A client called me last week, excited about the new Israeli income tax exemption for olim. She'd read about it on my previous article, and was excited about how her 2026 tax bill was about to drop by $15,000.

I ran through the numbers with her though, and pointed out something interesting that she missed. But it wasn't bad news, it was even more than she thought.

Key Points

  • The old method: Olim used Foreign Tax Credits (FTC) to offset U.S. tax on Israeli-source income, which preserved the refundable Additional Child Tax Credit.
  • The new method: Israeli income tax on earned income drops to zero under the November 2025 / March 2026 exemption law. FTC generates nothing because there's no Israeli tax to credit.
  • The forced switch: Families are pushed onto FEIE (Form 2555) because FTC no longer works. But FEIE disqualifies the excluded income from counting toward the earned income requirement for the refundable CTC.
  • The damage: Each qualifying child is worth up to $1,700+ in refundable CTC for 2026. A family of four kids can lose up to $6,800 in refundable credits per year.
  • The workaround: See which method makes the most sense to file under. Or file MFS with one spouse using FEIE and the other preserving CTC eligibility.

The Age Old Question

You know that question that everyone always asks? Isn't there a treaty to protect against double taxation? So yes, and that comes in very handy. But often doesn't work the way you may think it does. It doesn't mean that because you pay tax in Israel, you aren't subject to tax in the United States. What it does mean though is that you can use the Israeli taxes paid to offset a similar amount of U.S. taxes.

Until now, an oleh earning $150,000 in Israel paid Israeli income tax at an effective rate of roughly 25 to 30 percent. That's $37,500 to $45,000 of Israeli tax. On the U.S. side, they used Form 1116 Foreign Tax Credits (FTC) to wipe out most of their U.S. federal tax. Because FTC doesn't involve excluding any income, the full $150,000 counted as earned income for the refundable Additional Child Tax Credit.

A family with four kids received up to $6,800 in refundable credits even after their federal income tax hit zero. That's real money and cash in hand, often the single biggest tax benefit of the year for American families in Israel.

The New Math

Under the new regime, that same oleh pays zero Israeli income tax on the first ₪600,000 in 2026, ₪1,000,000 in 2027 & 2028, and then reduced amounts in 2029 & 2030. For someone earning $150,000, that's full coverage in 2026. Zero Israeli income tax.

Zero Israeli income tax means zero Foreign Tax Credits (with one small caveat of maybe taking the health tax that still applies). So the old strategy doesn't work anymore. The only way to shelter the income from U.S. tax is Form 2555, the Foreign Earned Income Exclusion (FEIE). It works great! you say, I know I made ~$132K, but I made it while living and working in Israel, so it gets reduced from my taxable income.

Here's where the problem hits. The rule is that if you use the FEIE, you can't claim the refundable portion of the child tax credit. You end up paying no tax to the IRS, but your refundable credit goes down to zero.

A family of four kids goes from getting a $6,800 refund to getting nothing. Meanwhile their Israeli tax went from $37,500 to near zero. Net result: they saved $30,700 net. Still better off overall, right?

But there are two things that may be missed. The first is how this affects low income earning households. The second is for dual working spouses there may be a way to come away with even more!

For a lower-earning family, the Israeli tax savings may be smaller than the CTC loss. Additionally, working mothers with lots of kids, already get a lot of credit points in Israel reducing their income tax significantly. Especially with the regular credit points you already get from previous rules when making Aliyah, this may leave you with a net loss position, where the refund would have been higher than the Israeli taxes saved.

For families with two working parents, there is an opportunity to still receive the refunds while not paying as much in taxes. It just depends on how you file your returns.

The Workarounds

Two moves can preserve the CTC refund.

Option 1: Don't use the foreign income exclusion at all.

For those with lower income amounts, it is entirely possible that the standard deduction of $32,200 for married couples filing jointly already offsets most of their income. Add to that the non-refundable portion of the child tax credit, and depending on the number of kids, you can offset a good amount of income. So don't use the foreign income exclusion at all! You don't have to, and in this case it is better not to.

You still owe zero Israeli income taxes, and now since the FEIE wasn't used, you still qualify for the refundable child tax credit. Turbo Tax is unlikely to point this out. Also many accountants without proper cross-border experience will also miss the difference. So make sure to get someone with the proper experience to make sure you aren't losing more than you are saving. If you need help with this approach, that is what we do. Please reach out.

Option 2: For dual-bread winning families.

As a CPA, at least once a week a client asks if it makes sense to file separately from their spouse or better to file one return together. Almost always it makes more sense to file married-filing-jointly. The tax rates are better, the thresholds for other taxes is better, and the accounting costs are usually less. That is until now. For dual-earning couples filing separate, one spouse can use FEIE and the other can use FTC. The FTC spouse preserves CTC eligibility because their earned income is not excluded. Depending on the income split, this can capture most of the new tax benefits while keeping the CTC refund intact.

MFS has downsides. You lose some credits, deductions get more complicated, and the return becomes harder to prepare. But at certain income levels the math works out and can add thousands of dollars in your pocket.

What This Means for You

If you have three or more qualifying children and you're making Aliyah in 2026, don't just assume the new Israeli exemption is plug-and-play. Run the full math. Compare your position under the old FTC strategy, under pure FEIE, and under MFS splitting. One of these four is the right answer, and which one depends on your specific income, family size, and spouse's earnings.

This is exactly the kind of planning that we do. If you are thinking about making Aliyah and want to plan properly, reach out and we'd be happy to assist.