7 Critical State Tax Obligations for Israelis Who Are Not US Residents
In the complex American tax world, many Israelis focus on federal tax obligations while overlooking the more complicated area of state taxes. The obligation to pay state taxes may also apply to Israelis who are not US residents, especially those earning income from specific US sources.
Different US states adopt various approaches to taxing residents and nonresidents, and sometimes the rules are more complex than those at the federal level. Each state sets its own tax rules, creating a complex mosaic of potential obligations.
What Are State Taxes and When Do They Apply?
State taxes are levies imposed by individual US states separately from federal tax. Each state determines its own tax rates, exemptions, and collection rules. Some states do not impose income tax at all, while others levy relatively high rates.
For Israelis who are not US residents, state tax obligations may arise when they have income from sources located within a specific state. This includes wages from US employers, real estate profits, capital gains from assets located in the state, or business income derived from operations within the state.
The complexity arises because each state defines “source of income” differently. One state may consider all earnings from work performed within its borders as taxable income, while another might tax only the portion actually earned within its boundaries.
Key States for Israelis in the Real Estate Investment World
California, New York, and Florida are the most popular states among Israelis investing in American real estate. Each imposes different tax obligations on nonresidents selling property or generating rental income.
In California, the tax rate on capital gains from real estate sales can reach 13.3% in addition to federal tax. The state requires foreign real estate sellers to withhold 3.33% of the sales price before closing.
New York charges a state tax rate of up to 8.82% on various income types, including capital gains from real estate sales. The state enforces withholding rules requiring the buyer to withhold part of the purchase price as an advance state tax.
Florida differs from California and New York in having no state income tax. However, there are still reporting obligations and other taxes such as property tax that affect foreign real estate holders.
Residency Rules and Their Impact on State Taxes
Determining residency status for state tax purposes may differ from federal determination. Some states apply stricter or different residency tests. A person may be considered a state resident for tax purposes even if not a US resident for federal tax purposes.
The common test includes staying in the state over a certain number of days in the year (usually 183 days), owning a permanent home in the state, or having significant economic ties to the state. An Israeli who frequently travels to the US for business may span multiple states and be considered a resident of one or more states.
In some cases, a person may be deemed a resident of a state without physically visiting if they have significant income from sources within the state. This particularly complicates tax planning for Israelis investing in the US.
Business and Employment Income in Different States
Israelis working for American companies, whether as employees or independent consultants, may be required to pay state taxes in the state where the work is performed. This holds even if the work is done remotely from Israel, provided the employer is based in a specific state.
Some states require employers to withhold state tax from foreign workers’ wages starting from day one. Others provide exemptions for temporary workers or those working fewer than a specified number of days per year.
Businesses operated by Israelis within the US can create complex state tax obligations. If the business operates in multiple states, reporting and tax payments may be required concurrently in several states, necessitating sophisticated tax planning.
Handling US-Israel Double Taxation Agreements at the State Level
The US-Israel tax treaty applies only at the federal level. US states are not obligated to recognize the treaty and may collect taxes without crediting amounts paid in Israel. This creates a potential for double taxation at the state level.
An Israeli paying tax in Israel on income sourced from a US state may not receive full state-level tax credits. The state might require full tax payment and grant only partial credit for foreign taxes paid.
Some states offer relief for nonresidents or allow credits for taxes paid to foreign countries, but the rules vary widely. Proper tax planning requires reviewing each state’s specific regulations individually.
Reporting Requirements and Forms for State Taxes
Each state develops its own reporting forms for state taxes. An Israeli subject to state tax must file a state tax return separately from the federal return. Filing deadlines may differ from the federal deadline of April 15, 2025.
Some states require a return even if no tax is due, provided certain income thresholds are met. Others allow waiving the filing if income is below a specific threshold.
Preparing state tax returns requires understanding the specific credits and deductions applicable in each state. Information on the federal return is not always relevant for the state return, often necessitating separate and complex calculations.
Tax Planning Strategies to Minimize State Tax Liabilities
Proper planning can reduce state tax liabilities for Israelis. One strategy is concentrating activities in states without income tax such as Florida, Texas, Washington, and Nevada. Real estate investments in these states produce fewer state tax liabilities.
Establishing business entities in certain states can improve tax positions. An LLC formed in a no-income-tax state may reduce overall tax liability depending on the nature and location of activities.
Timing property sales can affect tax liability. Selling real estate within one tax year instead of spreading over several years may trigger different tax rates. Sometimes postponing a sale until the next tax year can save significant tax.
Using advanced tax tools like the 1031 exchange for real estate or strategies such as charitable remainder trusts can defer or reduce state tax liabilities.
States Without Income Tax and Tax Opportunities
Seven US states do not impose income tax on individuals: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Washington. New Hampshire and Wyoming tax only interest and dividends. These states offer interesting tax opportunities for Israelis.
Investing in real estate in these states eliminates the need to pay state income tax on rental income or capital gains from sales. However, annual property tax may still impact overall returns.
