Deductions ניכויים for income tax purposes

As we described in an earlier post (see here), certain deductions can be claimed, even if they are not direct business expenses. This post will look at some of these in greater detail.

The tax saving for the deduction allowed will depend on your marginal rate of tax, including Bituach Leumi (if you're self-employmed).

Disability insurance ביטוח אובדן כושר עבודה

You are able to take out insurance that will pay you a monthly "salary" if you are forced to stop working for a period of time due to certain health issues (check with your insurance agent for precise details). The premiums paid are tax-deductible, both against employment and self-employment income. There are small differences in the calculation of the maximum deduction allowed between employment and self-employment income, and only those self-employed have the deduction for Bituach Leumi purposes.

Pension contributions קצבה

There are various types of pension funds that can be paid into in Israel. Contributions made to funds under section 47 of the tax law (as opposed to section 45) entitle the taxpayer to a deduction, subject to certain income-based limits. It is worthwhile speaking to your agent to find out what type of fund is right for you,taking into account the potential tax savings.

There are small differences in the calculation of the maximum deduction allowed between employment and self-employment income, and only those self-employed have the deduction for Bituach  Leumi purposes.

 

Keren Hishtalmut קרן השתלמות

The Keren Hishtalmut is a special type of tax-efficient medium-term savings scheme. There are separate types of plans available to those who re employed and those who are self-employed. The deductions are available only to those who are self-employed, and apply to the Bituach Leumi liability as well.

The maximum deduction available is on a contribution of 7% of your annual self-employment profit (subject to limits). The first 2.5% is not granted as a deduction, leaving the remaining 4.5% available.

Bituach Leumi ביטוח לאומי

Strangely enough, 52% of your payments to Bituach Leumi - excluding the health tax element - are available as a deduction. This is available to the self-employed, and for anyone received a pension pre-pension age.

The deduction works in different ways for Income Tax and Bituach Leumi purposes:

(1) Income Tax - purely on a cash basis, so any prior-year amendments will be included as well. As such, you could end up having received a net refund - so the 52% is then added to your income (as you previously took a deduction).
(2) Bituach Leumi - this is done on an accruals basis i.e. what you were supposed to have paid taxes on. As such, amendments for prior years get taken into account in those previous periods.


With the 2013 tax year drawing to a close, you should consider whether you can benefit from topping up payments to any of the

The Capital Statement - הצהרת הון

Tax authorities around the world like to use a "standard-of-living" test to assess whether taxpayers are declaring all of their income. Essentially, someone with a low earning should not be living in a mansion - unless there's some sort of decent explanation e.g. inheritance.

In Israel, the system is more formalised with the tax office asking taxpayers to produce a statement of their assets and liabilities worldwide on a periodic basis. The idea is to compare the overall movement between the two statements with reported income and known or expected expenses (e.g. taxes, regular living expenses, one-off large expenses such as weddings/bar mitzvahs, etc.), and to see if the overall picture is logical. This is a widely-used tool in any audit carried out by the tax authority, and so its importance cannot be understated.

One important point to note - anyone entitled to the 10-year exemption on tax on their foreign income (i.e. new olim or veteran returning residents who came/moved back to Israel in 2007 or later) is not required to report overseas assets or liabilities during the 10-year period. The one exception would be an asset for which the income is being voluntarily declared in Israel.

The form itself it a complicated looking thing (see here for an example), and I would strongly recommend that you ask a professional to review your work before filing. This is especially so if you are filling in a subsequent (i.e. not first) form, so that any pitfalls can be forseen and forestalled.

On the form, you list all of your personal assets (i.e. what you own and what is owed to you) and liabilities (i.e. what you owe), with amounts, as at the requested date. This is always 31st December, so just double-check the year being requested. It is important to note that you put down only capital amounts (e.g. deposits do not include accrued interest, and only the capital owing on a mortgage/loan is put down) that you paid (e.g. pension funds ignore employer contributions, and property is listed at cost price, not current value).

There is a section for loans/mortgages/other amounts owed - so the figures that go there should all be positive - the tax computer knows to deduct these figures from your assets.

The deadline for filing the Hatzharat Hon is four months from the end of the month in which the form was requested. However, since the tax offices generally send out requests at the start of the month, you typically have five months to complete. For example, any requests sent out during December will have a filing deadline of 30 April. If you file within a month late, late-filing fines are not usually levied; otherwise they will be, based on the number of months late. If you think you are going to miss the deadline, you can always send in a letter requesting an extension. Usually the tax office will agree to such an extension by two-three months.

As explained, perhaps the most important part of the work is not what is actually filed, but rather the explanations of income and expenses over the period between two reports. It is therefore very important to keep paperwork regarding exempt income (such as presents from family or inheritances) and large expenses (e.g. renovations, family trips abroad, weddings etc).

Are you entitled to a tax refund?

In a previous post, we considered who was required to file a tax return.

However, it could be that even if you are not required to do so, it will be on your interests - if you are due a refund. Any refund due to you is given back with the addition of interest (4% per annum) and linkage - all tax free. You can't get anywhere near that in the banks these days, and even the most successful investments would be hard-pressed to give you such a favourable post-tax return!

You are able to apply for refunds - which necessitates filing a tax return - up to six years in arrears. As such, any claim for a refund in respect of 2007 must be filed by 31 December 2013.

So, in what situations might you be due a refund? Here are some common examples (by no means an exhaustive list, but it covers most situations).

• A change of jobs midway through the year, especially if there was a significant change (up or down) in salary.
• You had a period of unemployment during the year. If you received unemployment benefit from Bituach Leumi, that income needs to be taken into consideration (Bituach Leumi deduct tax at source).
• Similarly, a woman who took maternity leave during the year - the maternity pay is also taxable, and tax should have been deducted at source by Bituach Leumi. This is especially true if the maternity leave was extended beyond the period for which Bituach Leumi pay (14 weeks for a regular birth). A word of caution: the maternity pay is paid in one lump-sum for the entire period. So if the maternity period spans two years (e.g. birth between October and December), it could be that you were under-taxed.
• You made donations to Israeli institutions, which you have not claimed tax relief for. A more detailed look can be found here.
• You made private contributions (i.e. not via your salary) towards pension, life insurance and/or disability insurance. The classical example is life insurance premiums paid for your mortgage.
• You did a Teum Mas. Typically, the tax office issues these on the basis that you will have paid at least the correct amount of tax - i.e. you have probably overpaid. Alternatively, you asked your second (+) employers to deduct the maximum rate of tax. See here for more details.
• You did not claim your full tax credits. This might include for army serivce, higher education, new child (especially if born towards the end of the year), deferred credits for new olim etc. A more detailed post regarding credits can be seen here.
• You have investments in the bank. There are many situations whereby the bank will have over-taxed you (through no fault of their own). You need to get the bank to provide you with forms 867, 867א+ב and 867ג.

In order to claim your refund, you need to present the tax office with supporting documentation - forms 106 from each employment, forms 867 for each bank account and other documentation to prove your claims (e.g. Teudat Oleh, certificate of completion of studies, certificate of completion of army service etc.). You also need to fill out either form 135 (2012 version) - the refund request for salaried people, or form 1301 (2012 version) - the full tax return, and hand everything into your local tax office. I would also recommend that you attach a copy of a check from the account that you want the refund paid into - the authorities no longer issue checks.

It is important to note that there are situations whereby you may actually owe tax. So I would strongly suggest that you get an accountant to look at the paperwork prior to submitting - once you have filed, you will have to pay the taxes that you owe - in addition to interest and linakge charges!