Tax refunds for employees in Israel

Tax Refunds For Employees
How Does It Work?

What is a tax refund?

Hundreds of thousands of Israeli citizens pay more tax than the law requires because they’re unaware that they’re eligible to receive a tax refund, which they can receive simply by filing a tax return.

80% of regular salaried employees paying tax are paying too much. The reason that so many wage earners are paying excess tax and are eligible to receive a tax refund stems from a few different reasons that will be explored here.

A tax refund is the result of a taxpayer having paid too much tax for the tax year in question. Let’s look at some of the reasons and the main possibilities that salaried employees might be eligible to receive a tax refund.

The method of calculating tax commonly used in Israel is efficient, but not perfect. Most salaried employees in the economy are by and large exempt from filing an annual tax return (up to a threshold of about ₪649,000 in employment earnings (wages) for the 2020 tax year). Individuals with an income from securities (up to a threshold of a sales turnover of ₪2,522,000 for the 2020 tax year), along with individuals earning interest income (up to a threshold of about ₪643,000 in interest per year for the 2020 tax year ).

The possibility that a salaried employee can request and receive a tax refund stems from the fact that in particular cases, tax withholdings at source that the employee pays on their regular pay check is higher than their true tax obligation. This money, which is transferred to the tax authority by the employer, is not returned to taxpayers automatically, but rather, only after filing a detailed request by means of an annual tax return to the tax authority in which the employee petitions to receive a refund of the discrepancy from the tax that was withheld. This gives us the familiar concept of a “tax refund.”

There are a few reasons that individuals may neglect to file a request for a tax refund:

They’re simply not aware that it’s possible and that they’re owed a tax refund
Considering the cost-benefit ratio, they decide that the cost in time and trouble isn’t worth the effort
Complete lack of knowledge in the tax field
Fear of the tax authority – “I don’t want the tax officials on my back”: this reason is complexly unfounded, since the tax authority doesn’t view a request for a tax refund as opening a regular file

The law allows individuals (salaried employees) to request a tax refund of excess funds that were held back. The maximum period of time to file this request retroactively is up to six years. In other words, until the end of 2023, it’s possible to receive a tax refund for all tax years from 2017 onward, but not for any previous years. The excess tax collected will be returned with interest along with index differentials (both of which are exempt from taxes) from the end of the tax year for which the return is filed.

The request can be filed alone or – recommended – through an accountant who can verify that indeed, they are owed a tax refund beforehand, and also so they won’t accidentally end up owing taxes. The request can be filed at any tax authority office using Form 135 / 1301, the annual return, for all years for which a tax refund is being claimed. Since the tax refund is returned directly to your bank account, you’ll also need to attach a photocopy of a check or official proof of bank account ownership.

All relevant documents supporting data in the request for tax refund must be attached, such as Form 106, or, in the event of termination, Form 161, the employer’s notice of termination of the employee, authorizations for payments to retirement fund and life insurance that was not withheld through the paycheck (independent deposits).

In the case of a couple who are registered with the Ministry of the Interior as married, Form 135 / 1301 will also detail the income of the other spouse.

Now let’s look at the most common situations for taxpayers who are entitled to submit a
request for a tax refund:

Working for a number of employers

If an individual works for more than one employer, that individual will need to coordinate their taxes by submitting paychecks from all workplaces or pension payors, along with filling out a request for reduction and coordination in tax withholdings (Form 116 – Claim for Reduced Rate of Withholding Tax/Exemption from Withholding). The income tax department of the Israel Tax Authority will provide that individual with a certification of tax coordination, and the employee will pass this along to their secondary workplace, where the percentage of tax withholding will be determined. Their primary place of employment can continue to withhold taxes in accordance with the accumulated tax levels and in consideration of that employee’s tax credit points, just as if it was that individual’s only workplace.

In this case, if the employee does not file for tax coordination, the secondary employer will withhold the maximum tax rate from the employee’s income (for tax year 2020, 47%), even though very often the employee does not reach this tax rate for their additional income. In the event that tax coordination is not done during the year, it is possible to request a refund for the amount of excess tax withheld from the secondary workplace through a tax refund request for tax payment during that year.

On the other hand, if the employee does file for tax coordination, the percentage of tax they are charged will be calculated according to an advance estimate of their expected annual income from all employers (income estimate). It must be noted that in most cases, the estimate will be incorrect, therefore, in this case as well, the solution is to file a tax refund request for that tax year.

Working only for part of the tax year:

An individual who was on unpaid leave, between jobs, or unemployed is very likely entitled to a tax refund. Calculation of tax is done on a yearly basis, but tax is withheld on a monthly basis. Tax withholdings are taken off the pay check each month on the assumption that income will remain the same throughout the year. However, when work took place only over a few months (rather than over the entire tax year), the tax withheld will be higher than the true amount owed. Because of this, the actual amount of tax owed for that year will be lower than the amount withheld from the salary over the course of the year.

