12 following months, they are entitled to two credit points for each month. For the subsequent 12 months, they are entitled to one credit point for each month.
The 42 month count starts when an immigrant obtains his immigrant document, and continues uninterrupted even if the immigrant has no income. The immigrant’s period of IDF military service or studies in an institution of higher education is not included.
If the immigrant worked for several months during the tax year, he can take advantage of the credit points at his disposal to reduce his tax payments for the part of the year in which he worked.
An immigrant that was inducted to the army or begun studying in an institution of higher education before completing his 42 months in the country, can utilize his credit points after completing his military service or after graduation. If he had utilized part of this benefit before his induction or before beginning studies, he is entitled to the rest of the benefit after completing his army service or studies.
A returning citizen, who spent six consecutive years abroad, and returned to Israel in the period between May 16, 2010 and September 30, 2012 is considered a new immigrant regarding the eligibility points that every new immigrant receives. He has to note this in Form 101 and present a returning citizen document from the Ministry of Immigrant Absorption.
* A discharged soldier - A soldier doing his obligatory army service in the Border Guard, Police or National Service, is entitled to monthly credit points for 36 months beginning from the month in which he finished his service. (The military service of one who is serving as a career military soldier does not qualify as military service concerning the calculation of these credit points.) The credit point applies to personal effort income in all occupations and in all sectors, including service industries, as below:
|* Foreign workers - Starting in 2015, foreign workers working in Israel on a valid work visa in long term nursing care only will be eligible for two and a quarter credit points per month.
Beginning from 2017, foreign workers with a legal work visa in other industries besides nursing will get a half credit point per month (in addition to the half point credit which a woman gets).
From 2018, foreign worker with a legal work visa in other industries besides nursing will get a full credit point per month (in addition to the half point credit which a woman gets).
* One who graduates with an academic degree - (recognized institution of higher education in Israel only):
If he completed his BA degree - Beginning from 2014, one who received his BA is entitled to one credit point in the tax year after the year he graduated or the following tax year, whichever he prefers.
If he completed his MA degree - Beginning from 2014, one who received his MA is entitled to one half credit point in the tax year after the year he graduated or the following tax year, whichever he prefers.
If one is entitled to a credit point for completion of a bachelor's degree and a half a credit for completion of a master's degree, he can get the two benefits in the same tax year, but can not receive any more credits for an additional bachelor's or master’s degree if he already received credit points in the past for a bachelor's or master’s degree.
Important! Beginning from 2012, in those professions where an employee is required to undergo a year of internship as a condition of employment, he can postpone his credit points for the tax year following the end of the internship, provided the internship period begins no later than the tax year following the tax year when his studies ended.
Completion of a PhD (through a full-time track) - Beginning from 2014, one who is in full-time studies for his Ph.D. is entitled to one credit point in the tax year following the year of graduation or the following tax year, whichever he prefers, and half a credit point in the tax year after that.
Completion of a PhD (in medicine or dentistry) - Beginning from 2014, one who is completing his PhD in medicine or dentistry is entitled to one credit point in the tax year following the year of graduation or the following tax year, whichever he prefers, and half a credit point in the tax year after that.One who utilized the full credit points for his BA or MA degree, can not receive this benefit for his PhD degree but he can choose whether to receive this benefit only for his PhD degree.
Please note! Credit points for a PhD are only given for full-time PhD studies or for a PhD in medicine or dentistry.
|Completion of vocational studies (including teacher’s training outside of the Teaching Committee framework) - One who completed vocational studies in 2017 and received a vocational certificate, is entitled to three quarters of a credit in the tax year following the year he completed his studies or in the tax year after that, whichever he prefers. From 2018 onward, he will be entitled to one credit point.
This is conditional on his professional training requiring 1700 hours of study.
Completion of teaching certificate (recognized by the Ministry of Education) - One who graduated from 2014 on, is entitled to half a credit point in the tax year following the year he completed his studies or in the tax year after that, whichever he prefers.
* Upkeep of a relative in an institution - If an employee’s close relative such as a parent, spouse or child is a resident of Israel and is being cared for in a special institution and they are completely paralyzed, permanently bedridden, blind, or insane, or the child is retarded or autistic:
The employee is entitled to a reduced 35% tax rate of the amount that he or his spouse pays for their relative’s upkeep.
The credit is given for payments to the institution which exceed 12.5% of the employee's taxable income.
Tax credit eligibility for the costs of maintaining a relative in the institution is conditional on your annual income being higher than 167,000 shekels, or if you are married and you and your spouse’s joint annual income exceeds 268,000 NIS.
* Residents in developmental or border towns - Residents who had lived consecutively in developmental or border towns for 12 months or more are entitled to income tax discounts, retroactive to when they moved into the town.
The maximum eligibility percentage rate and the maximum rate of income, differs from one locality to another. The Income Tax Authority has a special list with these details.
