Year-End Tax Preparation

Category: Tax Planning | Reading time: approx. 8 minutes

The Israeli tax year ends on December 31 — not just a calendar date, but a legal cut-off after which tax for that year is locked in. Most actions you take after that date cannot affect the prior year's liability. Therefore, October–December is a valuable window for legitimate tax planning. This article presents a professional checklist of actions to consider before year-end — separately for the self-employed, companies, and salaried employees.

Checklist for the Self-Employed and Companies

1. Provident Funds and Education Funds

• Self-employed provident fund: contribute up to 16% of income (cap ILS 35,200) — yields both deduction and credit.
• Self-employed education fund: up to 4.5% of income (cap ILS 19,920) — deduction + future capital-gains benefit.
• Investment provident fund (Gemel Lehashka'a): up to ILS 71,121 per year — no deduction, but future tax benefit.

2. Loss Utilization and Profit Reduction

1. Realize losses — review investment portfolios and identify loss securities to sell against gains.
2. Release reserves — defer income recognition to next year where possible.
3. Accelerate expenses — repairs, renovations, equipment purchases — if cash-flow-feasible.
4. Accelerated depreciation — check eligibility on new assets.

3. Recognized Donations

Donations to nonprofits with Section 46 approval yield a 35% tax credit (individuals) or 23% (companies) — minimum for credit is ILS 200, and the maximum is set by statutory ceilings.

4. Withholding Tax Coordination

If you have income from multiple sources, verify withholding-tax coordination to avoid a large liability at year-end.

5. Review of 102/126 Reports

Companies should ensure that preliminary employee filings are correct and that excess withholding-tax-at-source has been submitted for correction.

Checklist for Salaried Employees

• Provident-fund contribution — salaried are entitled to a benefit on independent contributions of up to 5%–7% of salary.
• Independent education fund — an important option for higher-earning salaried employees.
• Section 46 donations — sometimes not embedded automatically in the pay slip; can be claimed in the annual refund.
• Credit points — discharged soldiers, students, single parents, children up to age 18.
• Tax refunds — back 6 years in some cases.
• Academic-tuition expenses — partial refund eligibility.

Strategic Actions for Shareholders

Controlling shareholders should examine several issues:

1. Dividend distribution — strategic timing between years can save tens of thousands of shekels.
2. Excess withdrawals (Section 3(t)) — repayment required before year-end to avoid tax charge.
3. Loans to/from the company — review of classification and interest.
4. Shareholder salary — optimal planning between salary and dividend.
5. Shareholder pension — different ceilings and limits from regular employees.

Special Topics — Don't Forget

• Capital declaration — if required, start collecting data well in advance.
• Crypto and foreign securities — position at the cut-off date is critical.
• Foreign assets — reporting obligation on foreign bank accounts above certain thresholds (FATCA, CRS).
• Tax-exempt investments review — index-linked bonds are partially exempt.
• Severance funds — shareholders should ensure transfer to a recognized fund.

Common Year-End Planning Mistakes

• Contributing to a provident fund on December 31 after business hours — may be recorded only in the next year.
• Realizing losses that aren't offsettable — not every loss can be offset against any gain.
• Accelerating expenses without invoices yet — won't be recognized.
• Incorrect judgment on donation "reasonableness" (ceiling).
• Discarding receipts — must be kept for 7 years.

Summary

Year-end tax planning is a welcome annual opportunity to review your financial situation, identify opportunities, and substantially save tax legitimately. This checklist is a starting point — it does not replace personal professional advice. A few hours with your CPA before year-end will pay for itself many times over.