Estate Tax for American Citizens in Israel and Israeli Citizens who Own American Businesses

The American tax law states that American citizens and American residents who leave inheritances require an estate tax return to be filed if the amount they leave reaches over a certain threshold when they bequeath to an heir. (The exact amount of this threshold changes year to year and so should be checked with a qualified CPA.) What about Israelis who live here and own American businesses? What about Americans who live here in Israel? For those Americans who are citizens of Israel or live here in Israel, the American estate laws may be different for them. They should consult with someone on this because the laws do change.

Some people want to know how does the American estate tax law apply to Israeli citizens and residents of Israel? We first have to determine if our clients are considered American citizens or American residents. While they are living here as Israeli citizens or residents here in Israel, American citizens obviously have American passports and social security numbers so in that case, they know they have to be thinking about American estate taxes. However, American residents who live here in Israel may not know that they may be affected by American estate tax and other taxes in America even though they don’t live there.

Are you an American resident who lives here in Israel? American residents who are not American citizens have to file American tax returns just like citizens of America. Have you checked lately if you meet the American residency test? Just because you leave America doesn’t mean you’re not classified as a resident there. American residency is decided for tax purposes by looking at your tax file from different vantage points. Although many times it is better not to be considered an American resident, How doe one accomplish this? A qualified CPA should be making these determinations. The law changes every year and so you should hire a professional.

Here’s an example: one widely known fact is that American citizens must report their income in Israel to America even if they live here permanently and don’t ever visit America. A good blessing is if a man qualifies for American foreign income exclusion. By using the foreign income exclusion, an American citizen may consider himself an Israeli resident (and not a resident of America) by using two different ways: An American citizen who lives in Israel must meet either the “bona fide residence” test or the “physical presence” test so to have his Israeli income excluded from his American income tax return. This exclusion is known and it excludes Israeli income up to a certain amount from his American tax return. The exact amount of this benefit should be checked every year with a qualified CPA.

Are you an American resident for immigration & customs? For immigration, American residency is verified by looking to see if the man holds an American lawful permanent resident card or American resident visa card. If he lives here permanently in Israel, does he maintain his American permanent resident card (green card) or his American resident visa? Resident visas and green cards hold a man as an American resident for entry and exit into America. This can also work with one’s spouse and children. A person should look to see if he has one of these: the most common forms of American resident visas:

If a person has one of these American resident visas, he should see if he is considered an American resident also for estate tax purposes. This is because once a person is given the classification of an American resident, he must carefully take certain steps to make sure that his Israeli and even his American income doesn’t get taxed too much in America while he lives only permanently here in Israel. To prevent this, ask a qualified CPA.

Were you ever issued a green card? If so, your American residency may stay with you and cause you to have tax responsibilities. You should seek the counsel of a competent CPA who is well versed in these matters to help guide you to make proper decisions. As an added benefit for stating your residency in Israel while living here, some people who are not American citizens may even qualify for social security pensions. But those same people if they are self-employed here in Israel they will have to pay self-employment tax quarterly to America while they are here. These laws update frequently and Weinstein will do the work for you.

American tax law says, “The estate [of a deceased person] consists of all the property, real or personal, tangible or intangible, wherever situated, that the [person] owned an interest in at the death.” So an estate is looked at as everything that is owned; not only what is in Israel but also what is in America. However, not all estates must file an estate tax return. For example, to have to file an American 1041 estate tax return, we look at whatever income produced those assets (of the deceased person) and whatever income flowing out of those assets. If it is effectively connected with the business in America or includable in American gross income, then it is caught by the 1041 estate tax requirement. Income that is not effectively connected with the business in America and not includable in American gross income will not require a 1041 estate tax return. (These are complex determinations that you should see a competent CPA to help discover & identify for you.)

