What Is Really Happening With the 2026 American Tax Reform?
The 2026 American tax reform brings dramatic changes that most Israeli-Americans still do not understand the implications of. Beginning January 2026, changes take effect that could cost you thousands of dollars if you do not prepare correctly.
The most significant change concerns Section 199A of the IRC, which allows a deduction of up to 20 percent on business income. This deduction, which was supposed to expire on December 31, 2025, received a partial extension with new conditions that completely change the rules of the game.
The Big Change: Section 199A Credit Under New Conditions
Beginning with tax year 2025 (filed in 2026), the QBI (Qualified Business Income) deduction will only apply to businesses with annual revenue exceeding $500,000. This is a dramatic change from the previous threshold of $329,800 for married filers or $164,900 for single filers.
In practice, this means that Israeli-Americans who operate small businesses or work as freelancers will lose a deduction that could reach $32,980 per year for married couples. Classic tax planning strategies no longer work in this new reality.
What Happens With Foreign Tax Credit in Tax Year 2026
The second change concerns Form 1116 for the foreign tax credit. Beginning April 15, 2026, the IRS requires more detailed proof of tax payments in Israel. This includes certified translation of every document from the Israeli Tax Authority that exceeds 10,000 New Israeli Shekels.
The consequence? Additional costs of $200-500 per tax return, and a process that could extend by 3-4 months. Most Israelis are already losing thousands of dollars in foreign tax credit, and the new changes only worsen the situation.
FATCA Reporting: The New Requirements for 2026
Form 8938 undergoes significant change. Beginning with tax year 2025, the reporting threshold drops from $200,000 to $150,000 for married couples living abroad. This means thousands more Israeli-Americans will fall under the reporting requirement.
The penalty for non-reporting remains $10,000 for the first year, but from 2026 it increases to $12,500. After an additional 90 days, the penalty reaches $60,000 – a 20 percent increase from the previous penalty of $50,000.
Impact on Israeli Pension Plans
One of the most critical changes concerns reporting on Israeli pension plans. Beginning in 2026, any pension plan with a balance exceeding $50,000 will require filing an additional Form 8865 in addition to the regular Form 3520.
This is a dramatic change from the previous situation where most Israelis ignored pension plan reporting. Now, the penalty for non-reporting can reach $20,000 per plan.
The practical consequence: if you have a pension fund, severance fund, and managers insurance – this could cost you $60,000 in penalties if you do not report correctly.
Changes in U.S. Real Estate Reporting
The 2026 American tax reform also changes the rules for real estate taxation. Beginning with tax year 2025, depreciation deduction on rental properties will be limited to 80 percent of the previous amount for properties purchased after January 1, 2025.
This means that if you purchased an apartment for rent in the United States in 2025 for $500,000, the annual depreciation deduction will be $14,545 instead of $18,182. A difference of $3,637 that could cost you an additional $1,091 in taxes per year.
Most Israelis are already failing at U.S. real estate taxation, and the new changes only make the situation worse.
Online Businesses: The New Rules
The next change concerns taxation of online businesses. Beginning in 2026, any income from digital platforms exceeding $600 per year will be automatically reported to the IRS through a new Form 1099-K.
This is a dramatic change from the previous threshold of $20,000 or 200 transactions. The consequence? If you sell on Amazon, Etsy, or any other platform, the IRS will receive an automatic report of all your income.
Online business taxation becomes increasingly complex, and incorrect reporting can be costly.
Employee Stock Options: The Change No One Expected
The most surprising change in the 2026 tax rules concerns employee stock options. Beginning with tax year 2025, exercising ISO (Incentive Stock Options) will be subject to AMT (Alternative Minimum Tax) even if the shares are not sold.
This means that if you exercised options worth $100,000 in 2025, you will pay AMT of up to $28,000 even if you do not sell the shares. This is a dramatic change from the previous rule that only imposed tax upon sale.
Employee stock option taxation becomes a real tax trap for Israelis working at American technology companies.
Tax Debt: The New Collection Rules
One of the most critical changes concerns tax debt collection. Beginning in 2026, the IRS can directly block foreign bank accounts through FATCA agreements, without requiring a local court proceeding.
This means that if you have a tax debt exceeding $55,000, the IRS can block your accounts in Israel within 30 days of notice. This is a dramatic change from the previous process that required Israeli court approval.
Most Americans in Israel are already failing to pay tax debts, and the new rules make the situation critical.
Filing Deadlines: The New Changes for 2026
The 2026 American tax reform also changes filing deadlines. Beginning with tax year 2025, automatic extension for Form 1040 will only extend until August 15, 2026 instead of October 15.
This means you have less time to prepare, and American tax return extensions become more critical than ever. The penalty for late filing increases to 5.5 percent of the tax owed per month, instead of 5 percent currently.
Additionally, FBAR and FATCA reports will not receive automatic extension. The final deadline remains April 15, 2026, with no exceptions.
Bottom Line: How to Prepare for the Changes
The 2026 American tax reform brings changes that could cost Israeli-Americans thousands of dollars per year. The time to prepare is now, not after April 15, 2026.
The main changes you need to know: Section 199A credit under new conditions, stricter requirements for foreign tax credit, lower threshold for FATCA reporting, new rules for pension plans, limitations on real estate depreciation, automatic reporting on online businesses, AMT on stock options, and stricter collection rules.
My professional recommendation: do not wait until the last moment. Start preparing now, review how the changes affect your situation, and consult with a tax expert who understands the complexity of the Israeli-American situation. The official IRS website contains updated information on all the changes.
The cost of being unprepared could be tens of thousands of dollars. The cost of proper preparation is far less than that.