Does the Tax Authority owe you money? Sounds unlikely? Not necessarily.
The Tax Authority sometimes collects excess payments (i.e., more than what was required if accurate calculations had been made), so it’s important to actively check if you are eligible for a refund. The Tax Authority does not proactively return these funds, and to receive the money you are entitled to, you must submit a request for a refund. If it turns out that a tax refund is due, the tax authorities will transfer it directly to your bank account and even pay interest on these amounts.
- So, who is eligible for a tax refund?
Anyone who has overpaid income tax during the year is eligible for a tax refund. The tax amount is reviewed at the end of the tax year, and the total tax paid by the individual is compared with the tax that should have been paid.
Tax refunds mainly result from the fact that monthly tax deductions by the employer do not match the employee’s annual income. This mismatch usually occurs with salaried employees due to irregular work periods, failure to report certain details, or sometimes due to errors in the deduction and exemption categories to which the employee is entitled.
- How can a salaried employee know if they are eligible for a tax refund?
Income tax publishes an annual list of exemptions, deductions, credit points, and tax credits for that tax year. Based on this list, it is possible to check and estimate the tax refund amount before submitting the report to the tax authorities.
To do this, all relevant documents should be collected (Form 106, National Insurance documents for pension matters, status changes, proof of contributions to pension and provident funds, etc.).
The initial calculation can be done using the income tax department’s online calculator or other calculators available on the internet.
Additionally, you can consult a professional (lawyer, tax advisor, or accountant) who will check your eligibility. It should be noted that payment to a professional for preparing the tax report is a deductible expense that reduces taxable income and the amount of tax you will pay.
- In which cases is it recommended to check if you are eligible for a tax refund?
The common cases in which a salaried employee is eligible for a tax refund include:
- Working part-time during the year (due to unemployment, unpaid leave, job changes, and other cases of part-time employment).
- Changing employers during the year without coordinating taxes.
- Working abroad while simultaneously working in Israel during the year.
- Medical issues of the employee or their family members.
- Changes in personal status, such as marriage, childbirth, divorce, alimony payments, etc.
- Moving to an area with national priority (development towns, Galilee, Golan Heights, Negev, etc.).
- New immigrants within the first three years in the country.
- Soldiers discharged from compulsory military service within two years of completing their service.
- Contributions to pension funds, provident funds, or life insurance independently, for salaries without social benefits.
- Individuals who completed a bachelor’s degree or received a teaching certificate since 2005.
- Those who donated more than 190 NIS to recognized institutions for Section 46.
Guide to submitting a request for an income tax refund
- Will the tax authority notify me about my eligibility for a tax refund?
No. The tax authority publishes annually the list of exemptions, deductions, credit points, and tax credits for that specific tax year. This list is the basis for calculating the annual tax.
Typically, the tax authority does not require salaried employees to submit an annual report and relies on random checks instead.
- Do I need to submit a full annual tax report to receive a tax refund?
The tax authority has a simplified tax refund form for salaried employees (Form 135). This form is simpler than the full annual report. It is intended for salaried employees who are requesting a tax refund, not for the self-employed or those required to submit a full report.
According to Section 131 of the Income Tax Ordinance (“the Ordinance”), a resident of Israel who is 18 years old or older is required to submit an annual tax report to the tax authority.
However, certain groups are exempt from submitting the full report. These groups include salaried employees whose income or pension does not exceed 698,280 NIS per year (for the 2023 tax year).
- Is there a time limit or statute of limitations for submitting a tax refund request?
The statute of limitations and time limit for submitting reports to the tax authority and receiving tax refunds is up to 6 years after the end of the tax year for which the report was submitted. For example, in 2024, tax refunds can be requested for the 2017 tax year onwards, but not for earlier years.
For those not required to submit a full report, there are no set deadlines, so reports can be submitted throughout the year, subject to the 6-year limitation.
- What documents should be attached to the report?
Documents regarding income from employment (Form 106), other income, confirmations from the National Insurance Institute regarding replacement income benefits (such as unemployment benefits, maternity leave benefits, etc.), proofs of residence, Form 161 for severance pay, medical certificates, and personal deductions and credits (such as confirmations of life insurance or pension funds not paid through salaried work). Also, attach original receipts for donations, etc.
The report should also include the details of your spouse, as the eligibility for a tax refund is based on the combined income of both spouses.
- Will the tax authority compensate me for paying too much tax?
The Income Tax Ordinance states that the tax refund will be linked to the cost-of-living index and will accrue annual interest at a rate of 4%, starting from January following the tax year in question. The interest and linkage differences are exempt from tax.
In other words, those eligible for a tax refund will benefit from both interest and linkage on their refunds, similar to a tax-free savings plan.
- Is there an amount below which it’s not worth submitting a report to the tax authority?
According to the law, every report submitted to the tax authority must be processed, and every amount must be refunded. Even if the amount you receive is small, it’s worth investing the effort to complete the forms, submit the request, and receive the refund you’re entitled to.
- Is it possible to offset amounts between different tax years?
Tax liability is calculated annually, based on income from salary, employment, or other income received during that year. Therefore, it is not possible to carry income from one tax year to another. - Am I at risk of “upsetting” the tax authority when I request a tax refund? Could it lead to a full audit or the need to pay additional taxes?
Submitting a report with complete and accurate data does not “upset” the tax authority and does not cause tax assessors to place the taxpayer on a “blacklist.” Of course, anyone who has followed the law throughout the years is not at risk when submitting a report to request a tax refund and has nothing to fear. It is simply a registration process for the tax refund.
Every tax refund report undergoes examination and approval by the tax authority. The responsibility to ensure that all the data submitted is accurate and complete falls on the person submitting the report.
Preliminary verification of the data will help assess with a high degree of certainty whether the employee is entitled to a tax refund or if they owe additional taxes.
- How long does it take to receive the money back from the tax authority?
The law stipulates that a tax refund should be processed within 90 days or by July 31 of the year following the tax year for which the report was submitted, whichever is later.
Sometimes, the review of the report may be delayed beyond that, but it is important to note that the tax authority pays interest at a rate of 4% and applies adjustments for inflation on tax refunds until the actual refund date.
- How does the tax authority return the money?
The tax refund is made directly to the bank account of the person submitting the report. Bank account details are provided along with the report, so it is recommended to ensure that the details in the report are correct and accurate.