There are other things to do. Once finished determining if the bequeathed assets or whatever income flows from them is not effectively connected with America so that the non-American-resident does not trigger the 1041 requirement, keep in mind that yet those who bequeath assets or money to a ‘nonresident alien’ are also required to prepare a 1041 estate tax report. So this is another term we should know, what is a nonresident alien? If someone as a nonresident alien ever receives money or valuable possessions from the death of a person who bequeathed American income or assets to him, then the fiduciary is required to file the 1041 tax report for that estate. This is something you should know ahead of time by consulting with your CPA.

The word, alien, refers only to non-citizens of America. Whoever is that non-citizen of America has to determine if he is a resident alien or a non-resident alien because this can help or hurt him. To determine this, we consider you as a non-resident alien once we look at the “green card test” and also the “substantial presence test.” If you have ever had a green card or if you show a substantial presence in America, you are an American resident even if you don’t live there. The substantial presence test gives you American residency if you visited America for a certain number of days in the past 3 years. But even if you visit America that number of days that would cause your residency there, you can file your American tax report as a non-resident of America if you maintain closer ties to Israel. A qualified CPA can make sure you file Form 8840 so you make your closer tie to Israel and you can avoid American residency with all its tax responsibilities. The Treaty may also help. But look forward with us at the 706 estate tax reports that become required for non-American-residents!

It is important to see you are being classified as an American resident alien may cause you to be responsible for certain taxes. A competent CPA should help you determine if you are a resident of America or a non-resident of America for income, estate taxes and other tax purposes. You may be surprised: You can avoid the American residency and that may help you on one hand, but being a non-resident alien may hurt you on the other hand because you may then have estate tax reports to file. The best way is to check with us because the laws are ever-changing.

American Residency for Estate Tax Purposes

The most significant way that American residency, non-residency, and wealth interplay with Israeli residency and citizenship is the 706 estate tax report because laws are different for Americans and Israelis who have accumulated a lot of wealth and want to bequeath that wealth to their heirs. The 706 estate tax laws differ for American citizens and American residents versus non-American-resident aliens who bequeath to their heirs. The main difference is the threshold that gives rise to the estate tax reporting requirement. The filing threshold is much lower if the person is a non-American-resident alien than if the person is an American citizen! For example, a non-American-resident alien who leaves only 60,000 $ of American assets to his heirs as an inheritance will have to file a 706 estate tax report (as of 2018, but these laws are not now the same). This is not a lot of money to be caught up in estate tax reporting! What do we do? These are non-American-citizens who don’t check their American residency with us. Someone who has American assets, either liquid (cash) or physical assets (such as real estate) should look at his American residency with us. It is very important now that you check your residency status with a competent CPA. The filing level for estate tax is very low for non-American-resident aliens who own these things. American residents don’t have to worry about this. So who is an American resident and who is a not an American resident for this blend of the estate tax?

An American resident for this 706 estate tax purpose is determined in a different manner than his residency is for the income exclusion, social security pension, or even the 1041 estate tax report. For this 706 estate tax report, we look at your domicile determination first. That is what is first made by a competent CPA. So that is why our clients should be very careful for where they choose (and how they document) their domicile with us so that later that they don’t have any unexpected taxes they ever have to pay. These tax laws are sufficiently complex that our team should advise you on your particulars rather than have you try any of it yourself. And they change rapidly so consult on this.

Even non-American-residents who are green card holders and live here in Israel have determinations they need to make. For example, the green card may continue his American residency for a man who has left America permanently already, but he might not find out he is a resident until later that he is truly an American resident for income tax purposes. Residents and non-residents have different filing requirements, different responsibilities. The first thing to do is to find out if you are an American resident or a non-American-resident for each of these taxes. If left alone, a man’s green card is a permanent lawful resident status that does not go away even after he leaves America permanently. Some of these determinations may be aided by a Treaty position that he is only a citizen of Israel and not America. These decisions vary with all the facts and circumstances, that you show to us.

The 706 form is due within 9 months from the death of the person, but if a timely extension is filed you can have another 6 months to prepare the report. The time to consult is now!