Israel, Netanya, Meffi 5, office 308
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Israel, Netanya, Meffi 5, office 308

U.S. citizen's choice between Puerto Rico and Israel

November 24, 2023 199 Time to read: 15 min.

American family moving to Israel: relocation with children

The client is 38 years old and his wife is 36 years old; they have two sons aged 4 and 6. The family resides in the city of New Haven, Connecticut. The city was founded in the 17th century and Yale University is located here. This place is very respectable, with impressive architecture and a lot of greenery. All infrastructure is in walking distance, without traffic jams and the tiresome noise of the metropolis. From the minuses – high prices for apartments and constant dampness. In addition, fall and winter in Connecticut can be quite chilly, and the family wanted to move to a region with a warmer and more stable climate. But the main reason prompting the move was the tax burden, which amounted to up to 30% of all income.

Domestic anti-Semitism was another reason to move. In 2022, the United States experienced the highest level of anti-Jewish sentiment in 40 years. This was expressed not only in the form of anti-Semitic statements on social networks, but also in threats of terrorist attacks.

The family enjoys outdoor activities and traveling and would prefer to live in a place where there is plenty of entertainment and educational activities for the children. The clients are also interested in giving their children a good education. The head of the family works in a company that has connections with foreign partners and branches abroad, a significant part of his working day is spent online. They would prefer to live in an English-speaking environment or where there is a large English-speaking community. Clients considered Israel and Puerto Rico, but could not make a definitive choice.

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    Jewish heritage and taxation: why was the client looking for an alternative?

    The client comes from a Jewish family: his grandmother came from Austria and miraculously managed to survive the Holocaust. There were over 190,000 Jews living in Austria before the Second World War. Terror began after the annexation of Austria by Germany in March 1938. Jewish assets were arrested and the Jews themselves were sent to concentration camp. In those years, the American Jewish committee “Joint” helped the Austrian Jews to emigrate urgently. It was thanks to the Joint that the client’s grandmother and her parents ended up in the United States.

    The client’s family has always honored Jewish traditions. He himself is not particularly religious, although he occasionally attends synagogue and tries to instill Jewish values in his children.

    Even before the birth of their youngest child, he and his wife considered moving to Israel, but they were deterred by the need to learn Hebrew and the tension at the country’s borders. On the plus side, there was a lack of anti-Semitism and more flexible taxation – especially since there has been a double taxation agreement between Israel and the U.S. since 1995.

    Puerto Rico: pros and cons

    Puerto Rico is an island state that has been under the control of the United States for 125 years (since 1898). It has its own administration, but it is a territory belonging to the United States. Since 1952 it has had the status of a “commonwealth of the United States”, or in Spanish “Estado Libre Asociado”, with a fairly wide degree of autonomy. Residents of Puerto Rico are granted U.S. citizenship from birth.

    The economy of the country is mainly represented by two sectors: industry and services. The share of agriculture is about 0.8%. Pharmaceuticals, electronics, food production, tourism are developed. American companies prevail in the field of production. Three quarters of all workers are employed in the service sector. The level of GDP per capita is 32,600 dollars.

    Puerto Rico, which is considered a U.S. territory, however, is not a state, and its residents do not pay federal taxes in full. Because of this, they have limited access to government social programs such as Medicaid and SNAP (Supplemental Nutrition Assistance Program). Residents of Puerto Rico cannot vote in U.S. presidential elections or have representation in the U.S. Congress.Other disadvantages of this island nation include the fact that its economy is largely dependent on financial support from Washington, and it is often insufficient to solve pressing problems. The country has been experiencing a protracted economic crisis since 2004, which worsened with the onset of the pandemic.

    The cost of living in Puerto Rico is quite high and not much inferior to the United States. Some products: milk, eggs, chicken meat, among others, are more expensive here than in Connecticut. The same goes for utilities, internet, and cell phone service. Housing prices rose an average of 8.5 percent in 2022.

    Nearly half of the population lives in poverty, and the median household income is about $18,000 a year. The nation’s population declined by 19% during the recession (2004-2022), and the pension and public health care systems are on the verge of bankruptcy. As of July 2023, Puerto Rico’s minimum wage is set at $9.50 per hour, or $1,472 per month.

