US-Israel citizens in a tizz over new kids’ savings plan
Dual citizens face dilemma of choosing low-interest bank track or a plan liable to double taxation
Shoshanna Solomon was The Times of Israel's Startups and Business reporter
Finance Minister Moshe Kahlon’s new “Savings Plan for Every Child” is creating a stir among US-Israeli citizens, as it poses the dilemma of having to choose for their children a bank savings plan that pays low interest or a plan that could potentially expose them to double taxation.
Israel’s National Insurance Institute has sent out letters to parents informing them than in January 2017 the Institute will open a savings plan for each child below the age of 18. The Institute will inject 50 shekels per month into the plan and retroactive amounts will also be paid into the new fund, for the period between May 2015 to December 2015, for the children who qualify.
At the age of 18, the National Insurance will pay into the account a 500 shekel grant, and the amounts accrued will be available for the young adult. If these savings won’t be drawn until the age of 21, then the National Insurance Institute will add an additional 500 shekels to the savings plan.
Parents must decide who will manage the savings fund, and are given the choice between choosing a banking institution or a Kupat Gemel, a deferred savings plan, until June 1, 2017.
However, Israel’s Kupot Gemel are considered by the US Internal Revenue Service (IRS) as a PFIC (Passive Foreign Investment Company) and are thus subject to PFIC rules for reporting and taxes.

The banks’ option offered as part of the new savings plan is generally “a poor investment strategy with minimal to zero interest resulting in very poor growth on the account based on present rates,” said Ira Hauser, a certified financial planner and accountant who holds both US and Israeli citizenship and lives in the Jerusalem area. The Kupat Gemel option in most cases will result in a much better growth scenario, he said.
Onerous reporting, taxation issues
However, this track will be onerous to US-Israeli citizens, Hauser said. Because the Kupot Gemel are considered a PFIC, US-Israeli citizens will be required to report on activity within the fund and pay taxes on gains within these funds annually. The reporting can be complicated and costly, he said.
In addition, Israel charges taxes on these Kupot Gemel only at termination of the funds, he said, so “Israel may not recognize earlier taxes paid, leading to the potential of a double taxation issue for these citizens with dual US-Israeli citizenship.”
Also, Hauser said, it is not yet clear who is responsible to report this PFIC, the parent, the child or both? If it is the parent, then there may be greater tax implications to take into account, he said.
At present this issue only affects US-Israeli dual citizens and not other dual citizens living in Israel, as the US is the only country in the world that taxes worldwide income no matter where you reside, Hauser said.
“Right now I am not doing anything for my kids — until the matter is clarified further,” he said.
Noam Waldoks, a US-Israeli citizen who works as an attorney in Tel Aviv, put up a Facebook post on the matter earlier this month and on Dec. 8 set up a petition on the White House website to bring attention to the matter.
“PFIC rules should not apply to children participating in an Israeli government program,” Waldoks said in the petition which to date has received 73 signatures. “The IRS should exclude these accounts from the PFIC rules.”
Waldoks, who made Aliyah in 2012 and has three children and another one on the way, said that the best track for his kids would indeed have been the Kupot Gemel track. But their accountant recommended the bank track instead, because of the PFIC concern.
“We were told by our accountant that because the Kupat Gemel is viewed as a PFIC the tax treatment of the fund is uncertain and we could be subject to double taxation, or taxation before the gain is realized or even a higher tax rate,” Waldoks said.
Waldoks said he has spoken to the Yesh Atid party and they have contacted the US ambassador in Israel Dan Shapiro on the matter.
“It is crazy that our children should pay tax because of some arcane tax rules of a country they are not even living in,” Waldoks said. “If we can get the issue in front of the right people in the US, they may be able to help us by exempting these accounts from the PFIC rules. It would help our kids save some money for university or even for making a down payment for a home.”
“The treaty between Israel and the United States allows the US to levy a tax on foreign income for American citizens,” the Finance Ministry said in a statement to The Times of Israel. “Therefore, this issue is decided by the American taxation laws.”