Why the simplest US filing choice is often the most expensive one
Yes, but only on one of the two filing routes. American olim reflexively elect the foreign earned income exclusion, which zeroes the US tax on an Israeli salary and switches off the refundable child credit in the same move: file Form 2555 and you cannot claim the additional child tax credit2. The other route can pay real cash.
Almost every American who moves here is blindsided by this, and it is not carelessness. US citizens are taxed on worldwide income for life regardless of where they live6, so your family lands inside two child-benefit systems at once: the Israeli one, which pays a monthly allowance and asks nothing of your US return, and the US one, which pays only if you file, and only if you file a particular way. The decision is annual, it is made by you, and for a family with two children it is worth thousands of dollars a year in either direction.
Scope, and the usual disclaimer
This is general information, not tax, legal, or financial advice. Cross-border and Israeli tax interact in complex ways, so consult a qualified cross-border professional before acting, and do not treat a worked example as a computation of your own return.
Scope: this page covers earned income and the child credit only. No fund, pooled savings product or investment vehicle of any kind appears anywhere on it, so PFIC, the punitive US regime for non-US pooled funds, is out of scope here. It is addressed in the PFIC guide for olim, and it matters enormously the moment you invest rather than earn.
Who counts as a qualifying child when the whole family lives in Israel?
The tests are US tests, and living in Israel does not break them, with one exception that catches families every year. For the 2025 tax year, a qualifying child must be under 17 at the end of the year, be your child or a descendant of one, not provide more than half of their own support, have lived with you for more than half the year, be claimed as your dependent, be a US citizen, US national or US resident alien, and hold a Social Security number valid for employment issued before the due date of the return including extensions3.
Read the residence test again: it says lived with you, not lived in the United States. A child who has never set foot in America and attends first grade in Modiin satisfies it. The test that actually bites is the identifying number, because it is procedural and it has a deadline. A child who is not a US citizen can at best support the $500 credit for other dependents, which is not refundable and therefore pays nothing to a family with no US tax to offset3.
How do you get the identifying numbers from Israel?
Through two separate US processes that both take time, which is why they belong in your first year rather than in the week before the deadline. A Social Security number is applied for on Form SS-5, with evidence of identity, age and US citizenship8; for a child born in Israel, the citizenship evidence is the consular record of a birth abroad, handled by US consular services, so the birth registration and the number application are one sequence rather than two errands.
A spouse who is not a US person and has no SSN cannot get one, and applies instead for an Individual Taxpayer Identification Number on Form W-79. An ITIN exists precisely for people who need a US tax number but are not eligible for an SSN8. Note the asymmetry that trips people up: an ITIN solves a spouse problem, never a child problem. The child credit and its refundable part require the child to have an SSN2, and the same instructions add that if you, and your spouse if filing jointly, do not have a valid SSN, you cannot claim the credit either2.
The US side: the two routes on one family's numbers
Take one family: two American parents living in Israel, two children under 17 who each hold an SSN, and household earned income that is entirely Israeli salary. Shekel figures are converted at the IRS yearly average rate for 2025 of NIS 3.451 to the dollar°10.
Route A, the exclusion. Form 2555 excludes foreign earned income up to $130,000° for 20254. The US tax drops to zero, which feels like the end of the story, and the refundable credit is gone with it2. You also cannot claim a foreign tax credit for taxes on income you excluded5, so the Israeli tax you actually paid buys you nothing.
Route B, the foreign tax credit. The Israeli salary stays on the return, and the Israeli income tax already withheld from your payslip is claimed as a credit on Form 11165. If that credit covers the US tax, the refundable computation on Schedule 8812 runs: 15% of earned income above $2,500, capped at $1,700° per qualifying child for 2025, inside a total credit of $2,200 per child that starts shrinking above $200,000 of income, or $400,000 on a joint return3.
