Q`s & A`s About Tax Coordination
When and Why Tax Coordination Is Worth Doing, and How to Do It in Practice
Author: Paamonim Team and Yossi Danziger, CPA and Paamonim Volunteer
In Israel, the tax system uses a unique approach to calculating and coordinating income tax throughout the year. Understanding how this works can help you keep more money in your pocket and avoid overpaying taxes. Let’s explore when tax coordination makes sense and how it works.
How Is Income Tax Calculated on Your Salary?
Income tax on your salary is calculated according to tax brackets. The more you earn, the higher the percentage of tax deducted from your income. The deduction is based on an estimate of your annual salary.
Tax is calculated on total annual income, which can only be determined accurately after the year ends. However, tax is deducted at source, meaning your employer calculates and deducts tax from your salary each month. When you don’t work for part of the year, work in multiple jobs, or change employers, situations arise where the tax deducted doesn’t accurately represent your actual annual salary.
Here’s an example: For the first month of the year, tax is calculated according to that year’s tax brackets divided by 12, assuming your salary remains constant throughout the year. If you stay with the same employer, the tax for the second month is calculated based on the cumulative amount from the first two months, with tax calculated according to the annual tax bracket divided by 6.
Why Is Tax Coordination Beneficial?
In certain situations, your employer’s estimate may be much higher than your actual income, creating a situation where you pay tax at a much higher rate than you actually owe.
When Should You Coordinate Your Taxes?
Tax coordination is beneficial in these common situations:
Working in more than one job – When you work multiple jobs, Israeli law requires employers to deduct tax at 47% from your second job onward, unless you coordinate your taxes.
Changing jobs during the year – Since there are usually differences between salaries at two different workplaces, you may pay more tax than you owe.
For example, your first employer deducted tax based on an annual estimate of 12 months times your salary. When you change jobs with different conditions, your new employer calculates tax based on your new salary times 12 months. In reality, your annual salary was a combination of both, and your tax should account for both salaries and the transition period. Sometimes the transition includes a period of unemployment, so you actually worked only part of the year and paid more tax than required.
Working only part of the year – By default, your employer multiplies your monthly salary by 12 to estimate your annual income and you pay tax accordingly, when in reality you worked only part of the year. Your cumulative annual salary is lower, so your tax liability is smaller.
Receiving a pension alongside employment income
Having self-employment income in addition to salary as an employee
Having passive income subject to tax, such as rental income or royalties from book sales
How Do You Coordinate Taxes?
Tax coordination with the Israel Tax Authority can be done in several ways, including through their website, through a tax assessor at the Tax Authority office, or through a licensed representative such as an accountant or tax consultant. The process generally involves submitting relevant forms and documentation, after which the tax assessor determines the appropriate tax rate to deduct from your income and prepares certificates to give to your employer or employers.
If I Work Two Jobs, How Does Tax Coordination Work?
During tax coordination, you designate your permanent workplace with the higher salary as your primary job and receive the full credit points you’re entitled to from that salary. For your secondary workplace, tax coordination is arranged and tax is deducted at a fixed percentage of salary without credit points.
How Do I Know If I’m Entitled to a Tax Refund for the Previous Year?
At the beginning of each year, it’s worth gathering all your tax forms from the previous year’s workplaces. Using the Israel Tax Authority’s simulator, you can check whether you’re entitled to a tax refund. You can submit a refund request independently or pay a professional such as an accountant or tax consultant to handle it for you.
Taking a few minutes to review your tax situation could put extra money back in your pocket. If any of these situations apply to you, it’s worth exploring whether tax coordination makes sense for your circumstances.
