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Transcription of interview with Ron Zalben on February 11, 2013.
Douglas Goldstein, CFPÆ, Financial Planner & Investment Advisor
Ron Zalben is one of the contributors in the new book
called Expatriates Guide to Handling Money and Taxes which is designed for expatriates.
Douglas Goldstein, financial planner & investment advisor, interviewed Zalben on Arutz Sheva
Radio.
Douglas Goldstein: Do all US expatriates have to report to the American tax authorities?
Ron Zalben: In general, yes, expatriates which includes US citizens and US residents which
are better known as green card holders have to report to the United States government
to the IRS.
They have to report their worldwide income.
Now people who live in the United States also have to report their worldwide income, but
someone who leaves the United States who is a US citizen or a green card holder has to
continue to report and report their worldwide income.
Douglas Goldstein: This is kind of unusual because most of the time if someone leaves
the country, heís done with it, but the US decided to kind of track people down and make
them pay forever?
Ron Zalben: Thatís one of the privileges that you get with your United States passport.
Douglas Goldstein: Is there a statute of limitations after 3, 5 or 10 years youíre done or is
it really forever?
Ron Zalben: Once youíre a US citizen, you have to keep reporting forever.
Douglas Goldstein: For example, theyíve left the United States, they live in Israel and
they get a job in Israel, are they required on their salary that theyíre already paying
tax in Israel to also pay tax to the US?
Ron Zalben: Yes, they are.
Usually I hear a gasp when I say something like that to the client but in general, they
have two different options when they have a salary from a foreign country.
One, they will get a foreign tax credit for the taxes for example that they pay in Israel
or two, they can take a foreign earned income exclusion where basically they put their salary
in the return and they take it out again.
Each year, thereís an exemption amount.
Right now, itís about $95,000 where they can put the salary in and take it out again
and they wonít pay tax on the salary.
Douglas Goldstein: What about people who earned more than that?
Ron Zalben: Theyíll get a tax credit for the amount thatís over letís say $95,000.
Douglas Goldstein: If a person letís say earns $200,000 living outside the United States
and he pays tax to Israel.
Whatís the difference between $95,000 and $105,000?
Ron Zalben: Letís take an example where I have somebody that makes $200,000 and he has
absolutely no other income.
He could take a foreign tax credit where he basically puts in his $200,000 of income and
then he will get a credit for the Israeli taxes paid and he will end up owing nothing.
Now in the second example where he takes the foreign earned income exclusion on the amount
thatís over the $95,000, he will get a foreign tax credit and it will result that he will
have to pay no additional tax either way.
Now where someone has interest, dividends, capital gains, rental income, thatís where
things get more interesting and you have to go between the two methods to see which is
more advantageous.
Douglas Goldstein: Itís possible that someone who has those sorts of investment income could
end up in fact being double taxed?
Ron Zalben: No, they wonít be double taxed.
Letís say I have somebody thatís a resident of Israel and they have an interest from the
bank account.
So the 20% tax or the 15% tax they pay in Israel, they will get a credit for that on
their United States tax return.
Now letís say theyíre in the 35% bracket in America and they only paid 15% tax to Israel,
theyíll have to make up the difference on their American tax return
for the 20%.
In general, on income thatís at ordinary income tax rates, in general income from Israel
will be taxed at a higher rate because Israelís highest tax rate is 48% and the brackets in
Israel tend to be very narrow and you tend to get up to the higher tax rates very quickly
but if somethingís at a flat rate for example on interest or dividends or capital gains
in Israel, itís possible that there will be a differential.
Douglas Goldstein: What about on real estate?
I know that the Israeli tax authority is a little more sympathetic to someone earning
rental income, he buys an apartment or rents it out to someone and he does necessarily
pay tax to a certain amount, how does that work?
Does he pay tax to America?
Ron Zalben: For real estate income in Israel, for example in tax for 2012, if somebody had
under 4910 shekels of rental income a month, that amount was totally exempted.
Letís say he had 3000 shekels of rental income a month so that will be 36,000 shekels, itís
under the exemptions.
He wonít pay any Israeli tax but under American tax return, theyíre going to have to pay
tax on that amount.
There are situations where people letís say have 6000 shekels a month of rental income
and they have an option where they can pay a 10% income tax.
For example for 72,000 shekels of rental income, they can pay 7200 shekels of tax to Israel
and they will get a credit for that 7200 shekels of Israeli income
tax under American
tax return.
Douglas Goldstein: Letís talk about the case where someone has US citizenship but doesnít
really feel like a US Citizen.
You said that if someone has a green card or is a US citizen then he falls into the
US tax net, but what about these people who are born in Israel, whose parents or grandparents
moved here and just be technicality, they have US citizenship, how does that work for
them?
Ron Zalben: Theyíre subject to US taxation just like anyone else.
For example a couple of days ago, we had in our office an 80-year-old woman and her parents
came to Israel in the 1930s.
She was born to an American parent and she is a US Citizen.
Now because of FATCA, the banks in Israel and everywhere else in the world have to ask
their customers if theyíre US citizens and this person told the bank she was a US citizen
and now they want her to fill out a W-9 form.
They have the bank accounts to report her social security number and her name and certain
other information to the IRS and her information now is going to be given to the IRS where
previously the banks never shared that information with the IRS.
Douglas Goldstein: Are there different levels that could make a personís obligation to
report to the United States different levels of income, does that come into play?
Ron Zalben: Yes, for 2011 tax year, if youíre single and under 65, if you had over $9500
of income from any source anywhere in the world, youíre liable for a tax return.
If you are married filing jointly and both spouses are US citizens or green card holders,
the threshold was $19000.
Thereís different threshold if youíre married filing separately or
if youíre head of household.
Thatís a worldwide income.
Douglas Goldstein: Is there an easy way for people to find this out kind of see if they
should be paying or reporting?
Ron Zalben: Yes, they should go to the 1040 instructions and thereís a chart I believe
on page 4 or 5 that explains what the filing thresholds are.
Douglas Goldstein: There are probably a lot of people, out of mistake, donít file.
What sort of penalties are they subject to?
Ron Zalben: If they owe tax, there are a number of penalties that they could incur.
First is failure to file and that is 5% for each month up to a maximum of 25%.
Thereís also interest on that.
Thereís an underpayment penalty that you could be subject to.
There are quite a few penalties.
Thereís another form that taxpayers have to file and itís called an FBAR form and
for that form, you have to report your financial accounts and that includes your bank accounts,
your security accounts, your employee benefit accounts such as [inaudible 00:11:53].
Douglas Goldstein: If they donít report that, what are the penalties there?
Ron Zalben: The penalty could be $10,000 per year or $100,000 or 50% of the account balance.
Itís pretty substantial.
Douglas Goldstein: Could you just tell people, how can they follow you and your work and
see whatís going on in your world of taxes?
Ron Zalben: Our firmís website is www.dscpa-israel.com or you can email me at ron@dscpa-israel.com.
Douglas Goldstein, CFPÆ, is the director of Profile Investment Services and the host
of the Goldstein on Gelt radio show (Monday nights at 7:00 PM on www.israelnationalradio.com.
He is a licensed financial professional both in the U.S. and Israel.
Securities offered through Portfolio Resources Group, Inc., Member FINRA, SIPC, MSRB, NFA,
SIFMA.
Accounts carried by National Financial Services LLC.
Member NYSE/SIPC, a Fidelity Investments company.
His book Building Wealth in Israel is available in bookstores, on the web, or can be ordered
at: www.profile-financial.com (02) 624-2788 or (03) 524-0942.
Disclaimer: This document is a transcription and/or an educational article.
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