US–Israel tax treaty, FBAR and the foreign earned income exclusion: what Americans in Israel actually owe in 2026

Two systems, one income

Israel taxes its residents on worldwide income, like almost every country. The United States is one of two countries that tax citizenship rather than residence: wherever you live, a US citizen or green-card holder files a Form 1040 on worldwide income, with the same thresholds as someone living in Ohio. Moving to Israel therefore stacks the two systems on the same income, and three mechanisms keep that from becoming double taxation: the treaty, the foreign earned income exclusion, and the foreign tax credit.

The order matters. Israel, as the country of residence and usually of source, taxes first, under the 2026 brackets. The United States then computes its own tax and lets you subtract, roughly, what Israel already took. Because Israeli rates are higher than US rates at every income level, the subtraction almost always wipes out the US tax on earned income. The exceptions are incomes that Israel does not tax (exempt foreign income of olim, or Israeli-exempt items) and charges that the US does not consider a creditable income tax, starting with Bituach Leumi.

What the treaty does, and does not do

The US–Israel income tax convention was signed in 1975, amended by protocols in 1980 and 1993, and entered into force in 1995. It is one of the older treaties in the US network and was never updated to the modern US model. Two consequences:

• The saving clause (Article 6) lets the United States tax its citizens and residents as though the treaty did not exist, with a short list of exceptions. For an American in Israel, the treaty therefore does not stop the IRS from taxing Israeli salary, Israeli dividends or Israeli rental income; the exclusion and the credit do that.
• The exceptions that do apply to citizens are the ones that matter: Social Security payments (Article 21), the relief from double taxation through the credit (Article 26), the non-discrimination rule, and the mutual agreement procedure. There is no treaty article protecting Israeli pension funds, keren hishtalmut or kupot gemel, which is why they create so much work.

Israeli salary: exclusion or credit

The foreign earned income exclusion (Form 2555)

If you pass the bona fide residence test (a full tax year as a resident of Israel) or the physical presence test (330 full days outside the US in any twelve-month period), you can exclude up to $132,900 of earned income for 2026 ($130,000 for 2025) from US taxable income. A married couple who both work can each exclude that amount. The exclusion covers salary and self-employment earnings only, never dividends, rent, pensions or capital gains, and it does not reduce self-employment tax.

The foreign tax credit (Form 1116)

Alternatively, you report the Israeli salary in full and claim a dollar-for-dollar credit for the Israeli income tax paid, limited to the US tax on that same income. Since Israeli income tax exceeds US tax at every bracket, the credit normally covers the whole US liability and leaves excess credits to carry forward for ten years. Bituach Leumi and health tax are social charges, not income taxes, and are not creditable.

Which to choose

• Credit alone is the default recommendation of most US–Israel practitioners for employees: simpler, builds carryforwards, and keeps the refundable additional child tax credit available, which the exclusion blocks because excluded income is not "earned income" for that purpose. A family with three children can lose several thousand dollars a year by using the exclusion.
• Exclusion wins when Israeli tax on the salary is low: first years of aliyah with many credit points, part-time work, or salary partly exempt in Israel.
• Both is possible: exclude up to the limit, credit the Israeli tax attributable to the rest. The computation is mechanical but unforgiving.

Self-employed: the 15.3% nobody warns you about

An American who is self-employed in Israel (osek patur or osek murshe) pays Israeli income tax and Bituach Leumi on the profit, as explained in the income tax guide. On the US side, the same profit is subject to income tax, which the exclusion or credit removes, and to self-employment tax of 15.3% (12.4% Social Security up to the annual wage base, plus 2.9% Medicare), which they do not. The United States has totalization agreements with about thirty countries that let an expat pay into one system only; Israel is not one of them. The result is social contributions in both countries on the same income.

The usual answers, each with trade-offs that need an advisor: incorporating an Israeli company (chevra ba'am) so that income arrives as salary and dividends rather than self-employment profit, which also raises the question of whether the company is a controlled foreign corporation with GILTI reporting; or accepting the SE tax as the price of accruing US Social Security credits, which has value for someone who may return to the US.

FBAR and Form 8938: the forms that carry the penalties

Most of the trouble Americans get into abroad is not unpaid tax but unfiled information returns, where penalties apply even when nothing is owed.

FBAR (FinCEN Form 114)

Required when the combined maximum balances of all your non-US financial accounts exceeded $10,000 at any point in the year. Israeli bank accounts, savings plans, keren hishtalmut, pension funds, kupot gemel, brokerage accounts, and accounts you only have signature authority over (a company account, a parent's account) all count, converted at the year-end Treasury rate. It is filed online with FinCEN, not with the tax return, by 15 April with an automatic extension to 15 October. Non-willful penalties can exceed $10,000 per year; willful ones are far higher.

Form 8938 (FATCA)

Filed with the Form 1040, for "specified foreign financial assets". For a taxpayer living abroad the thresholds are $200,000 at year end or $300,000 at any time for a single filer, and $400,000 / $600,000 for a joint return. It overlaps the FBAR but is not a substitute: many people file both. Israeli banks report US account holders to the IRS under FATCA, so the IRS already knows the accounts exist.

Other forms that appear in Israel

• Form 8621 for each PFIC (Israeli mutual fund, ETF, some savings plans), see below.
• Form 5471 if you own a share of an Israeli company; Form 8865 for a partnership.
• Form 3520 for gifts or inheritances from non-US persons above $100,000 in a year, common with Israeli family.
• Form 8833 when you take a treaty position, for example on Social Security.