Setting up businesses in these states can significantly reduce the overall tax burden. Many tech companies choose to incorporate in Texas or Florida to benefit from the absence of state income tax.
The Nonresident’s Guide: Filing a State Tax Return
Filing a state tax return as a nonresident requires careful preparation. The first step is determining whether there is a filing obligation in a specific state. This is based on types of income, location where it was earned, and state rules.
Collecting the necessary documents includes W-2 or 1099 forms showing income from state sources, property sale documents, rental income statements, and details of relevant expenses. Some states require attaching a copy of the federal return.
State tax liability calculation begins with determining taxable income in the state. Then, allowable expenses and exemptions for nonresidents are deducted. The final liability is computed according to the state’s tax tables.
Tax payment can be made by check, electronic transfer, or credit card depending on state options. Some states charge processing fees for credit card payments.
Common Mistakes in Handling State Taxes
One common mistake is completely ignoring state tax obligations. Many Israelis assume that if they are not US residents, they are not subject to state tax. This assumption can lead to penalties and additional liabilities.
Another mistake is relying on federal rules for state matters. Each state sets its own rules, and what applies federally does not necessarily apply at the state level. This includes residency rules, definitions of taxable income, and tax rates.
Some Israelis calculate state tax liability themselves without understanding the unique complexities of each state. Using standard federal tax software may not provide an accurate solution for state taxes, especially for nonresidents.
Impact of Legislative Changes on State Taxes in 2025
In 2025, several states will implement changes to their tax policies. California increased the exemption for nonresidents in certain cases, while New York tightened reporting rules for foreign real estate sales.
Florida considered imposing a new tax on foreign real estate purchases but ultimately decided to keep the status quo. Texas introduced new tax incentives for foreign businesses establishing operations in the state.
Federal level changes may also affect state taxes. Some states base their calculations on the federal tax framework, so federal-level changes could impact state liabilities.
Working with Expert Tax Advisors on State Taxes
Selecting a professional tax advisor specializing in state taxes for nonresidents is a crucial investment. Not all accountants are familiar with the nuances of state taxation for Israelis. It is important to find an expert who understands the double taxation treaty and the unique challenges of international taxation.
The right advisor should be licensed to represent clients before specific state tax authorities. This includes preparing returns, representing clients during audits, and resolving complex issues. Some cases require representation in multiple states simultaneously.
The cost of expert tax advisor services can be relatively high, but the tax savings and avoidance of penalties generally justify the expense. An experienced advisor can identify tax-saving opportunities that the average Israeli might not recognize on their own.
Practical Examples and Case Studies
An Israeli selling an apartment in New York bought in 2020 for $1 million and selling in 2025 for $1.4 million must pay tax on a $400,000 gain. Federal tax would be about $60,000 (15% capital gains), while New York state tax would add approximately $35,000 (8.82%).
A second case involves an Israeli working as an independent consultant for a tech company in California. Even if working from Israel, if the company is located in California and the work is considered for California operations, state tax may apply.
A third case concerns an Israeli investing in a Real Estate Investment Trust (REIT) located in Texas. Despite Texas having no income tax, dividends from the REIT are subject only to federal tax, making the investment more attractive from a tax perspective.
The Future of State Taxes for Israelis
The general trend among US states is tightening control over nonresidents and increasing collection efforts. New technologies enable states to better track nonresident transactions and identify cases where tax was not properly paid.
Some states are considering imposing additional reporting requirements on nonresidents or increasing applicable tax rates. The goal is to ensure nonresidents benefiting from the American economy participate fairly in the tax burden.
On the other hand, competition among states for foreign investments creates pressure for tax relief. States like Florida and Texas seek to attract investments by offering incentives and maintaining low tax rates.
Frequently Asked Questions (FAQ)
Is an Israeli who is not a US resident required to pay state tax?
Yes, if they have income from certain states. Each state sets independent rules for taxing nonresidents.
Which states do not collect income tax?
Seven states: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Washington. New Hampshire and Wyoming tax only financial investments.
Does the double taxation treaty apply to state taxes?
No. The treaty between the US and Israel applies only to federal taxes. States are not obligated to recognize it.
When must a state tax return be filed?
Deadlines vary by state. Most require filing by April 15, 2025, but some states have different dates.
How is state tax calculated on real estate sales?
Each state applies different tax rates. The gain must be calculated according to state rules and taxed at the appropriate rate.
Is there a credit for tax paid in Israel?
It depends on the state. Some permit partial credits, others do not recognize foreign tax at all.
How much does preparing a state tax return cost?
Costs vary based on case complexity, ranging from $500 to $3000 for a complex state return.
State taxes present a significant challenge for Israelis operating in the US. Understanding the obligations, proper planning, and working with suitable experts can minimize tax burden and prevent future penalties. It is advisable to review personal situations with a specialist before undertaking significant transactions or investments in high-tax states.