PFIC Rules: Why Your Israeli Investments May Be Costing You

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PFIC Rules: Why Your Israeli Investments May Be Costing You

Protect your assets and minimize your tax burden across both countries

Most people get pfic rules: why your israeli investments may be costing you wrong. Not because it's complicated — because the right information is scattered across dozens of sources.

US Tax Obligations for Americans in Israel

Unlike most countries, the US taxes its citizens on worldwide income regardless
of where they live. If you're an American in Israel, you're required to file
with both the IRS and the Israeli Tax Authority (Mas Hachnasa).

Key filing requirements:

Form 1040 — annual US income tax return (due June 15 for expats, extended to October 15)
FBAR (FinCEN 114) — if foreign accounts exceed $10,000 aggregate at any point during the year
Form 8938 (FATCA) — if foreign assets exceed $200,000 (single) or $400,000 (married) at year-end
Form 3520 — if you receive gifts from foreign persons exceeding $100,000

ReturnMyTax specializes in helping Americans in Israel navigate these
dual obligations efficiently.

Avoiding Double Taxation

The US-Israel Tax Treaty and several IRS provisions help prevent paying tax
twice on the same income:

Foreign Earned Income Exclusion (FEIE) — exclude up to $126,500 (2026) of foreign earned income from US tax
Foreign Tax Credit (FTC) — credit Israeli taxes paid against your US liability
Treaty provisions — specific rules for pensions, dividends, and capital gains

FEIE vs FTC — which is better?

It depends on your income level and Israeli tax rate:

Lower income (<$100K): FEIE often wins — simpler and effective
Higher income (>$150K): FTC usually better — Israeli rates (up to 50%) generate excess credits
Mixed income: You can use FEIE for earned income and FTC for investment income

Warning: You cannot use both FEIE and FTC on the same income.
ReturnMyTax can model both scenarios to find your optimal strategy.

Israeli Retirement Accounts and US Reporting

Israeli retirement accounts create some of the most complex US reporting situations:

Keren Hishtalmut (Advanced Training Fund)

Israel: Tax-free after 6 years
US: Taxable annually on earnings (no treaty protection)
Strategy: Consider a "check the box" election via Form 8832

Kupat Gemel / Pension Funds

Protected under US-Israel Tax Treaty Article 21
Employer contributions may be excludable
Distributions taxed per treaty rules

Bituach Leumi (National Insurance)

Treated as a social security equivalent
Totalization Agreement prevents double social security taxation
Credits transfer between systems for benefit eligibility

These accounts may also trigger PFIC (Passive Foreign Investment Company)
reporting if they hold mutual funds not registered with the SEC.

Common Mistakes Americans in Israel Make

After years of handling US-Israel tax cases, these are the most expensive
mistakes we see:

Not filing FBAR — penalties up to $12,906 per account per year (non-willful) or $129,210 / 50% of account balance (willful)
Missing Form 8938 — $10,000 penalty for failure to file, plus $10,000 for each 30-day period of non-compliance
Holding Israeli mutual funds — these are PFICs and taxed punitively unless you make a QEF or mark-to-market election
Ignoring state tax obligations — some US states continue to tax former residents (looking at you, California and New York)
Wrong FEIE vs FTC choice — once you revoke FEIE, you can't re-elect for 5 years

If you've fallen behind, the IRS Streamlined Filing Compliance Procedures
offer a penalty-free way to catch up. ReturnMyTax can guide you through
the process.

Take Action

Want to go deeper? ReturnMyTax offers free tools that make pfic rules: why your israeli investments may be costing you straightforward and actionable.

Originally published at ReturnMyTax