Pension funds, keren hishtalmut and PFICs: where Israel and the IRS disagree

Israel's savings products are tax-advantaged in Israel and ignored by the treaty, so the IRS applies its default rules:

• Pension fund (pensia) and kupat gemel. Employee contributions are made from after-tax income for US purposes; employer contributions (6.5% plus 8.33% severance in a typical payslip) are generally treated as taxable wages in the year contributed, even though Israel defers them. Growth inside the fund may or may not be currently taxable depending on how the fund is characterised; practitioners differ, and the IRS has not ruled specifically on Israeli funds.
• Keren hishtalmut. Exempt in Israel after six years, but for the IRS it is simply a savings account: employer contributions are wages, and the annual growth is taxable. If the fund invests through Israeli mutual funds, the PFIC rules can apply on top.
• PFICs. Israeli mutual funds (kranot ne'emanut) and ETFs are almost always passive foreign investment companies. The default regime taxes gains and distributions at the highest ordinary rate with an interest charge, and each fund requires a Form 8621. The practical rule for Americans in Israel: hold investments through a US brokerage in US-domiciled funds, and ask before buying anything in an Israeli bank's investment menu.

None of this is a reason to refuse an Israeli pension, which comes with employer money and Israeli tax relief. It is a reason to have the payslip read by someone who files both returns.

Social Security and US pensions

US Social Security benefits paid to a resident of Israel are, under Article 21, exempt from tax in both countries, and the saving clause expressly does not override that article, so the exemption applies to US citizens. This is one of the few places where the treaty does real work; it is claimed by treating the benefits as non-taxable on the 1040, with a Form 8833 disclosure. Whether a new oleh in the ten-year exemption period is a "resident of Israel" for treaty purposes has been questioned, because the treaty's residence definition refers to liability to tax; most advisors take the position that an oleh, taxable in Israel on Israeli income, qualifies.

IRA, 401(k) and private pension distributions are taxed by the United States as they would be at home, with no treaty reduction for citizens. In Israel they are foreign-source income: exempt for ten years for an oleh, then taxable with a credit for the US tax and, for pensions, the cap that limits Israeli tax to what would have been due in the country of origin. Roth conversions during the Israeli exemption period are a classic planning move precisely because Israel ignores the income.

The oleh exemption, seen from the US side

For ten years from aliyah, Israel exempts an oleh's foreign-source income and does not tax foreign capital gains (full guide). The IRS does not care: US-source income stays taxable in the US, and foreign income that Israel exempts generates no Israeli tax to credit, so it is taxed by the US at full rates. The exemption is therefore a pure benefit on income the US was going to tax anyway, and a trap for anyone who assumed "exempt in Israel" meant "exempt".

Two limits of the Israeli exemption matter to Americans in particular: work physically performed in Israel is Israeli-source income even when the employer or client is in the US, so remote work for a US company is taxed in Israel from day one (and is foreign earned income for the US exclusion); and the exemption does not cover Bituach Leumi, which can bill a minimum contribution to a resident living off US income.

Catching up on missed years

A large share of Americans in Israel discover their obligations years after aliyah, often when a bank asks for a W-9 or when they want to renounce citizenship or sponsor a relative. The Streamlined Foreign Offshore Procedures exist for exactly this case: a taxpayer who lives abroad and whose failure was non-willful files the last three years of returns and the last six years of FBARs, with a signed statement of non-willfulness, and pays any tax and interest due, without penalties. For most employees the tax due is zero. The procedure remains open in 2026 but the IRS can close it at any time, and it is unavailable once the IRS has contacted you.

Children born in Israel to a US parent are usually US citizens and inherit the same obligations once they have income or accounts above the thresholds; renouncing citizenship requires being tax-compliant for five years and, above certain net-worth or tax thresholds, triggers an exit tax.

The two-country filing calendar

• January Israeli employer issues Form 106 (annual salary summary); US employers issue W-2s. Israeli Form 101 renewed with the employer.
• 15 April US tax payment due (interest runs from here even with an extension). FBAR due, automatic extension to 15 October.
• 30 April Israeli annual return due for the self-employed, in practice extended through an accountant.
• 15 June Automatic two-month US filing extension for taxpayers abroad; Form 4868 extends further to 15 October.
• 30 June Israeli online annual return deadline for those required to file (see the filing section).
• 15 October Final US deadline with extension; FBAR final deadline.
• 15 December Discretionary additional US extension for taxpayers abroad, on written request.

Seven common mistakes

1. Assuming the treaty protects you from US tax. The saving clause means it mostly does not; the exclusion and the credit do.
2. Using the exclusion by default and losing the refundable child tax credit, then discovering the five-year lock on switching.
3. Crediting Bituach Leumi as if it were income tax. It is not creditable, and the IRS checks.
4. Forgetting the FBAR because "no tax was due". The penalty regime does not care.
5. Buying Israeli mutual funds through the bank's investment desk, creating a PFIC per fund and a Form 8621 per year.
6. Going self-employed in Israel without a plan for SE tax, and discovering 15.3% on top of Bituach Leumi at the first US filing.
7. Treating the Israeli exemption as a US exemption. Exempt in Israel means fully taxed in the US with no credit.