One who during the tax year became a resident or ceased to be a resident of a town eligible for credit points, will receive the relative part of the benefit on condition that he had lived in the town for 12 consecutive months.
* Severance pay - Severance pay given to the employee upon retiring which is based on one monthly salary per year of work, shall be exempt from tax up to a maximum 12,230 shekels per month.
* Donations - One is eligible for a tax credit up to 35% of the amount of a donation given to a public institution (recognized by the Tax Authority under section 46).
The tax credit is conditional on the total contributions (for 2016) totaling a minimum 180 shekels and a maximum 9,212,000 shekels.
If the amount of one’s annual contributions exceeds the maximum amount (9,212,000 NIS), one can apply the remaining amount of contributions to his tax calculation in the following three years.
* The blind and disabled - A blind person, one who is 100% disabled or 90% disabled due to limb injuries, and / or a person with a permanent 89% disability are exempt from tax provided that the total period of their disability is more than 184 days.
The maximum income level rate of exemption is determined according to the type of disability, and the type of income earned by personal effort (active income) and non-personal effort (passive income).
|What is a tax deduction?|
Although the tax rate is determined by a person’s income, in many cases one can reduce the rate of income that one has to pay taxes on. One such means is by getting credits and deductions for pension insurance. An allocation to a self-employed / employee pension fund entitles one to a tax deduction of the worker’s gross intake ranging from 10% to 45%, and a tax credit up to 35% for the allocation. The credit can amount up to 7% of one’s salary.
A person who receives a temporary or one-time fiscal income (work or allowance) from more than one employer or place, has to do a tax adjustment to prevent the maximum tax rate of 48% being collected from that additional income during the tax year.
|How to submit a claim for a tax refund (tax breaks) or a tax adjustment:|
Fill out the necessary forms, attach the relevant documents, and include a reference that verifies your bank account information for the tax refund. Then contact your employer, or the assessment officer where you live.
In order to receive a tax credit points refund or tax adjustment, fill out Form 101 which is a detailed statement on all sources of income, report it to your employer, and he will report it to the Tax Authority. If you are working for several employers, you must submit it to your main employer.
If you are self-employed, or if you forgot to report in the past, you must contact the assessment officer in the Tax Authority offices in your area, and fill out Form 116.
Apart from the above forms, the following declaration forms have to be filled out:
* A parent living separately from his spouse (divorced or separated) — Declaration Form 4440.
* For a discharged soldier — Declaration Form 130.
* For residents of border areas or development towns — Declaration Form 1312.
* For a deduction or credit for pension fund payments — Declaration Form 116.
* For donations — Declaration Form 116.
* For annuities — Declaration Form 116.
* Retirees who are living only from a stipend - have to fill out Declaration Form 101 C.
|What is a work grant (negative income tax)?|
To encourage and empower people to work, the state grants a salary supplement in addition to the salary they are getting. The supplement is paid by the Tax Authority according to set criteria both to employee and self-employed workers who are receiving a low monthly wage.
The income level is calculated according to the gross income. An eligibility test will also include income from the spouse’s work and / or business, pensions received, and more. Payment is made directly to the bank account.
|To be eligible for a work grant (for 2015):|
1. Aside from one’s living quarters, the one seeking a work grant and his / her spouse or children in their care may not possess more than 50% of the value of a property whether in Israel or abroad.
2. One’s monthly revenue from a job or a business is above 2,059 NIS and less than 6,147 NIS, provided that one’s age is above 23, and one has one or two children (under 19). Those 55 and older do not have to have children under 18 to qualify.
One’s monthly revenue from a job or a business is above 2,059 NIS and less than 6,750 NIS, provided that one’s age is above 23, with three or more children (under 19).
|How to submit a claim:|
You must personally go to the post office nearest to you and present yourself to the clerk for the purpose of filling out an online claim form for you. You must show a photo ID, and a document indicating your bank account details for the payment transfer. You must include your employer’s number.
The claim form can be submitted until the end of the year you are requesting the work grant for. The application is annual, and every year has to be submitted again.
|What is a double tax treaty?|
If a foreign national living in Israel produces money in Israel and is a citizen of a country that has a double tax treaty with Israel, the first right of taxation goes to the state where the profits were issued or increased. The country in which he is a resident will give him tax credits.
It is the same vice versa. If an Israeli citizen produces income abroad in a country that has a double tax treaty with Israel, the first right of taxation goes to the state where the profits were issued or increased. The country in which he is a resident will give him tax credits.
To date, Israel has signed a tax treaty with 53 countries.
Important! Tax exemption under a double tax treaty does not exempt one from paying supplementary taxes in Israel. An Israeli resident who has produced or increased his earnings overseas must pay supplementary taxes if the tax amount required by Israel is higher than the country where the profits were produced or increased.
Likewise, when the Israeli tax deduction is smaller than the tax deduction abroad, it will be credited to the next year's account.
|Contact information :|
To call the Tax Authority’s information center: *4954
Questions and Answers: