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Article #1: Investing for dual US-Israeli Citizens

עודכן: 29 במרץ 2023

Dual Israeli and US citizens may face several issues when investing in the stock market.

For example, many Israelis with dual citizenship may unknowingly expose themselves to extremely heavy tax burdens. This becomes a real problem when investing in passive foreign investment companies (PFICs).

PFICs are foreign companies whose income is primarily passive, such as from investments in stocks, bonds, or mutual funds and also Israeli investment instruments such as Polisat Chisachon. PFICs can be complex and may not be suitable for dual US Israeli citizens due to certain tax implications.

Under US tax law, PFICs are subject to special tax rules that are intended to prevent US taxpayers from deferring tax on passive income earned through foreign companies. These rules are known as the PFIC rules and they can be quite complex.

The PFIC rules apply to US taxpayers who own shares in a foreign corporation that meets the definition of a PFIC (e.g. a mutual fund traded on the Tel-Aviv stock exchange or a Polisat Chisachon bought from the major Israeli insurance companies). This can include dual US Israeli citizens who own shares in a foreign company. If the PFIC rules apply, US taxpayers may be subject to additional taxes and reporting requirements.

In general, PFICs may not be suitable for dual US Israeli citizens due to the potential tax implications. However, it's important to note that not all foreign investments are PFICs, and there may be other types of foreign investments that are more suitable for dual US Israeli citizens.

Dual US Israeli citizens who are considering investing in foreign companies should consult with a tax professional or financial advisor who is familiar with the PFIC rules and can help them navigate the tax implications of their investments. A simple and relatively straightforward solution may be to buy exchange traded funds (ETFs) via the US stock exchange (NYSE or Nasdaq).

Using just three ETFs (actually even two may be sufficient such as vanguard VT and Vanguard BSV) an Israeli-US dual citizen can gain exposure to international stocks or bonds and avoid the implications of PFIC tax rules.

To build a three-fund investment portfolio using three ETFs, a dual Israeli-US citizen (and of course a US citizen) can consider the following steps:

  1. Determine asset allocation: The first step is to determine the appropriate asset allocation based on personal investment goals, risk tolerance, and time horizon. A commonly recommended starting point for a simple three-fund portfolio is a split of 60% stocks, 40% bonds.

  2. Choose the US stock ETFs: Next, select a stock ETF that matches the desired stock allocation. Some popular options include VTI (Vanguard Total Stock Market ETF), SCHB (Schwab U.S. Broad Market ETF), or IVV (iShares Core S&P 500 ETF).

  3. Choose the international stock ETF: For the international stock allocation, investors can choose an ETF that covers international markets such as VXUS (Vanguard Total International Stock ETF), SCHF (Schwab International Equity ETF), or EFA (iShares MSCI EAFE ETF).

  4. Choose the bond ETF: Vanguard BSV is a great first option to base the bond side of the portfolio on and may be completely sufficient as a core or even single holding. BSV invests in high-quality, short-term bonds, and can provide stability and income to the portfolio.

  5. Allocate funds: Finally, the investor can allocate funds to each ETF based on the desired asset allocation. For example, an investor with a 60/40 stock/bond allocation could allocate 36% to the stock ETF, 24% to the international stock ETF, and 40% to the bond ETF (BSV).

It's important to keep in mind that investing involves risk, and past performance does not guarantee future results. Therefore, it is always a good idea to consult a financial advisor before making any investment decisions.

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