US citizens who make aliyah face taxation from two countries simultaneously — the US taxes its citizens on worldwide income regardless of where they live, and Israel taxes residents on their worldwide income. In practice, the US-Israel Tax Treaty, the Foreign Tax Credit, and Israel’s 10-year Olim exemption together prevent most US-Israeli dual-citizens from paying tax twice on the same income.
If you’ve recently made aliyah, or you’re planning to, understanding how these two tax systems interact is one of the most important financial decisions you’ll face. This guide explains the mechanics clearly — who owes what, which reliefs apply, and what you need to file each year.
Does the US Tax You After You Move to Israel?
Yes. The United States is one of only two countries in the world (the other being Eritrea) that taxes its citizens on worldwide income regardless of where they live. Moving to Israel, becoming an Israeli resident, or even becoming an Israeli citizen does not end your US tax obligation. As long as you hold a US passport or green card, you must file a US federal tax return every year — even if you earn no US-source income whatsoever.
This is called citizenship-based taxation, and it creates the double taxation problem that many olim encounter for the first time when they receive their first Israeli salary slip.
Does Israel Tax New Immigrants?
Israel taxes residents on their worldwide income, just like the US. However, Israel offers one of the most generous new-immigrant tax benefits in the world: new olim (and returning residents who qualify) receive a 10-year exemption from Israeli tax on foreign-source income. This exemption applies to passive income such as dividends, interest, royalties, rent from overseas property, and capital gains from overseas assets.
Importantly, the 10-year exemption does not cover Israeli-source employment income. If you work for an Israeli employer or perform services in Israel, that income is taxable in Israel from day one.
The US-Israel Tax Treaty: What It Covers
The US and Israel have had a bilateral income tax treaty in force since the 1990s. The treaty is designed to prevent double taxation and covers several key areas:
Saving clause. Like most US tax treaties, the US-Israel treaty includes a “saving clause” that preserves the US’s right to tax its own citizens as if the treaty did not exist. This means many treaty benefits that apply to non-US-citizens living in Israel do not help American olim reduce their US tax bill. US citizens need to rely primarily on domestic US relief mechanisms (FEIE and FTC, described below) rather than the treaty itself for day-to-day income.
Tie-breaker rules. The treaty includes rules for determining which country has primary taxing rights when a person is considered a resident of both countries simultaneously.
Pension treatment. The treaty addresses how retirement plan distributions (including Israeli pension funds and US IRAs) are taxed in each country, though the interaction between Israeli kupot gemel and the US tax system is complex and specialist advice is essential.
The Three Mechanisms That Prevent True Double Taxation
In practice, most US-citizen olim avoid paying full tax in both countries by using one or more of these three mechanisms:
1. The Foreign Tax Credit (FTC)
The Foreign Tax Credit (Form 1116) allows you to offset taxes you pay to Israel against your US tax liability, dollar-for-dollar (or shekel-for-dollar, converted at the applicable exchange rate). Since Israeli income tax rates are generally equal to or higher than US rates on comparable income, most US citizens living in Israel who use the FTC end up owing little or no additional US tax on their Israeli employment income.
The FTC does not provide a refund — it can only reduce your US tax bill to zero, not below. Any excess credits in one category (for example, “general limitation income”) can sometimes be carried forward or back, but the rules are detailed and category-specific. A US-qualified tax preparer (CPA) familiar with expat taxation is essential for this calculation.
2. The Foreign Earned Income Exclusion (FEIE)
The Foreign Earned Income Exclusion (Form 2555) allows qualifying US citizens abroad to exclude a portion of their foreign earned income from US federal income tax. For 2023 the exclusion was $120,000 per person, adjusted annually for inflation.
To qualify for FEIE you must:
- Have your tax home in a foreign country (Israel, in this case)
- Meet either the Bona Fide Residence Test (you are a genuine resident of Israel for an uninterrupted period covering a full tax year) or the Physical Presence Test (you are physically present in Israel for at least 330 full days in any 12-month period)
FEIE only applies to earned income — wages, salaries, and self-employment income. It does not shelter investment income, rental income, or capital gains.
