Americans who move to Israel to make aliyah, join family, or take a job in Tel Aviv's tech sector quickly discover that two governments now expect a tax return: the Israel Tax Authority, known in Hebrew as Rashut HaMisim, and the IRS back home. US expat taxes in Israel are not optional and one filing does not cancel out the other. Because Israel taxes its residents on worldwide income and the United States taxes its citizens and green card holders no matter where they live, an American living in Israel typically owes a filing obligation in both countries every year, and the entire planning exercise is about coordinating the two so the same income is never taxed twice.
Do US Citizens Living in Israel Have to File Both Israeli and US Tax Returns?
Yes, in almost every case. Israel taxes individuals who qualify as tax residents, a determination generally based on where a person's center of life is, factors including home, family location, and time spent in the country, on their worldwide income through the Israel Tax Authority. The United States separately taxes its citizens and green card holders on worldwide income no matter where they live, a rule tied to citizenship or immigration status rather than Israeli residency.
That means the two filing obligations run independently of each other. Filing and paying tax in Israel does not excuse you from filing a US Form 1040, and filing a US return does not excuse you from your Israeli obligations. The mechanisms that keep the same dollar of income from being taxed twice, the Foreign Earned Income Exclusion, the Foreign Tax Credit, and the US-Israel tax treaty, operate on the US side of that equation, not as a substitute for either filing.
How Does Israel Tax Residents on Worldwide Income?
Israel applies its income tax on a worldwide basis to anyone who qualifies as a resident, which is the starting point for figuring out what an American in Israel actually owes there before turning to the US return. Employers generally withhold tax directly from wages throughout the year.
One feature specific to Israel is worth flagging at a high level rather than with exact figures. New immigrants, known as olim, and certain returning residents have historically been eligible for a multi-year exemption, often described as lasting around ten years, on foreign-source income and capital gains earned outside Israel. The precise scope and duration change over time and depend on individual facts, so anyone who may qualify should confirm the current-year rules with a professional rather than assume the benefit applies exactly as it did in an earlier year. Outside that window, Israeli income tax on employment and business income generally runs comparable to or higher than the equivalent US tax, which matters directly for the FEIE-versus-FTC decision below.
Should You Claim the FEIE or the Foreign Tax Credit on Israeli Income?
For most Americans earning wages in Israel outside a new-immigrant exemption period, the Foreign Tax Credit on Form 1116 is the stronger tool, because Israeli income tax generally runs comparable to or higher than the equivalent US tax on the same income. When that is true, the credit can eliminate US tax on your Israeli-source income entirely and still leave unused credit on the table.
The Foreign Earned Income Exclusion on Form 2555 works differently: it excludes foreign earned income up to an annually indexed maximum, for example $130,000 for 2025, from US taxable income in the first place under IRC §911. That structure can matter more during a period when Israel is taxing little or no foreign-source income, such as under an olim exemption, since there may be little or no Israeli tax available to credit in the first place. Outside that window, the FEIE still comes with real costs: it does nothing for self-employment tax, it can disqualify the refundable Additional Child Tax Credit for a family with kids, and once revoked you generally cannot re-elect it for five years without IRS consent. The Foreign Tax Credit, by contrast, is computed by category under IRC §§901 and 904, and any credit you cannot use in the current year carries back one year and forward ten years on Schedule B of Form 1116. Our FEIE versus Foreign Tax Credit comparison walks through the decision in more detail, and the two elections can also be combined across different income types in the same year.
What Does the US-Israel Tax Treaty Do for Double Taxation?
The United States and Israel have had a comprehensive income tax treaty in force since 1995. Like nearly every US treaty, it contains a standard saving clause that lets the United States tax its own citizens and green card holders largely as if the treaty did not exist, so the domestic Foreign Tax Credit and Foreign Earned Income Exclusion mechanisms described above do most of the actual work of avoiding double taxation on wages.
Where the treaty matters most is in the details: tie-breaker rules for residency when someone could be considered a resident of both countries in the same year, reduced withholding on certain investment income, rules for business profits, and specific provisions touching pensions that can differ from the general rule. Because treaty provisions have to be read in their specific text, any position relying on a specific treaty article beyond the general saving-clause framework should be reviewed against the actual treaty language before you file.
Does the US-Israel Totalization Agreement Cover Social Security?
No. The United States and Israel have not entered into a totalization agreement, unlike a number of other countries where such agreements are already in place. Without one, there is no treaty mechanism to assign social security coverage to a single country or to prevent a worker from being subject to both systems on the same earnings.
