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16 July 2014

Spouses - taxation of joint income

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As previously mentioned, tax files in Israel are joint between husband and wife. The question therefore arises as to how joint income is taxed.

In this respect, the law differentiates between earned (eg salary, self-employment, pension) and passive income.

Passive income

In general, passive income is treated as joint income and added to the earned income of the higher-earning spouse.

However, with the exception of using the exemption for Israeli residential properties, any income arising from an asset owned by one spouse for at least one year prior to marriage or from an asset received by inheritance after marriage can be treated as that spouses' income only.

Earned income

In general, spouses' earned income are completely seperate from each other. As such, each spouse's income is taxed separately.

However, there are situations whereby both spouses work in the same business. For this to be an issue, the business must be controlled by one of the spouses (e.g. we're not talking about husband and wife both working in the same hospital)

In this situation, the main spouse in the business cannot give income to the spouse who just helps out - and all of the income must be taken by the main owner of the business. However, the law (effective 1st January 2014) allows the other spouse to get some income of their own, provided that the following three conditions are all met:

1. Both spouses' work is required for the business.
2. Each spouses' income is commensurate with their contribution to the business.
3. If the business is run from the family home, the home is the primary place of business. For example, an electrician with the spouse acting as secretary from home would not meet this criteria.

As this is a new law, it is not entirely clear how the tax authority will approach these situations, and what sort of proof will be required. If this is relevant to your business, take advice!

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