In the 18th century, British shepherds would dock their sheepdogs. This was not for health or esthetic reasons, but as a way of avoiding taxes. The tax burden on British citizens at the time was unbearable, and in many cases reached 85% of income. A heavy tax was also levied on working dogs. But the tax laws had a loophole in the form of a regulation stating that if the dog had a defect, the owners would be exempt from paying taxes on it. And that is how English sheepdogs lost their tails but gained a tax break.
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Since then, the tax collection system has improved – slightly – around the world. It has also given rise to all sorts of financial advisers, whose entire role is to find ways for their clients to avoid taxes, pay less and circumnavigate the huge number of complex laws and regulations that have developed over the years.
In recent years, though, a new tax consultant has arisen and assumed a key position for many taxpayers: Google.
This new consultant has the advantage of being available to anyone with a computer, smartphone or tablet connected to the Internet. But among the endless number of search results, it is rarely easy to find explanations in plain language that everyone can understand.
TheMarker checked with Google, using its Google Trends tool, to ascertain the most common taxation questions that Israelis have asked in the first half of 2015. We then took these posers and asked a number of Israeli taxation experts to answer them in a professional, but simple, manner.
These answers are provided by attorney Yair Benjamini and accountant-attorney Avi Noiman of PwC Israel.
1. Why should I pay income tax?
Income tax is levied on the profits made by individuals and companies, and is one of the taxes that allows the government to pay for the services it provides its citizens.
The principle is that the government allows and helps businesses and individuals to make money by providing services: It paves roads, invests in infrastructure and is supposed to provide security so people can go to work, etc. The citizens must then share these profits with the government in a sort of partnership, with each partner’s share rising as profits go up. Collecting taxes also has another, equally important, goal: A redistribution of wealth within society, with the goal of reducing social and economic inequality.
There are many other taxes and payments alongside income tax, including national insurance and health tax.
2. How much income tax must we pay?
Individuals incur higher tax rates as their income rises. In professional terms, this is known as a progressive tax. In principle, we pay tax from the first shekel earned, but because of the system of tax deductions (know in Israel as credit points), Israelis usually only pay income tax after they earn at least 5,000 shekels (about $1,300) a month.
The more “credits” a person has, the higher their tax threshold. The highest tax bracket is 48%. (For those who earn more than 810,000 shekels a year, there is an extra 2% surcharge on every shekel above that amount.)
Companies pay a 26.5% corporation tax rate, which is scheduled to fall to 25% next January.
There are also dozens of other deductions and credits – for instance, to students, demobilized soldiers, disabled persons, new immigrants, retired people and foreign residents – so ultimately only some people pay full taxes. Over half of all Israelis do not pay any income tax, since their earnings are deemed too low.
3. How much are these deductions worth?
The value of a single credit point is adjusted for inflation each year: as of January 2015, it was 218 shekels a month (or 2,616 shekels a year). Every Israeli resident is entitled to 2.25 such points, worth 490.50 shekels a month in reduced taxes. Women are entitled to another half point.
4. How many points does a man receive for his children?
There are many groups who receive additional deductions. What stood out in the Google searches were those for men with children aged up to 2 (two points) and then for age 2-4 (one point).
Graduates are entitled to an additional point for a year after they complete their degree (it used to be three years until recently). And in those professions that require an apprenticeship – such as law, accounting and architecture – this point can be deferred and used later.
Others receiving tax breaks (and which Israelis searched for information about the most) include single parent families and parents of disabled children. In addition to income tax breaks, the disabled also receive property tax breaks, and lower electricity and water rates.
5. What are the tax tables?
There are six tax brackets for taxable income, each with its own tax rate, which rise as the amounts increase. The idea is that even though a person pays a higher rate if they earn more, the amount remaining after tax always increases as income increases.
The lowest tax bracket is 10% (starting at 5,270 shekels a month), and then rises to 14% (up to 9,000 shekels), 21% (13,990 shekels), 31% (19,980 shekels), 34% (41,790 shekels) and, finally, 48% for anything above 41,790 shekels.
For income that does not come from work (or “non-earned income”), such as rent, there are different tax tables and brackets.
6. When do you pay purchase tax?
Purchase tax is paid when you buy property – for example, a plot of land, a house, office building, etc, or when you buy a share of a real estate company that owns only real estate. The purchase tax is calculated based on the value of the property bought. This is also a progressive tax, with rates for a first home starting at 0% and rising to 10%, based on the price.
7. How can I get an income tax rebate?
If you think you paid more tax than required – usually because too much tax was deducted from your paycheck without justification – you can file a tax return and ask for a refund. The forms are on the Tax Authority website. You can ask for a refund up to six years back. Salaried workers in Israel do not have to file a tax return if they earn under a certain amount and have no passive income (with some exceptions).
The self employed are required to file an annual return, and will receive any refund that way.
If your personal circumstances have changed, there are a number of instances in which you may have a refund coming: If your marital or family status has changed (such as marriage, divorce, births or deaths); changing jobs; unemployment; and any case in which your employer does not update such information for deductions, such as finishing a college degree or moving to a part of the country where a tax break is available.
The Tax Authority is legally obliged to pay the refund within 90 days of your submitting the return, although if large sums are involved, it often takes longer.
8. What is a tax adjustment?
A tax adjustment is necessary when you have more than one salary – including allowances such as for a pension or disability allowance – from more than one employer. You must then ask the Tax Authority for a document instructing the various employers how much tax to deduct from each salary, or allowance, which will prevent you from overpaying tax. You can apply for approval on the Tax Authority website and then give the documents to your employers.
9. What is withholding tax?
Because there is no requirement for most people in Israel to file a tax return – and less than a quarter of households do – the government had to find an alternative arrangement to make sure everyone pays their taxes in full.
The solution was the withholding tax, which requires anyone who pays salaries, or other taxable income, to withhold appropriate income taxes from these payments and to transfer the money to the Tax Authority. Since this is how most salaried workers are paid, they never have to deal with the tax authorities.
The same goes for Israeli banks, who must withhold taxes on capital gains and interest from bank and other accounts; pension funds and others must do likewise. There is almost no precedent elsewhere worldwide for such a widespread tax withholding system.
10. What is inheritance tax?
Today, Israel has no inheritance tax – it was canceled in 1981. But in recent years, and especially since the social protests of the summer of 2011, there have been repeated attempts to amend this.
During the most recent Knesset election campaign, Finance Minister Moshe Kahlon declared that he supported an inheritance tax – which would also have to be accompanied by a gift tax in order for it to be effective. Kahlon said he believed that a tax on inheritances of at least 10 million shekels would be fair, and said it should be in the 20% to 25% range. For now, though, there seems to be little chance of such a law passing. Most Western nations, including Britain, the United States and Germany, have an inheritance tax.