Different Income Sources, Different Taxes: What You Need to Know
In this article, I will explain how various types of income are taxed in Israel.
1. Employment Income
Income tax on wages is calculated according to the tax brackets (מדרגות מס). Tax credits are deducted from the total, which can significantly reduce the amount payable.
2. Business Income as a Sole Proprietor
The profit (income minus recognized expenses) of a sole proprietor is taxed according to tax brackets (מדרגות מס). Tax credits are applied to the total, reducing the final amount due.
3. Limited Liability Company (LLC)
LLCs are subject to two tax rates:
23% corporate tax on the company’s profits.
30% dividend tax when the owner withdraws money from the company.
The main tax optimization tool for an LLC is retaining some funds within the company. This allows the business to pay only corporate tax, which is significantly lower than the maximum tax rate for sole proprietors.
4. Rental Income from Properties in Israel
If rental income is less than 5,654 NIS per month (as of 2024), it is completely tax-exempt.
For higher amounts, there are two taxation options:
Pay 10% on gross rental income without deducting expenses.
Taxation at the marginal tax rate (מס שולי), allowing deductions for expenses like depreciation and property maintenance.
5. Rental Income from Properties Abroad
For income from foreign real estate rentals, two taxation options are available:
Pay 15% tax, but only depreciation can be deducted.
Taxation at the marginal tax rate (מס שולי), allowing deductions for depreciation, foreign taxes paid, and other expenses.
New immigrants are generally exempt from this tax for up to 10 years after immigrating.
6. Securities and Stock Markets
Income from securities sales is typically subject to 25% capital gains tax (מס רווח הון). However, there are opportunities to avoid taxes:
Investments through a Keren Ishtalmut (linked to stocks) can be tax-free. For example, in 2024, you can invest up to 20,520 NIS, and profits from these investments are exempt from tax.
New immigrants are generally exempt from tax on income from foreign securities for up to 10 years.
Example: If you had invested 100,000 NIS in the S&P 500 index five years ago, your profit would be approximately 100,000 NIS (100%). Under standard taxation, you would pay 25,000 NIS in tax, but with a Keren Ishtalmut, this amount remains yours.
7. Cryptocurrency
Profit from cryptocurrency sales is usually subject to 25% capital gains tax (מס רווח הון). However, there are nuances:
If the tax authority classifies your activity as a cryptocurrency business, taxation will apply at your marginal tax rate (מס שולי).
Converting one cryptocurrency to another is also considered a taxable event, requiring payment of tax on the profit.
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