The legal trick that will save you tens of thousands of shekels from the Tax Authority

Retirement from work or the end of a significant employment period is often accompanied by the receipt of large sums of money at once. Retirement grants, increased severance pay, and the redemption of vacation days can accumulate into significant amounts, and therefore tax planning at this stage can have a significant impact on the amount that will remain in the employee's hands.

According to a report by Globes, one of the legal ways to deal with the tax liability on such amounts is a mechanism known as "tax spreading" (prissat mas). This is a tool intended primarily for severance pay or grants that are subject to tax, meaning the amounts that are beyond the exempt ceiling set by law.

Within the framework of the mechanism, it is possible to conceptually divide the amount of severance pay over a number of tax years. Eligibility allows for one year of spreading for every four years of work, up to a maximum of six years of spreading. When it comes to funds related to several employers, this is also subject to conditions regarding the continuity of severance pay.

It is important to clarify that in practical terms, the money is not received in parts over the years. The employee receives the amount in cash into the bank account immediately, but for tax calculation purposes, the Tax Authority treats it as if it were received in equal parts over the years of spreading.

The main advantage lies in the possible decrease in income after retirement. When the annual income is lower, one can enjoy lower tax brackets and credit points, instead of having the entire amount taxed at once at the high marginal tax rate, which can reach about 50 percent. In some cases, the savings can reach tens of thousands of shekels.

However, alongside tax spreading, there is another issue that is important to take into account. The state grants a tax exemption on the withdrawal of severance pay in cash, up to about 13,750 shekels for each year of work, as well as a monthly tax exemption on the pension, up to about 5,400 shekels. These are interrelated benefits, where withdrawing exempt severance pay today may reduce the tax exemption that will be granted on the pension in the future.

In contrast, tax spreading refers only to the part of the severance pay that is subject to tax. Therefore, activating the mechanism on the taxable amount does not harm the future exemption on the pension.

This tool may be especially suitable for employees who receive a significant grant and are not expected to earn high amounts in the years following the end of work. An example of this is employees in the high-tech sector who finish an employment period, go on sabbatical, or move to a field where the salary is lower.

On the other hand, for those who continue to work full-time and with a high salary, the spreading may not provide an advantage. In such a case, the annual amount attributed within the framework of the spreading is added to the already high income and may be taxed at the maximum tax rate.

One of the main mistakes is a lack of planning in advance. Allowing the employer to deduct the maximum tax and withdrawing the funds all at once can be steps that are difficult to correct in retrospect. Also, automatic spreading is not necessarily the right solution, and therefore one must examine in advance what the income is expected to be in the coming years.

In cases where a high income is expected, one can consider "severance continuity" (retzef pitzuim), in which the money remains in a designated fund and the tax is not paid immediately. Tax spreading can be carried out at a later stage, when one actually stops working and the income changes.

The timing of retirement can also have significance. According to the article, planning the end of work for the last quarter of the tax year may allow the first year of spreading to end in a relatively short time, so that the following years will be cleaner of income from work and one will be able to enjoy the low tax brackets to a greater extent.

Those who choose to use tax spreading must also take into account the obligation to report. Throughout each of the years of spreading, it is required to submit an annual report to the Tax Authority. Therefore, early planning of retirement and an understanding of the expected income can be significant in determining the way in which it is worth handling the funds received at the end of work.