The Hidden Changes in 2026 Tax Laws That Will Affect Every Israeli-American
Effective January 1, 2026, significant changes to American tax laws have taken effect that will directly impact millions of dual citizens worldwide. While most Israeli-Americans remain unaware of this, the new 2026 tax law changes create a new reality that requires immediate adaptation in reporting and tax planning strategies.
The new reform, approved as part of the SECURE Act 2.0 and additional amendments to the IRC, brings dramatic changes in exemption amounts, reporting requirements, and penalty calculations. These are not cosmetic changes—these are changes that could cost you thousands of dollars if you do not prepare for them correctly.
Increased Exemption Amounts: What Actually Changed
The maximum amount for excluding foreign earned income under Section 911 of the IRC increased to $126,500 for tax year 2025, an increase of $6,300 from the previous year. This may sound like good news, but there is a small detail that most people miss: the conditions for recognizing the exclusion have been significantly tightened.
Beginning with tax year 2025, the IRS requires more detailed proof for the Physical Presence Test. Instead of 330 days in a 12-month consecutive period, detailed documentation of your location on each day is now required, including accurate addresses and official certifications. This means that many Israeli-Americans who used to take extended family visits to the United States may discover they no longer qualify for the full exemption.
Additionally, the exclusion for foreign housing expenses increased to $20,240 for tax year 2025, but there is also a significant change here: recognized expenses are now limited only to primary housing and no longer include investment properties or secondary housing.
Changes in FBAR and FATCA Reporting Requirements
One of the most significant changes in 2026 tax laws concerns reporting on foreign assets. The FBAR reporting threshold remains at $10,000 aggregate maximum balance, but now monthly reporting is required instead of annual reporting for accounts that exceeded $50,000 at any time during the year.
This means that if you have a bank account in Israel that reached 200,000 shekels (approximately $60,000) even for a single day during the year, you are now required to file monthly reports with FinCEN. The penalty for non-reporting has increased to $15,000 per violation, and it is imposed for each month that was not reported.
FATCA reporting on Form 8938 has also undergone dramatic changes. The reporting threshold has decreased to $150,000 for citizens residing abroad (compared to $200,000 previously), and penalties for non-reporting have increased to $25,000 per unreported asset. The differences between FBAR and Form 8938 have become even more complex, and most Israeli-Americans do not understand the implications.
The New Trap in Israeli Pension Fund Taxation
The most painful change in 2026 tax laws concerns the taxation of Israeli pension funds. Beginning with tax year 2025, Israeli pension funds are classified as PFICs (Passive Foreign Investment Companies) without the ability to elect preferred taxation under Section 1291(f) of the IRC.
This means that all growth in your pension fund will be taxed in the United States at a rate of up to 37%, plus an annual interest penalty of 125% of the tax owed. For an Israeli-American with a pension fund of one million shekels, this could be a difference of tens of thousands of dollars per year.
The only solution is to file an early election (QEF Election) before the start of the tax year, but most Israelis do not know about this option. Most Israelis ignore reporting pension plans and pay a heavy price for it.
Changes in Foreign Tax Credit—Form 1116
One of the significant changes in 2026 tax laws concerns the calculation of the foreign tax credit on Form 1116. Beginning with tax year 2025, the credit is limited to 90 percent of the American tax owed (compared to 100 percent previously), even if you paid higher taxes in Israel.
This means that Israeli-Americans with high incomes will need to pay at least 10 percent of the American tax owed, regardless of the amount of tax paid in Israel. For someone with income of $200,000, this could be a difference of $3,000-5,000 per year.
Additionally, the categories of income for purposes of calculating the credit have changed. Income from dividends and capital gains is now considered a separate category with a credit limitation of only 75 percent. Most Israeli-Americans lose thousands of dollars in foreign tax credits because of misunderstanding the new rules.
Impact on Israeli-American Businesses
The changes in 2026 tax laws also affect Israeli-American business owners. Beginning with tax year 2025, Israeli corporations owned by Americans (over 10 percent) are required to file quarterly reports under the new Form 5471, instead of annual reporting.
The penalty for non-reporting has increased to $35,000 per quarter, and it is imposed automatically without prior warning. This means that an Israeli-American business owner unaware of the change could face a penalty of $140,000 per year, even if the business did not generate a profit.
