New Pension Tax Limits in 2023

New Pension Tax Limits in 2023

Moshe Klempner and Leon Harris

Inflation was the headline story of 2022, and we are all feeling the pinch of higher prices everywhere, but not all is bad.

The Israel Tax Authority recently published an update for tax and pension contributions paid in 2023. The figures reflect an update based on a CPI inflation adjustment of 5.278%. This means that your taxes for 2023 should be lower; the value of a tax credit point (Nekudat Zikui) has risen, so less taxes will be deducted from your income. In addition, the tax brackets have shifted upwards, thereby lowering the overall marginal taxes.

Israeli personal income tax rates:

For 2023 the 10% tax bracket is for income of ILS 6,790 per month (versus ILS 6,450 last year), the 14% tax bracket is for additional income up to ILS 9,730 (versus ILS 9,240), the 20% tax bracket is for additional income up to ILS 15,620 (versus ILS 14,840), the 31% tax bracket is for additional income up to ILS 21,710 (versus ILS 20,620), and the 35% tax bracket is for additional up to ILS 45,180 (versus ILS 42,910). Above these brackets the tax rate is 47%.

As an example, an employee who earned ILS 20,000 per month in 2022 may pay around 2% less in taxes per month in 2023.

Social Security:

Similarly, Bituach Leumi (National Insurance/Social Security) has updated its stipends in order to help fight the rising costs of living. The base pensioner allowance (Kitzvat Zikna) will rise by 5.3% to ILS 1,680 per month; while not enough to capture all the price increases in everyday life, every bit helps! Disability allowance will rise by a more substantial 9.55%.

Pension contributions:

For salaried workers the maximum total contribution for a comprehensive pension plan (Pensia Mekifa) was updated quite significantly from ILS 4,326 to ILS 4,867 monthly. To illustrate, assuming standard contributions of 6.00% employee, 6.50% employer and 8.33% for severance, this would translate into a maximum salary base of ILS 23,360. For this to take effect, there might need to be a formal reallocation of pension contributions and new instructions given to the employer and pension fund reflecting the new updated amounts. Unfortunately, for employees, Sabbatical Funds (Kranot Hishtalmut) contribution remains unchanged in 2023 at ILS 1,571 per month.

For freelance workers, the maximum contribution into Sabbatical Funds (Kranot Hishtalmut) has been raised to ILS 19,920 of which ILS 12,776 can be expensed (4.5%*283,905). While for Provident Funds (Kupot Gemel), Pensions, or Managers Insurance (Bituach Minhalim) the maximum contribution for tax benefits has been raised to ILS 37,224 annually.

Tax efficient top-up plans

For those considering investing in a “Tikun 190” plan, this year might be a good time as the markets are down and there may be opportunities. The “Tikun 190” plan is a highly attractive plan for those nearing retirement or even already retired. It allows Israeli residents to invest lump sums into a tax wrapper that grants deferral of taxes or even full exemption. Generally, the Israeli tax rate is 15% of income (not capital) for lump sum withdrawals and as low as 0% if you take an annuity. The Tikun 190 plan can serve as a retirement top-up or an efficient strategy for estate planning (for example, 0%-15% Israeli tax on accumulated capital gains….).

The plan has exploded in popularity over recent years due to its flexibility and is offered by the major insurance companies and investment houses. The plan has no minimum investment amount, while offering significant tax benefits to the investor and family. It is well suited for those wanting to leave their options open and to make changes as they get older. Investments typically include traditional assets such as stocks and bonds. Furthermore, there is a version of the plan which allows for investment in alternative assets such as real estate, credit funds, private equity etc. For 2023, due to inflation, the maximum allowed contribution to this version now ranges up to ILS 5.76 million per individual.

In the US

Briefly, Social Security benefits for US citizens should increase significantly by 8.7% in 2023. The annual IRA contribution limit is now $6,500 in 2023 ($7,500 if age 50 and older).

Olim Pensions:

Olim receiving a pension from their “old” country may enjoy a special tax relief whereby Israeli tax may not exceed the tax that would have applied in the “old” country. Alternatively, you may pay Israeli tax on 65% of that pension and take a 35% exemption – without limit for a foreign pension.

Next Steps:

As always, consult experienced financial and tax advisors in each country at an early stage to determine your specific situation.

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(c) 14.2.2023

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