Inflation was the headline story of 2022, and we are all feeling the pinch of higher prices everywhere, but not all is bad.
The Israel Tax Authority recently published an update for tax and pension contributions paid in 2023. The figures reflect an update based on a CPI inflation adjustment of 5.278%. This means that your taxes for 2023 should be lower; the value of a tax credit point (Nekudat Zikui) has risen, so less tax will be deducted from your income. In addition, the tax brackets have shifted upwards, thereby lowering the overall marginal taxes.
Personal income tax
For 2023 the 10% tax bracket is for income of NIS 6,790 per month (versus NIS 6,450 last year), the 14% tax bracket is for additional income up to NIS 9,730 (versus NIS 9,240), the 20% tax bracket is for additional income up to NIS 15,620 (versus NIS 14,840), the 31% tax bracket is for additional income up to NIS 21,710 (versus NIS 20,620), and the 35% tax bracket is for additional income up to NIS 45,180 (versus NIS 42,910). Above these brackets the tax rate is 47%.
Social Security
Similarly, Bituach Leumi (National Insurance/Social Security) has updated its stipends in order to help fight the rising costs of living. The base pensioner allowance (Kitzvat Zikna) will rise by 5.3% to NIS 1,680 per month; while not enough to capture all the price increases in everyday life, every bit helps! Disability allowance will rise by a more substantial 9.55%.
Pension contributions
For salaried workers the maximum total contribution for a comprehensive pension plan (Pensia Mekifa) was updated quite significantly from NIS 4,326 to NIS 4,867 monthly. To illustrate, assuming standard contributions of 6.00% employee, 6.50% employer and 8.33% for severance, this would translate into a maximum salary base of NIS 23,360. For this to take effect, there might need to be a formal reallocation of pension contributions and new instructions given to the employer and pension fund reflecting the new updated amounts. Unfortunately, for employees, sabbatical funds (Kranot Hishtalmut) contribution remains unchanged in 2023 at NIS 1,571 per month.
For freelance workers, the maximum contribution into sabbatical funds (Kranot Hishtalmut) has been raised to NIS 19,920 of which NIS 12,776 can be expensed (4.5%*283,905). While for Provident Funds (Kupot Gemel), Pensions, or Managers Insurance (Bituach Minhalim) the maximum contribution for tax benefits has been raised to NIS 37,224 annually.
Tax efficient top-up
For those considering investing in a “Tikun 190” plan, this year might be a good time as the markets are down and there may be opportunities. The “Tikun 190” plan is a highly attractive plan for those nearing retirement or even already retired. It allows Israeli residents to invest lump sums into a tax wrapper that grants deferral of taxes or even full exemption. Generally, the Israeli tax rate is 15% of income (not capital) for lump sum withdrawals and as low as 0% if you take an annuity. The Tikun 190 plan can serve as a retirement top-up or an efficient strategy for estate planning (for example, 0%-15% Israeli tax on accumulated capital gains….).
The plan has exploded in popularity over recent years due to its flexibility and is offered by the major insurance companies and investment houses. The plan has no minimum investment amount, while offering significant tax benefits to the investor and family. It is well suited for those wanting to leave their options open and to make changes as they get older.
In the US
Briefly, Social Security benefits for US citizens should increase significantly by 8.7% in 2023. The annual IRA contribution limit is now $6,500 in 2023 ($7,500 if age 50 and older).
Olim Pensions
Olim receiving a pension from their “old” country may enjoy a special tax relief whereby Israeli tax may not exceed the tax that would have applied in the “old” country. Alternatively, you may pay Israeli tax on 65% of that pension and take a 35% exemption – without limit for a foreign pension.
As always, consult experienced financial and tax advisors in each country at an early stage to determine your specific situation.
moshe@priority.co.il, Leon@h2cat.com
Moshe Klempner is a Licensed Investment Manager and Insurance Agent, Leon Harris is an Israeli Certified Public Accountant.