    Since 1967 in Puerto Rico there have been 6 referendums on the future political status of the country. All this time the number of supporters of turning Puerto Rico into the 51st state of the USA has been growing. At the last one, held in 2020, 52.3% of Puerto Ricans were in favor of joining the United States. Another referendum is due to be held in August 2024, but all of these votes are not legally binding on the United States, so they have no impact on the political status issue. Only Congress can authorize such a referendum, and a majority vote in the House of Representatives and the Senate is required to admit a new state into the United States.

    The client was also confused by the fact that Puerto Ricans are mostly of mixed Spanish-Afro-Caribbean culture, which would make it difficult for him and his family to express their Jewish identity. Religiously, it is a Catholic-Protestant country, and a small one at that. There are only a couple of synagogues, one of which belongs to Reform Judaism.
    Puerto Rico, like any other island state, can not boast of high-quality medical care or the presence of prestigious educational institutions. This place is more suitable for retirees than for a young couple with children.

    The entire program for obtaining 2nd citizenship may be abolished altogether since Puerto Rico wants to gain independence from the United States, the decision to stop issuing citizenships will be made before 2027. This is important to understand when choosing a country to obtain a second passport.

    Why the client gave up on Puerto Rico: taxes and residency permits

    There are many similarities between Puerto Rico and the rest of the United States: basic laws, banking and judicial system. However, this country has its own tax system. Americans moving from the mainland to this island nation are exempt from filing an annual Form 1040 tax return with the Internal Revenue Service (IRS). Taxes on wages, dividends, interest on income from the sale of stock and capital gains will be remitted to the government of Puerto Rico. However, in some instances, U.S. citizens retain the obligation to pay federal taxes. Specifically, individuals pay customs duties and employers pay payroll taxes and Federal Unemployment Tax Act (FUTA) taxes.

    In Puerto Rico, one must earn more than $61,500 per year to qualify for the highest tax bracket. The maximum tax rate for individuals in Puerto Rico is 33% (37% in the U.S.). Puerto Rico’s tax residency status depends on whether the resident is a U.S. citizen or a foreigner. If a U.S. citizen meets Puerto Rico’s Bona-Fide Resident Rule, their income may be exempt from U.S. taxation. However, income earned in the United States will be taxed.

    A bona fide resident may be defined as a U.S. citizen who, during the tax year:

    • Passed the residency test (presence test)
    • Did not have a “tax home” outside of Puerto Rico.
    • Did not have closer ties to the U.S. than to Puerto Rico.

    Passing the residency test means that the person was in the country for at least 183 days in the current tax year and at least 549 days in the last 3 years, and in any of these 3 years must be in Puerto Rico for at least 60 days per year. The stay in the U.S. must be no more than 90 days per year and the income for the year must be no more than $3,000.

    A tax home is where a person has a permanent source of income, or where he or she has a permanent residence. In Puerto Rico, a resident must purchase real estate to have a tax home there – the rental option is not eligible. Close connection with the state confirms the location of the person and his family, the presence in this country of his movable and immovable property, as well as organizations related to his activities – both professional, social or cultural.

    After weighing the pros and cons, the client decided that Puerto Rico residency was not right for him. While the cost of living is comparable to the U.S., the level of education and health care in this country is significantly lower. The issue of the status of this island nation has been discussed for decades, but no agreement has ever been reached. The decision is influenced, among other things, by the high level of corruption and bureaucracy in the country.

    Choosing Israel: tax advantages and cultural environment

    2022 was marked by a significant increase in aliyah from the United States: the number of American repatriates increased by more than 30 percent compared to the period before the pandemic. Israel is a country with a much more stable and developed economy than Puerto Rico. The pharmaceutical, medical and chemical industries, metal processing, energy production, and information technology development are all well represented here.

    There are more than 9,000 startups in Israel, and per capita the country attracts almost 30 times more venture capital than the US. The government provides substantial support to businesses, including young repatriate entrepreneurs. They can count not only on counseling and assistance in preparing a business plan, but also on preferential lending.