This situation can also come about in cases where a person changes jobs at some point during the tax year and earns a different salary, or, alternatively, in the event where they have changed jobs with a gap of a few months in which they were not working at all.

Entitlements not used

Entitlements (tax credit points) are amounts that reduce the tax obligation of a salaried
employee. Entitlements are given for a particular status for the employee or to particular activities which legislators have chosen to encourage.

Very often, there will be a change in an employee’s personal status which is not updated in the payroll system of your employer, so that they are withholding more tax than that individual is actually obligated to pay. In addition, there can be mistakes by the employer in withholding terms, or an inability on the part of the employer to apply an applicable tax discount in certain situations.

One credit point is worth money (for the tax year 2020, this amount stood at ₪2,628 per year, meaning ₪219 per month). In general, every man (Israeli resident) is given a minimum of 2.25 credit points, and every woman (Israeli resident) is given 2.75 credit points per year.

New Immigrant

An individual with an immigration certificate (Teudat Oleh) is entitled to additional credit points for 42 continuous months beginning from the date of aliyah to Israel, whether they work during that period or not, as follows: For the first 18 months from the date of aliyah – 1/4 point per month. For the following 12 months, 1/6 of a point per month (months 19-30 from the date of aliyah). And for the following 12 months – 1/12 of a point per month (months 31-42 from the date of aliyah).

Children

A parent of children between the ages of one and five years are entitled to 2.5 credit points. Women (and men in certain cases) are entitled to points for children up to age 1. Often, payroll departments do not update this entitlement following the birth of a child during the tax year in which the child is born.

Discharged Soldiers

It has been established that the calculation of income for a discharged soldier should take into account credit points for 36 months from the end of the month in which discharge took place. The value of the credit points will depend on the taxpayer gender and the period of time over which service took place.

Academic Degree / Professional Certificate Graduates

An individual who completed studies for a Bachelor’s degree between the years 2014 and 2022 are entitled to one point in the tax year following the year in which they completed their studies, or in the following year, at their choice.

Donations

An individual who donates to a recognized institution which has a valid authorization to function according to Section 46 to and the amount of the donation is over ₪190 and limited to about ₪9,322,000 for the 2019 tax year (₪9,211,000 in 2018 ₪9,184,000 in 2017; ₪9,212,000 for the 2016 tax year, and ₪9,295,000 prior to that), will receive upon showing original receipts for the donation, an entitlement at a rate of 35% of the donation amount. It should be noted that in any case the amount of the donation is limited to 30% of the applicable income of the donor for the same tax year, but the excess amount may be carried over to the following tax year.

Contributions to a retirement fund or life insurance

In the event that funds were independently contributed to a pension, retirement fund, professional development fund and/or life insurance, generally it is possible to enjoy a tax refund for these contributions. It is recommended to contribute up to the recognized tax contribution threshold, since contribution above this threshold does not provide you with eligibility for tax benefits. Independent contribution is a contribution which is not done through your paycheck, and in order to enjoy this benefit, you must attach authorizations from funds with details of your balance to the end of the tax year.

Child with disabilities in the family

Tax benefits (2 credit points) will be given in situations where the salaried employee or his/her spouse has a child with disabilities. The definition of disabilities is: A child who is diagnosed by a neurologist or specialist physician as paralysed in one of their limbs, or for whom a physician has declared that they were born without a limb or had a limb amputated, a child diagnosed as blind by an ophthalmologist, a child with intellectual developmental disabilities in accordance with the diagnosis of a neurologist / physician specializing in child development, a child with a developmental delay caused by a severe learning disability who is referred by a placement committee for a special education setting (for high school students, if the Ministry of Education has determined that they are entitled to “Track 07”, they are considered as students studying in a special education setting).

I submitted a request for a tax refund only and I was sent a tax bill to pay – what can I do?

It is very important prior to submitting a request for a tax refund to carefully scan all the details and verify precisely the tax results obtained.

In this event, you will not have the option of taking back your tax refund claim; instead, you will be forced to pay the tax owing which was determined for the given tax year.

Often, taxpayers choose to submit a request on their own, or visit an income tax officer personally and request that the clerk help them file a request for a tax refund and they don’t know the precise tax results that are obtained.

The tax clerk will not bother telling an individual that they aren’t eligible for a tax refund (or notify them of a debt). Another less common reason is a calculation error in the data provided by the tax clerk.

In this case, it is possible to examine the tax return received and verify whether the details entered by the income tax officer match the details submitted.

Another situation which can create a tax obligation instead of a tax refund occurs when the taxpayer submits a request on his or her own and forgets having worked in a particular workplace within the past six years, and then, obviously, the tax results will be dramatically different.

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