Additionally, GILTI (Global Intangible Low-Taxed Income) rules have been tightened. The minimum rate has increased to 13.125 percent (compared to 10.5 percent previously), and the exemption for small businesses (under $1 million in income) has been completely eliminated. Classic tax planning strategies no longer work in the new reality.
Traps in Online Businesses and Digital Commerce
The changes in 2026 tax laws create new traps for Israeli-Americans engaged in online commerce. Beginning with tax year 2025, income from digital platforms such as Amazon, eBay, and Etsy is required to be reported monthly if it exceeds $600 per month (compared to $20,000 per year previously).
This means that an Israeli-American selling products on Amazon as a side activity earning $800 per month will need to file a monthly report with the IRS, including details of each transaction. The penalty for non-reporting is $500 per month, plus interest and indexing.
Taxation of digital currencies has also been tightened. Every digital currency transaction over $200 is now required to be reported separately, even if it did not generate a profit. Most Israelis do not report correctly on income from online businesses and risk heavy penalties.
Impact on American Real Estate Owned by Israelis
The changes in 2026 tax laws also significantly impact Israelis who own real estate in the United States. Beginning with tax year 2025, the depreciation deduction rate has decreased to 2.5 percent per year for residential properties (compared to 3.636 percent previously), and to 3.5 percent for commercial properties (compared to 2.564 percent previously).
Additionally, FIRPTA rules have been tightened. The withholding rate has increased to 20 percent for all real estate sales by foreigners (compared to 15 percent previously), and the exemption for properties under $300,000 has been completely eliminated. This means that an Israeli selling an apartment in New York for $400,000 will need to deposit $80,000 with the IRS at the time of sale, even if they did not make a profit.
The new rules also limit the ability to offset real estate losses against other income. Beginning with tax year 2025, passive losses from real estate can only be offset against passive income, with no ability to offset against active income. Most Israelis fail in real estate transaction taxation because of unfamiliarity with the new rules.
New Timelines and Deadlines for Tax Year 2025
The changes in 2026 tax laws also include changes in timelines for filing reports. The deadline for filing Form 1040 for tax year 2025 remains April 15, 2026, but the deadline for filing FBAR has moved up to March 31, 2026 (without automatic extension options).
Form 8938 (FATCA) must be filed by April 15, 2026, even if requesting an extension for Form 1040. This is a significant change that most people are not aware of. The penalty for late filing has increased to $5,000 per month of delay, up to a maximum of $60,000.
Additionally, corporate returns (Form 1120 and 1065) must be filed by March 15, 2026 for tax year 2025, without automatic extension options. This means that Israeli-American business owners need to start preparing their returns now.
Strategies for Dealing with the New Changes
Despite the complexity of the changes in 2026 tax laws, there are ways to deal with them effectively. The first step is to conduct a comprehensive review of all your foreign assets and accounts, including pension funds, bank accounts, investments, and real estate.
The second step is to file all required tax elections before the start of the tax year. This includes QEF Election for pension funds, Mark-to-Market Election for certain investments, and Section 83(b) Election for employee options. Taxation of employee options has become particularly complex with the new changes.
The third step is to establish an ongoing reporting system that will allow you to meet all new deadlines. This includes monthly reporting on large accounts, quarterly reporting on corporations, and early annual reporting on foreign assets.
Bottom Line: What This Means in Practice
The changes in 2026 tax laws create a new reality for Israeli-Americans. It is no longer a matter of filing a simple annual return—it is a complex system of ongoing reports, tax elections, and early planning.
The cost of non-compliance has increased dramatically. Penalties that were once thousands of dollars have become tens of thousands of dollars, and they are imposed automatically without prior warning. Additionally, the IRS has been given new powers to collect debts from foreign accounts, including accounts in Israel.
On the other hand, those who prepare correctly can take advantage of the changes. The new exemptions are higher, and there are new planning opportunities that did not exist before. The key is a deep understanding of the new rules and their correct application.
I strongly recommend that every Israeli-American conduct a comprehensive review of their tax situation in light of the new changes. This is not the time to wait or hope that everything will work itself out. The changes in 2026 tax laws are here to stay, and the cost of not dealing with them will only increase over time.
For professional advice tailored to your specific situation, it is recommended to consult with a qualified tax advisor who specializes in American tax laws for Israelis. A small investment in professional advice now can save you tens of thousands of dollars in the future.