Fixation Of Rights

Introduction:

If you started receiving a monthly pension – you must get to know the term “Fixation of Rights”.

Unlike other exemptions that exist in the Israeli law, the exemption on pension received from fixation of rights cannot be obtain automatically, one needs to apply to the Tax Authority in order to receive it, or else you and you end up paying a high and unnecessary tax.

In this article we will try to explain the term “Fixation of Rights”, give special emphasis regarding U.S citizens and draw attention to the fact that tax refunds can be obtained for previous years.

What is “fixation of rights”?

Once in retirement age (62 for woman and 67 or man) and after receiving the first monthly pension, the pensioner is entitled to perform a “fixation of rights”.

In fixation of rights, a permanent exemption on pension for life is calculated, which can be utilize against the monthly pension for life.

What the amounts we are referring to?

Each retiree is eligible for an exemption basket of 800,000 NIS. This exemption can be received as a withdraw as a lump sum or as a monthly pension exemption of up to 4,400 NIS for life.

In the “fixation of rights”, we ultimately decide how to take advantage of the exemption package.  There are three possible types of exemptions:

• Exemption for a severance package
• Monthly pension exemption
• Exemption on “Hivun Kitzba” (Withdrawing the accumulated pension amount as a lump sum – tax-free).

Is it possible to make changes in the Fixation of Rights after been performed?

The fixation of rights – As its name implies, is permanent. Once the fixation of rights has been carried out, you only have 120 days to make changes. After that it is impossible to regret or to change the ratio between the different types of exemption’s types. Filling out the fixation of rights form has far-reaching implications for the tax paid from the date of retirement and onwards.

The fixation of right is set on Form 161D. To go to the form, click here.

Since this is a substantive decision, employees of the Tax Authority are prohibited from assisting in filling out this form. Therefore, they usually refer the pensioners to get external advice or instruct them to fill out this form on their own without understanding the significance of their decision.

What is the special emphasis for American citizens who wish to perform “fixation of rights”?

U.S. citizens who wish to perform fixation of rights should consider the future tax payment to the U.S. tax authorities who do not recognize this exemption. For this reason, they should examine the options available to them very carefully.

The U.S. citizen who performs fixation of rights and does not consider American tax aspects could be caught up in a “tax accident”.

Example of a tax accident:

John is a resident of Israel and a U.S. citizen. By being a U.S. citizen, John is required to file tax reports to the U.S. Tax Authorities.

John performed a fixation of rights and received an exemption of 600,000 NIS which he withdrew from the pension fund in Israel without paying tax in Israel.

Since the IRS does not recognize this exemption, John is forced to pay full tax on this income to the U.S. Tax Authority according to his marginal tax bracket.

If John would have withdrawn this amount over several years or alternatively sought to divide the exemption in a different way a large portion of the liability to the IRS would have been saved.

Is it possible to perform retroactively fixation of rights?

It certainly is. You can perform fixation of rights and request a tax refund based on the exemption up to 6 years from the end of the tax year. As of 2021, you can receive a tax refund for 2015 onwards.

In the past few years, we have applied for many tax refunds for pensioners who wished to perform fixation of rights. These pensioners have received thousands of shekels of tax refunds for every year.

The retirement department in our firm is set to assist you with patience, smile and professionalism in any matter related to planning your retirement tax and pensions.

For questions, advice and to arrange a meeting on zoom, you are welcome to contact the CPA Hai Bahalul from our office and the rest of the firm’s staff at [email protected]