If you live in the United States and are in a high tax bracket, a good move to minimize your tax bill is to purchase tax-exempt municipal bonds. This may be a smart move since the tax-exempt status of many of these bonds means that you don’t pay tax on the interest payments that you receive.
But what happens if you own municipal bonds but you live and work in Israel? Under Israeli law, you are required to report your income worldwide to the Israeli tax authorities. As Israel doesn’t recognize the beneficial U.S. tax status on municipal bonds, this means that you would have to pay a whopping 25% on any interest payments you receive. Israel doesn’t recognize the American tax exemption on municipal bonds, since Israel doesn’t receive any benefits in giving a tax break to help build a foreign municipal project.
If you are a new oleh, you may still enjoy a tax break on investments as part of the rights that you receive during your first ten years in Israel, and therefore not realize the necessity of reviewing your investment portfolio. If you are nearing the 10-year mark, it’s time to restructure your investment portfolio with not only retirement planning in mind, but tax-efficient strategies for the two countries you must report to.
There is another compelling reason to sell your municipal bonds: These bonds have lower yields than other investments, as their main advantage is their tax-exempt status. Since their tax-exempt status doesn’t exist in Israel, there is no advantage in keeping them.
Therefore, consider selling your municipal bonds and reinvesting your money in other bonds, such as corporate or treasury bonds. Make sure that you examine the risks and benefits involved very carefully first.
If you’re still concerned about what holdings a potential or new oleh should have in his investment portfolio, consult a financial planner with knowledge of the markets on both side of the Atlantic for further advice.
For more information on bonds, read this blog: profile-financial.com/bonds-portfolio
Douglas Goldstein, CFP®, is the Director of Profile Investment Service, Ltd., which specializes in helping people who live in Israel with their US dollar assets and American investment and retirement accounts. He helps olim meet their financial goals through asset allocation, financial planning, and using money managers.
Published March 2, 2015. Updated December 2019.