FTC vs FEIE — which should you use? This is one of the most consequential choices an American olim makes on their first Israeli tax return, and it cannot easily be reversed. FTC generally works better for high earners in high Israeli tax brackets; FEIE can be simpler to administer for lower earners. Critically, if you have self-employment income and use FEIE, you still owe US self-employment tax on the excluded amount — a common and expensive surprise. Get professional advice before making the election.
3. The US-Israel Totalization Agreement
The United States and Israel have a Totalization Agreement that coordinates social security coverage between the two countries. Its purpose is to ensure that workers don’t pay into two social security systems simultaneously for the same work period.
Under the agreement, US citizens working for Israeli employers in Israel generally pay into Israel’s National Insurance (Bituach Leumi) and are exempt from US Social Security and Medicare taxes (FICA) on that income. If you are self-employed in Israel, the rules differ — check the Social Security Administration’s guidance or speak to a specialist.
Israel’s 10-Year Olim Tax Benefit in Practice
Israel’s 10-year exemption on foreign-source income is extraordinarily valuable for olim who have overseas investment portfolios, rental properties abroad, or ongoing royalty income from work done before aliyah. During the exemption window:
- Dividends from a US brokerage account are not taxable in Israel (though they remain US-taxable)
- Capital gains on the sale of overseas assets are not taxable in Israel (subject to conditions)
- Rental income from a property in the US, UK, or Australia is not taxable in Israel
- Royalties and licensing income from intellectual property created before aliyah (or held overseas) may be exempt
The exemption starts from the date you become an Israeli tax resident — generally the date you receive your teudat oleh. It cannot be deferred or paused. It is available only once in a lifetime (or after 10 consecutive years of non-residency for returning residents).
What US Citizens in Israel Must File Each Year
Maintaining compliance with both tax systems requires filing several returns annually. Here is a practical checklist:
US filings (due April 15, with automatic extension to June 15 for overseas filers, and further extension to October 15 by request):
- Form 1040 — US individual income tax return (required even with zero US tax owed)
- Form 2555 — Foreign Earned Income Exclusion (if using FEIE)
- Form 1116 — Foreign Tax Credit (if using FTC)
- FinCEN 114 (FBAR) — Report of Foreign Bank and Financial Accounts, due April 15 (auto-extended to October 15). Required if the aggregate value of your Israeli bank, brokerage, and pension accounts exceeds $10,000 at any point during the year.
- Form 8938 (FATCA) — Statement of Specified Foreign Financial Assets. Required if your foreign financial assets exceed certain thresholds (consult irs.gov for the current thresholds for taxpayers living abroad).
Israeli filings (tax year runs January to December, returns due by April 30 of the following year, with extensions available):
- Annual income tax return to the Israeli Tax Authority (not all employees are required to file — Israeli employers withhold tax via a PAYE system; many salaried employees are automatically assessed without needing to file a full return)
- Annual Bituach Leumi declaration (National Insurance)
Missing FBAR or FATCA filings carry severe US penalties — up to $10,000 per non-wilful violation per year, and significantly more for wilful failures. These penalties apply even when no US tax is actually owed. Filing these forms is not optional.
Common Mistakes That Create Genuine Double Taxation
Not filing a US return at all. Some olim assume that moving to Israel ends their US tax obligation. It does not. Years of non-filing create a compliance backlog that is expensive to unwind, and the IRS has data-sharing arrangements with Israeli financial institutions under FATCA.
Making the wrong FTC vs FEIE election. Once you elect FEIE, reversing it requires IRS permission and has a five-year moratorium on re-electing. Choosing the wrong method in year one can cost thousands of dollars per year for the rest of your working life in Israel.
Missing the FBAR deadline. Israeli bank accounts, investment accounts, and pension accounts (including kupot gemel) are foreign accounts from the IRS’s perspective. FBAR is simple to file — it is an informational return with no tax due — but the penalties for missing it are severe.
Ignoring the interaction between US and Israeli capital gains tax on property. If you sell an Israeli property, the US and Israeli rules on exemptions and timing differ. Mishandling this is one of the most common sources of avoidable double taxation for long-term olim.
How Employment Structure Affects Your Tax Exposure
Israeli employee of an Israeli company. Tax is withheld at source by your employer. You receive a year-end tofes 106 (similar to a W-2). This is the simplest structure for cross-border filing.