In practice, that means a self-employed American in Israel can face US self-employment tax on net earnings with no coordination against Israel's own National Insurance system, Bituach Leumi, which operates independently with its own contribution structure. Anyone working for themselves in Israel should plan for the possibility of owing both rather than assuming a certificate of coverage will apply, since that relief only exists in countries that have an agreement. Our guide to totalization agreements and self-employment tax abroad explains how the coordination works where an agreement is in force, useful context for understanding what is missing here.
How Are Israeli Pensions and Retirement Accounts Taxed by the US?
Not automatically. Israel offers several distinct retirement vehicles, including employer and employee pension funds, provident funds, and severance-linked savings arrangements built into the employment relationship. Being tax-favored under Israeli law does not, by itself, make any of these tax-deferred for US purposes.
The general US rule, under the operation of IRC §§401(a) and 402(b), is that income accruing inside a foreign retirement plan is taxed currently to a US person unless a specific treaty provision defers it. Whether the US-Israel treaty provides that deferral, and for which type of Israeli plan, is fact-specific and has to be analyzed against the actual treaty text rather than assumed. Because the analysis is the same regardless of which country the plan is in, our foreign pension US tax treatment guide walks through the four questions that determine the answer for any foreign plan: whether growth is taxed as it accrues, whether a treaty defers it, what has to be reported, and how distributions are taxed.
Are Israeli Investment Funds Taxed as PFICs?
Usually, yes, and this is one of the more expensive surprises for Americans investing through an Israeli brokerage. An Israeli mutual fund, ETF, or other pooled investment vehicle domiciled outside the United States typically meets the definition of a passive foreign investment company under IRC Section 1297, with Sections 1291 and 1298 governing the tax treatment. That classification is a matter of US tax law and does not turn on how the fund is taxed inside Israel under its own domestic rules.
Once a fund is a PFIC, the default US tax treatment is punitive: absent a timely election, gains and certain distributions are spread over your holding period, taxed at the highest rate in effect for each of those years, and hit with an interest charge on top. Each PFIC generally requires its own Form 8621 filing, and the reporting obligation applies even in a year where no tax is actually due. This is one of the clearest reasons Americans in Israel are usually steered toward US-domiciled brokerage accounts and US-based index funds for new investing rather than opening a local fund through an Israeli bank or brokerage.
What Else Do You Have to Report to the IRS?
Beyond the income tax return itself, Israeli financial accounts and investments carry their own separate information-reporting obligations that apply whether or not any US tax is owed. These filings are enforced on their own terms, and the penalties for missing them are typically far larger than any tax that would have been due.
The Israel Reporting Stack
Reference- FBAR (FinCEN Form 114). Required when the combined balance of your Israeli bank, brokerage, and pension-related accounts exceeds $10,000 at any point during the year. See our FBAR filing guide.
- Form 8938 (FATCA, IRC §6038D). A separate filing threshold, higher for Americans living abroad, that can require you to list the same Israeli accounts directly on your federal tax return. See our Form 8938 guide.
- Form 8621 (PFIC). Generally required for each Israeli mutual fund or other pooled fund that qualifies as a passive foreign investment company. See our PFIC and Form 8621 guide.
Whether you even count as a US tax resident in the first place, if your situation is more complicated than straightforward citizenship, such as extended time in Israel before a green card or a move became permanent, is a separate question governed by the substantial presence test.
Bottom Line
Living in Israel does not simplify your US tax picture, it adds a second filing system on top of it. The Israel Tax Authority and the IRS operate independently, and the tools that prevent double taxation, primarily the Foreign Tax Credit given Israel's generally comparable-to-higher tax rates outside any olim exemption, along with the treaty's narrower provisions, have to be applied deliberately rather than assumed. The absence of a US-Israel totalization agreement adds a real cost for self-employed Americans, and pensions, Israeli investment funds, and foreign accounts each carry their own reporting rules on top of the income tax analysis, so getting any one of them wrong tends to cost more in penalties than the underlying tax ever would have.
Have questions about US expat taxes in Israel? Contact TS CPA for a free consultation. We respond within the same day.
Official IRS and Government Sources
- IRS, Foreign Earned Income Exclusion
- IRS, Foreign Tax Credit
- IRS, US Citizens and Resident Aliens Abroad
- IRS, United States Income Tax Treaties A to Z
- Social Security Administration, Totalization Agreements Overview
- FinCEN, Report of Foreign Bank and Financial Accounts (FBAR)
- IRS, About Form 8621
- IRC Section 911, Citizens or Residents Living Abroad