[PaulaW]

Hi,
I want to know about the treatment of capital gains from mutual funds, gains on qualified retirement accounts and pensions held in both the United States and Israel for a United States/Israeli dual citizen whose main resident is in Israel in light of the US Israel tax treaty and considering new legislation by the US income tax authority regarding 'foreign' investment accounts.
Thank you

[wnhough]

QUOTE," . . . the treatment of capital gains from mutual funds, gains on qualified retirement accounts and pensions held in both the United States and Israel for a United States/Israeli dual citizen whose main resident is in Israel in light of the US Israel tax treaty and considering new legislation by the US income tax authority regarding 'foreign' investment accounts."---Though you are a US/ Israeli dual citizen, you only need to pay the taxes in the contractin' state, in this case, Israel( as you are claiming Israel as your permanent home) accordin' to the US-Israeli treaty Article #13. So, suppose in the US you hold the mutual funds for over one year and your individual tax bracket is lower than 15%( 10% or 15%), then you DO not pay any capital gain tax because your LTCG rate is 0% for 2010, not 5%. As you don't pay your CG tax in the US, you do not get CG tax credit in Israel. Also, what d'you mean by "gains on qualified retirement accounts "?? ---You mean early distribution from your qualified retiremnt plan, defined-benefit plans and defined-contribution plans. i.e. 401K or Roth IRA, ROTH 401K or IRA etc?? --Yes, it does. In general, except some special cases,you may be subject to an additional tax of 10%. This is penalty imposed on you for an early distribution from an individual retirement account (IRA), 401(k), or other qualified retirement plan before reaching age 59 1/2. The penalty is not subject to tax credit under the US/Israely treaty.
" . . . pensions held in both the United States and Israel . . ."According to the Article #22 under the US-Israeli treaty," Social security payments and other public pensions paid by the Contracting State, US to you who is a resident of US shall be exempt from tax in both US and Israel. BUT this provision is subject to change at any time by the U.S. government and supersedes the new Israeli Tax Reform Regulations. ( I guess, if your provisional income level in a certain level, then you are not subject to tax on your Soc. Sec. benefits.

[MukatA]

You are a U.S. citizen so you must report worldwide income on your tax return. You do not get any treaty benefit. If you paid taxes in a foreign country, you can claim foreign tax credit Form 1116 or foreign tax deduction as itemized deduction.
Another filing requirement is Form TD F 90-22.1. Your U.S. Tax Return: U.S. Citizen or Resident with Foreign Income

[PaulaW]

In reply: by qualified retirement accounts I meant Tax-advantaged savings like ROTH IRA being saved in the US while I live and work in Israel and likewise such accounts being saved in Israel. (Of course I report worldwide income to both countries.) Would all of these accounts be recognized as retirement accounts by both countries - would Roth withdrawals upon retirement be tax free in Israel? Would both countries recognize a deferral of tax on capital gains set by either of the contracting states?Why does MukatA say there is 'no treaty benefit'?

[wnhough]

QUOTE,". . .(Of course I report worldwide income to both countries.) . . ."-- Definitely( You must report and pay taxes on your worldwide income there in Israel as an Israeli citizen).BUT substantially,though you are a US/ Israeli dual citizen, you only need to pay the taxes in the contractin' state, in this case, Israel( as you are claiming Israel as your permanent home).As you can see, the U.S. is pretty clear about this --what I am sayin' I sthat IRC states, "If you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or in Israel. Your worldwide income is subject to U.S. income tax, regardless of where you reside."
It's not quite as bad as that quote suggests --but you can claim a credit on the U.S. tax return for any tax you paid in ISRAEL, or alternatively, you can claim an exclusion for up to $91,500(for 2010) of salary earned in Israel. So most dual-citizens won't actually end up owing any tax each year.
However, as you casn see,all U.S. citizens are officially required to file a U.S. tax return if their annual income is above $8950, even if they don't end up owing tax at the end of the year.
If you want more info. you may gi and check more details in IRS Publication 54 ( http://www.irs.gov/pub/irs-pdf/p54.pdf ) and this note: U.S. Citizens and Resident Aliens Abroad .
"Would all of these accounts be recognized as retirement accounts by both countries - would Roth withdrawals upon retirement be tax free in Israel?"---As you know, those who use R-401K or R-IRA will be in a higher tax bracket after retirement than they are now. Both Roth products are funded with after tax dollars, making withdrawals of contributions and earnings tax free. So, I GUESS as you have no any tax obligation on the distributions in the US, you do not getany tax credit on the distributions( in case, you need to pay tax on the distributions in Israel).In fact, in the US, your provisional income exceeds acertain level , then you are subject to taxation even on your Soc. Sec. benefits including IRA or 401K distributions as part of AGI.
"Would both countries recognize a deferral of tax on capital gains set by either of the contracting states?"---You recognize your capital gains(i.e. LTCG; hold period>1yr) only when disposin' of your capital assets, deferred tax on CGs usually recognizes and CG taxes are exempt in the other contracting state EXCEPT some situations, i.e. The gain is from the sale, exchange or other disposition of property described in
Article 7 (Income from Real Property) situated within the other Contracting State,Accordin' to the Article #15.You can visit;http://unclefed.com/ForTaxProfs/Treaties/israel.pdf

[aporeh]

None of the above questions were answered.
If you have Kupot Gemel in Israel (401K) are these Kupot Gemel considered to be taxable in the US or are they considered retirement accounts taxed only when they are distributed.