    Several MAALOT business initiative support centers have been opened in the country. As for taxes on individuals, in Israel, as in Puerto Rico, applies a progressive scale, but the rates are generally lower than in the United States. Say, if a person in Israel receives 15,000 shekels a month, he will pay personal income tax at the rate of 10-12 percent. The fact is that every resident of Israel is entitled to tax deductions, which are expressed in “favorable units” – nekudot zikuy. By default, all Israelis are given 2.25 such units. Certain categories of citizens receive additional nekudot zikuy: women, demobilized soldiers, parents, divorced spouses.

    Repatriates, in addition to the additional units, can count on a ten-year grace period, during which income received abroad is not taxed in Israel.

    Thanks to the development of the economy, Israel can provide a decent and comfortable standard of living with quality education and top-notch medical care. Israeli health care is rightly considered one of the best in the world; all citizens of the country are included in the state health insurance system. Secular education in the country is built according to British and American standards; there are schools and kindergartens with education in English. There are also religious schools. The expenditure on school education in Israel is 13.1%, which is higher than the average for OECD countries (10.6%). Israeli universities have a good reputation: in 2022, 4 higher education institutions of the country were included in the top 100 best universities in the world, with the Hebrew University of Jerusalem took the 18th position in this ranking.

    The history, religion, culture and identity of the Jewish people have always been linked to the Land of Israel, so it was here that the client and his family could fully experience their identity. Also important was the fact that Israel is a thriving democracy that protects the rights and freedoms of its citizens. One can be Jewish here without fear of anti-Semitism. It was the cultural proximity to the Jewish people that ultimately influenced the client’s final decision.

    Virtual relocation and unexpected obstacles: preparation and process

    • Client. A US citizen, holds an executive position in an IT company, is married, has two children and would like to relocate to another country to optimize his tax burden, which in the US exceeds 30%. Good healthcare and the opportunity to give his children a quality education are important to him. He is hesitating between Puerto Rico and Israel and would like to make sure he is making the right decision. The client wants to make the relocation smoothly and without unnecessary bureaucratic costs.
    • Task. To show the client the advantages of Israel from an economic, sociological and cultural point of view, to prepare a package of documents for repatriation and to provide support in the process of obtaining Israeli citizenship.
    • Stages of work. The interaction was carried out online. The client was shown the advantages of tax residency in Israel, and comparative calculations of tax burden in Israel and Puerto Rico were presented. The client chose Israel because it is a democratic country with a developed economy, where it is possible to raise children in a Jewish cultural environment. In addition, there are good business prospects here and there is government support for entrepreneurs. The preliminary contract was sent to the lawyer on the client’s side for review. There were no objections to any of the clauses of the agreement. The client had some of the documents in hand, the rest had to be searched in the archives, which made the process take a little longer. We worked with the client’s family on questions that are usually asked during a consular interview. In the course of the conversation the client got a couple of questions that turned out to be from the category of those for which he was not prepared, but it did not cause any problems.
    • Result. The client and his family successfully repatriated to Israel and obtained Israeli citizenship. They also signed a contract for additional services.

    From the United States to Israel: the case of tax-sensitive relocation

    The United States is the strongest economy in the world and a country with a strong democratic tradition dating back three hundred years. Nevertheless, high taxes, expensive health insurance, and social problems are causing some Americans to look elsewhere for a place to live.

    The year 2022 saw a significant increase in aliyah from the U.S., with the number of American repatriates up more than 30 percent from before the pandemic. American Jews were concerned not only about inflation and the political crisis in the U.S., but also about increasing incidents of anti-Semitism.

    The client had Jewish roots but was initially inclined to move to Puerto Rico because it was a U.S. territory, U.S. laws, U.S. companies, and English was widely spoken. The client decided that Israel was the best choice, including in terms of tax burden. Tax rates here are lower than in the United States, and repatriates, among other things, are provided with significant benefits. The client’s decision was also influenced by the opportunity to live in a Jewish cultural environment.

    And this is true, with such an important choice, it is important to evaluate all the pros and cons for you personally and make an informed decision whether to rely on Puerto Rico, which at any time can refuse to issue citizenship, leaving you in limbo, or rely on the half-century history of repatriation , favorable tax regimes and huge benefits for new citizens.

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