Wednesday, February 19, 2014

Taxes During "The First 10 Years”

There is a lot to talk about when it comes to taxes. I have even heard it said that some people make entire careers out of it. Let’s start by considering the question that I hear most often:

Does it make any sense to invest money in Israel during the first 10 years of aliyah? 

During this time, gains from your pre-aliyah investments in America are not taxed by Israel. Won’t this savings outweigh the benefits of having the money in Israel?

From what we have learned so far at Investing by Accident, here is the summary of the relative advantages/disadvantages of investing your money in the U.S. versus in Israel for these 10 years:
                                                                                             

America
Israel
Dollars versus Shekels
Shekel value exposed to the risk (or gain) from a weakening (or strengthening) dollar
Shekel value not exposed to currency risk
Investment Opportunities
Exposure to wide variety of U.S. investment options
Exposure to a limited (but potentially attractive) set of Israeli stocks and bonds as we saw in The Coffee Hypothesis and Fixing Income in Shekel
Special Tax Liability in the First 10 Years
Tax due only to the U.S.
Taxes due in Israel and in the U.S.

The first two considerations make a very good case for investing some of your money in Israel. In general, tax liability does not impact this one way or the other, as you will be obligated to pay taxes to both Israel and the U.S. on gains from investments regardless of where the money is invested. The only exception to this is the taxes that Israel will collect during the first 10 years of aliyah.

In my particular case, I started investing by accident in Israel with money I earned in Israel. In this case, the exemption for the first 10 years did not apply. However, even if it did, the benefit of this tax exemption depends on how the taxes are calculated.

Unless you really make a mess of things, you will not pay tax twice. For gains on your investments in Israel, you will pay taxes to Israel. Then, when you calculate your U.S. taxes, you will take a credit for the taxes that you already paid to Israel.  

If the tax rates were exactly the same between Israel and the United States, then it would be fairly obvious that it doesn’t matter where you invest your money during the first 10 years (or at any other time, for that matter). If this were the case, the credit from the taxes you would pay in Israel would be exactly the same as the taxes you would owe in the United States. Obviously, that is not the case, or I would not have pushed off writing about taxes for so long.

If taxes are higher in Israel, then for the first 10 years, you would be better off keeping your money in the U.S. and avoiding the higher taxation. On the other hand, if taxes are lower in Israel, then it won’t be costing you any more in taxes to have your investments in Israel.

So which is higher?

The answer is something that could only happen when politicians write the rules, state departments negotiate treaties, and accountants help you understand it all.


Both.

19 comments:

  1. Why not invest in Ron Moritz coffee company in Israel?

    ReplyDelete
    Replies
    1. Wouldn't Nespresso be so much easier?

      Delete
  2. Which offers a higher dividend?

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  3. Is there captchas that use ivrit instead of English?

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  4. Danny Boy - any thoughts on investing in Bitcoins?

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  5. Are they too volatile for the Israeli market?

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  6. if ((err = SSLHashSHA1.update(&hashCtx, &serverRandom)) != 0)
    goto fail;

    ReplyDelete
  7. if wealth == bitcoin

    return err;

    else ahhh!

    ReplyDelete
  8. Investing in BitCoins would be currency trading, like investing in dollars, euros or yen. This is an interesting "alternative investment", which is a topic I've added to the backlog. In the meantime, my recommendation is to stay traditional and avoid alternatives.

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  9. No risk, no reward!

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    Replies
    1. This is another great topic for the backlog... whether it is really true that you need to take risk in order to get the reward.

      Delete
    2. Definitely a good topic. Look what happened yesterday - Bitcoin dropped by more than 5% based on our discussion! Do you know if you can sell Bitcoin short in Israel?

      Delete
  10. Is Bitcoin traded in Israel?

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  11. I recommend looking at Israeli startups for virtual currency and not Japanese inventions.

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  12. Why do you have to join Google to comment on this thing? Did you move to Google like AmitF?

    ReplyDelete
    Replies
    1. I can't believe you just outed Amit on my blog! Investing by Accident uses the Blogger platform because our marketing consultant (otherwise known as a little voice in my head) told me that we should keep the look-and-feel the same as Aliyah by Accident. After all, we have a brand to manage here. In any case, we allow anonymous posts because we know that many people want to be part of the discussion, but don't want to de-lurk.

      Delete
  13. I think there's a related question that's also important. How to transfer the money once you've decided to move it to Israeli funds? If you move your nest egg in one lump sum, you are implicitly speculating on the exchange rate and opening yourself to exchange-rate risk. Instead, spread your transfers over several years and you've essentially gotten the average exchange rate over that period and lowered the risk.

    ReplyDelete