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18 December 2013

Deductions ניכויים for income tax purposes

As we described in an earlier post (see here), certain deductions can be claimed, even if they are not direct business expenses. This post will look at some of these in greater detail.

The tax saving for the deduction allowed will depend on your marginal rate of tax, including Bituach Leumi (if you're self-employmed).


Disability insurance ביטוח אובדן כושר עבודה

You are able to take out insurance that will pay you a monthly "salary" if you are forced to stop working for a period of time due to certain health issues (check with your insurance agent for precise details). The premiums paid are tax-deductible, both against employment and self-employment income. There are small differences in the calculation of the maximum deduction allowed between employment and self-employment income, and only those self-employed have the deduction for Bituach Leumi purposes.


Pension contributions קצבה

There are various types of pension funds that can be paid into in Israel. Contributions made to funds under section 47 of the tax law (as opposed to section 45) entitle the taxpayer to a deduction, subject to certain income-based limits. It is worthwhile speaking to your agent to find out what type of fund is right for you,taking into account the potential tax savings.

There are small differences in the calculation of the maximum deduction allowed between employment and self-employment income, and only those self-employed have the deduction for Bituach  Leumi purposes.

 
Keren Hishtalmut קרן השתלמות

The Keren Hishtalmut is a special type of tax-efficient medium-term savings scheme. There are separate types of plans available to those who re employed and those who are self-employed. The deductions are available only to those who are self-employed, and apply to the Bituach Leumi liability as well.

The maximum deduction available is on a contribution of 7% of your annual self-employment profit (subject to limits). The first 2.5% is not granted as a deduction, leaving the remaining 4.5% available.


Bituach Leumi ביטוח לאומי

Strangely enough, 52% of your payments to Bituach Leumi - excluding the health tax element - are available as a deduction. This is available to the self-employed, and for anyone received a pension pre-pension age.

The deduction works in different ways for Income Tax and Bituach Leumi purposes:

(1) Income Tax - purely on a cash basis, so any prior-year amendments will be included as well. As such, you could end up having received a net refund - so the 52% is then added to your income (as you previously took a deduction).
(2) Bituach Leumi - this is done on an accruals basis i.e. what you were supposed to have paid taxes on. As such, amendments for prior years get taken into account in those previous periods.


With the 2013 tax year drawing to a close, you should consider whether you can benefit from topping up payments to any of the

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