| Household earned income | Filing route | US tax owed | Refundable child credit received | Net cash difference per child |
|---|---|---|---|---|
| NIS 60,000 (about $17,386) | A: exclusion (Form 2555) | $0 | $0 | Baseline |
| NIS 60,000 (about $17,386) | B: foreign tax credit (Form 1116) | $0 | $2,233 (about NIS 7,706) | +$1,116 per child |
| NIS 180,000 (about $52,159) | A: exclusion (Form 2555) | $0 | $0 | Baseline |
| NIS 180,000 (about $52,159) | B: foreign tax credit (Form 1116) | $0 | $3,400 (about NIS 11,733) | +$1,700 per child |
| NIS 400,000 (about $115,908) | A: exclusion (Form 2555) | $0 on the excluded slice | $0 | Baseline |
| NIS 400,000 (about $115,908) | B: foreign tax credit (Form 1116) | $0 | $3,400 (about NIS 11,733) | +$1,700 per child |
Work the first row by hand, because it is the row that surprises people. Earned income of NIS 60,000 is about $17,386 at the 2025 average rate10. Subtract the $2,500 floor and take 15%: 0.15 x $14,886 is $2,233, which is below the $3,400 ceiling for two children, so the family receives $2,233, roughly NIS 7,706, or about $1,116 per child3. At NIS 180,000 the formula clears the ceiling and the family receives the full $3,400. Route A pays nothing at any of the three levels, and the entire difference is which form was attached.
The Israeli side: what Israel pays for the same two children
Israel pays קצבת ילדים (Kitzvat Yeladim), a monthly child allowance paid by ביטוח לאומי (Bituach Leumi) (the National Insurance Institute) to families living in Israel with children up to age 18, regardless of family income13. It arrives whether or not you ever file anything in the United States, and it is delivered as a benefit payment rather than through a tax return.
The two systems do not talk to each other, and that cuts both ways. Nothing in the Schedule 8812 computation asks what Bituach Leumi paid you1, so the Israeli allowance neither reduces nor replaces the US credit. Equally, the Israeli tax withheld from your Israeli payslip is not wasted money on Route B: it is the raw material for the Form 1116 credit that clears your US tax out of the way5.
What does the US-Israel treaty actually do here?
It protects you from double taxation, and it does not release you from the US return. The 1975 convention11 carries a saving clause at Article 6(3): notwithstanding the rest of the convention, a Contracting State may tax its residents and its citizens as if the convention had not come into effect12. That single sentence is why an American in Israel keeps filing.
What the treaty gives you instead is Article 26, under which the United States allows a citizen or resident a credit against US tax for the appropriate amount of taxes paid to Israel12. That is the treaty-blessed backbone of Route B. What no article does is create, preserve or enlarge a child credit: the credit is domestic US law, computed on Schedule 88121, and the treaty has nothing to say about it.
| Question | US treatment | Israeli treatment | What the treaty does |
|---|---|---|---|
| Who pays you for your children? | A credit on your return, refundable up to $1,700 per child for 2025, and only if you file3 | A monthly allowance from Bituach Leumi to families living in Israel with children up to 18, regardless of income13 | Nothing. No article creates or protects a child credit |
| What does your Israeli income tax buy you? | On the Form 1116 route, a credit against your US tax; on the exclusion route, nothing5 | It is your Israeli liability, withheld from your payslip at source | Article 26 has the US allow a credit for the appropriate amount of taxes paid to Israel12 |
| Can you stop filing in the US? | No. Worldwide income, for life, wherever you live6 | Israeli obligations are set by Israeli law and are unaffected by your US filing choice | Article 6(3) expressly preserves each state's right to tax its own citizens12 |
What if your spouse is not American?
Then filing status becomes a real decision rather than a formality. The IRS lets you elect to treat a nonresident spouse as a US resident and file jointly, in which case each spouse must report their entire worldwide income for that year and all later years, the election is made by a signed statement attached to the joint return, and the spouse needs either an SSN or an ITIN7. Without that election, head of household status is available to taxpayers who qualify7.
The interaction with the credit runs in both directions. A joint return raises the income ceiling before the credit starts shrinking, from $200,000 to $400,0003, and it brings your spouse's Israeli salary onto the return, which can lift the earned income the refundable formula runs on. It also enrols an Israeli spouse in the US tax system, for that year and every year after7. That is a one-way door, and it is the single point on this page most worth a cross-border professional's time.
