Philip Stein & Associates — U.S.-Israel Tax Treaty Overview and Double Taxation Protection

Source: https://www.pstein.com/our-firm/us-israel-tax-treaty · 2026

Background

Over 74 countries have an Income Tax Treaty with the United States, and Israel is one of them. The U.S.-Israel Tax Treaty dates from 1995 and is considered in need of an update. If you are a dual citizen paying taxes in both countries, it is essential to know what is included in the treaty — and equally important to know what is not included.

Why the Treaty Matters More for U.S. Citizens

Unlike almost every other country, the U.S. imposes taxes based on citizenship and worldwide income, not just residency. This makes the tax treaty more crucial than in countries that only tax based on residency.

• A German citizen living in Israel with purely Israeli income does not owe German taxes.
• A U.S. citizen or green card holder living in Israel must file U.S. tax returns on their Israeli income — and may owe U.S. taxes.
• An “Accidental American” — someone born a U.S. citizen who has never lived in the U.S. and earns only Israeli income — must still file and may owe U.S. taxes.

The treaty explains how taxes are shared between the two countries and which country gets the “first bite” of taxes in each income category.

Does the Treaty Prevent Double Taxation?

The treaty includes a double taxation article, but it does not fully eliminate the burden. In practice:

• You are generally not taxed twice on the same income.
• However, you are subject to the highest rate between the two countries in each income category.

Examples:

• Dividends taxed at 20% in the U.S. and 25% in Israel → You pay Israel the full 25% (the higher rate), with no additional U.S. tax.
• Israeli interest income taxed at 10% in Israel but up to 37% in the U.S. → The U.S. may allow a credit for the 10% paid in Israel, but you may still owe the additional 27% to the U.S.

The treaty also provides some protection for non-U.S. citizens with U.S.-sourced income (e.g., an Israeli who studied or worked in the U.S. and has a U.S. pension).