Did you receive a large grant? The move that will save you tens of thousands of shekels in taxes
Ending employment is sometimes accompanied by receiving a retirement grant or a large sum of money. Apparently, this is money subject to tax of up to 50%, but under certain conditions you can save tens of thousands of shekels net. This is how the "tax spreading" method works.
Ending employment or retiring is sometimes accompanied by receiving one-time sums of money, such as retirement grants, increased severance pay, or cashing out vacation days. However, these amounts pass through another station before they become net in the bank account - the Tax Authority. The share it demands can reach 50%. The good news: there is a way to reduce the severity of the decree.
In this article, we will analyze the tools that will allow paying less tax in these cases. We emphasize that each case should be examined on its own merits through individual and professional advice according to your conditions.
When is it not mandatory to pay all the tax immediately for a large sum?
"At retirement age, the state grants two main gifts, but these are communicating vessels - one comes at the expense of the other," explains Shahar Kaykov, director of the Seniority retirement support center at Migdal Insurance and Finance. "The first is tax-exempt severance pay in cash: exemption from paying tax on severance pay up to a ceiling of about 13,750 shekels for each year of work at the same employer. The second is tax exemption on the monthly pension, which is subject to regular income tax, but the state additionally grants a basket of exemptions within the framework of rights fixation worth about 5,400 shekels every month, for life."
4 things you must know about tax spreading at retirement
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The trap: Retirement grants, sick day cashing, and increased severance pay are considered income subject to a marginal tax rate that can reach up to 50%.
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The mechanism: Forward tax spreading divides the amount for up to 6 years forward, while all the money enters the current account immediately.
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The eligibility formula: One year of spreading forward for every 4 years of seniority at the employer.
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The critical mine: Returning to work with a high salary during the spreading years will jump the tax brackets and erase all the savings.
The condition for receiving the full exemption on the pension, according to Kaykov, is not to withdraw exempt severance pay in the 32 years preceding retirement age (starting from 2027). "The more exempt severance pay you withdrew in the past, the more the monthly exemption on the pension shrinks," he says.
When does tax spreading enter the picture?
"Tax spreading is born when there are funds subject to tax, mainly large retirement grants beyond the exempt ceiling. This tool is intended mainly for those who receive large grants, for employees with high salaries, or for employees who are controlling shareholders in companies who are facing retirement," says Kaykov. Two main options enter for delaying or reducing the tax event: severance pay continuity and tax spreading.
How does the mechanism of tax spreading work in practice?
Kaykov: "The ordinance determines that it is allowed to receive one year of spreading for every 4 years of work at the employer, up to a maximum of 6 years. The critical point is that the spreading is conceptual only for tax purposes - all the money is received into the bank account immediately. For example, suppose you worked 16 years at the same place and received a taxable grant of a million shekels. 16 divided by 4 gives 4 years of spreading. From the Tax Authority's perspective, it is as if you earned 250 thousand shekels in each of the 4 following years. If you have no other income in these years, the amount will benefit from low tax brackets, which creates huge tax savings."
Who is it suitable for?
Maor Eliasi, CEO and founder of Orient Insurance and Finance, explains: "If you retired and received a million shekels in taxable severance pay, spreading is almost always a mandatory move. When is it unnecessary? Only if the client continues to work full-time with a very high salary." Net savings in the pocket range around 20-60 thousand shekels.
What is the most critical mistake?
Eliasi: "The biggest mistake is to think 'the employer will already arrange it' and withdraw the money in one payment without prior planning. Once the tax was deducted at source and entered the account, in some cases it cannot be fixed. This mistake costs retirees tens and even hundreds of thousands of shekels that remain with the state."