What newcomers get wrong
- Assuming zero US tax means nothing to file. The duty is to report worldwide income, and Americans abroad get an automatic extension of the 15 April due date to 15 June6. No return means no refund, however low your US tax was.
- Electing the exclusion casually. If you later revoke the choice, you cannot claim the exclusion again for your next five tax years without IRS approval4. The reflex choice in year one can be expensive to undo in year three.
- Getting the child an ITIN. It does not work. The child needs an SSN valid for employment, issued before the due date of the return including extensions3, and a late consular appointment can cost a whole filing year.
- Treating Kitzvat Yeladim as the answer. It is a separate Israeli benefit paid to residents regardless of income13, and it has no bearing on what the US owes you.
- Deciding once. The better route flips with salary, with the number of children still under 17, and with the Israeli tax you actually paid. Run both routes every year, before the return is filed.
Knowledge Check
An American family in Israel has two children under 17, both with SSNs, and about $52,000 of Israeli salary. They file with Form 2555 and exclude all of it, so their US tax is zero. How much refundable child credit do they receive?
US citizens are taxed on worldwide income for life, so an American family in Israel can still claim the US child tax credit, but only on the right filing route. The foreign earned income exclusion on Form 2555 zeroes the US tax and also bars the additional child tax credit, so the reflex choice pays nothing. Keeping the Israeli salary on the return and offsetting the US tax with a foreign tax credit on Form 1116 leaves the refundable credit intact: up to $1,700 per qualifying child for the 2025 tax year, computed as 15% of earned income above $2,500. Each child must be under 17, live with you, and hold a Social Security number valid for employment issued before the return is due. Israel separately pays Kitzvat Yeladim through Bituach Leumi, and the two systems do not interact.
It cancels the refundable part outright. The Schedule 8812 instructions state that if you file Form 2555, you cannot claim the additional child tax credit. The non-refundable part survives on paper but has nothing to do, because the exclusion has already reduced your US tax to zero. For a family whose income is all Israeli salary, that combination usually means the exclusion route pays nothing.
For the 2025 tax year the refundable additional child tax credit is capped at $1,700 per qualifying child, inside a total child tax credit of $2,200 per child, and it is computed as 15% of earned income above $2,500. A family with two children and about NIS 180,000 of Israeli salary clears the ceiling and receives $3,400, roughly NIS 11,733 at the IRS 2025 average rate of 3.451.
Only if the child is a US citizen, US national or US resident alien and holds a Social Security number valid for employment issued before the return due date including extensions. A child born in Israel to an American parent normally gets there through consular documentation of the birth abroad, followed by the SSN application on Form SS-5. Start it early: the deadline is the return, not the tax year.
No. An ITIN is for people who need a US tax number but cannot get an SSN, and it does not unlock the child tax credit. A child without a qualifying SSN can at most support the $500 credit for other dependents, which is not refundable, so it produces no payment for a family whose US tax is already zero. ITINs solve spouse problems, not child problems.
No. Kitzvat Yeladim is paid by Bituach Leumi to families living in Israel with children up to age 18, regardless of family income, and nothing in the Schedule 8812 computation asks about it. The two systems run in parallel: the Israeli allowance arrives monthly whatever you file, and the US credit depends on your filing route, your earned income and your children having SSNs.
It does not. The 1975 convention carries a saving clause at Article 6(3), under which a Contracting State may tax its residents and its citizens as if the convention had not come into effect. What the treaty does provide is Article 26 relief from double taxation, allowing a credit against US tax for taxes paid to Israel. That relief is what makes the foreign tax credit route work.
You choose. Electing to treat a nonresident spouse as a US resident lets you file jointly, raises the income ceiling before the credit shrinks from $200,000 to $400,000, and requires both spouses to report worldwide income for that year and all later years. Without the election, head of household status is available to those who qualify. The joint election is effectively one-way, so take it with cross-border advice.
Possibly, but not casually. Revoking the exclusion means you cannot claim it again for your next five tax years without IRS approval, so the switch is a multi-year decision rather than a one-off. Amending earlier years to claim a refund is also subject to a time limit. Model both routes across several years with a cross-border preparer before you revoke anything.
Next step