Working for a foreign company while in Israel. If your employer is a US company that has not registered in Israel, you may technically be self-employed from an Israeli perspective, which changes your Bituach Leumi obligations, your Israeli filing requirements, and the self-employment tax treatment on your US return.
Working through an Employer of Record (EOR) in Israel. The cleanest solution for foreign companies hiring US-citizen olim in Israel is to engage an Israeli EOR. The EOR becomes the local employer of record, handles all Israeli payroll, Bituach Leumi, pension contributions, and tax withholding correctly, and issues the tofes 106 that the employee needs for their US filing.
At CWS Israel, we employ hundreds of professionals in Israel on behalf of overseas companies — many of them US-citizen olim. We handle the full Israeli employment compliance so that employees have clean, correctly structured payslips and year-end documentation. Learn more about how Israeli EOR works for your situation.
Frequently Asked Questions
Do I still need to file a US tax return after making aliyah?
Yes. US citizens are required to file a US federal income tax return every year regardless of where they live, as long as their income exceeds the filing threshold. Moving to Israel does not end this obligation.
Will I actually pay tax twice on my Israeli salary?
In most cases, no. The Foreign Tax Credit allows you to offset the Israeli income tax you pay against your US tax liability. Because Israeli tax rates are generally comparable to or higher than US rates, most American olim end up with little or no additional US tax on their Israeli employment income after applying the FTC.
What is the 10-year Olim tax exemption in Israel?
Israeli law grants new immigrants a 10-year exemption from Israeli tax on foreign-source income — including dividends, interest, capital gains, and rental income from overseas assets. Employment income earned in Israel is fully taxable from day one. The exemption runs from the date of aliyah and cannot be deferred.
Do I need to report my Israeli bank accounts to the US?
Yes. If the aggregate value of all your foreign financial accounts exceeds $10,000 at any point during the calendar year, you must file an FBAR (FinCEN 114) by April 15 of the following year. Failure to file carries significant penalties even when no tax is owed.
What is the Foreign Earned Income Exclusion and can I use it in Israel?
The FEIE (Form 2555) allows qualifying US citizens abroad to exclude a portion of their foreign earned income from US federal income tax (for 2023, $120,000 per person, adjusted annually for inflation). US citizens who are genuine Israeli residents for a full tax year can generally qualify. The FEIE only covers earned income — not investment income, dividends, or capital gains.
Should I use the Foreign Tax Credit or the Foreign Earned Income Exclusion?
This depends on your income level, type of income, and long-term plans. The FTC is often more advantageous for employees in Israeli payroll; FEIE can be simpler but creates self-employment tax exposure for freelancers. The election is difficult to reverse once made. Consult a CPA qualified in both US and Israeli taxation before filing your first return after aliyah.
Does the Totalization Agreement between the US and Israel affect my National Insurance?
Yes. The US-Israel Totalization Agreement generally means that if you work for an Israeli employer in Israel, you pay Bituach Leumi (Israeli National Insurance) rather than US Social Security and Medicare taxes on that income. This eliminates social security double taxation for most employed olim.
How does being employed by a foreign company affect my taxes in Israel?
If you are paid by a foreign company but work in Israel, you are likely a taxable Israeli resident and must declare and pay Israeli tax on that income. The foreign employer typically does not withhold Israeli tax, meaning you are responsible for quarterly advance tax payments. An Israeli EOR eliminates this problem by making you a properly structured local employee.
The Bottom Line for US-Citizen Olim
Dual taxation between the US and Israel is a real risk but not an inevitable outcome. The combination of the Foreign Tax Credit, Israel’s 10-year Olim exemption, and the Totalization Agreement means that most American olim, when properly advised, pay tax in Israel at Israeli rates and owe little or nothing extra to the IRS.
If your employer is based outside Israel and you are working here as an oleh, make sure the employment arrangement is structured correctly. Talk to CWS Israel about how a locally compliant employment structure through an Israeli Employer of Record protects everyone involved.
This article is for informational purposes only and does not constitute tax or legal advice. Tax laws in both the US and Israel change regularly. Consult a licensed tax professional qualified in both US and Israeli taxation before making any filing decisions.
