The State of Israel imposes an annual reporting obligation and an additional tax on individuals whose annual income exceeds designated statutory thresholds. In 2026, with updated inflation adjustments and tax bracket revisions, it is essential to understand who qualifies as a "high earner" and what financial obligations apply.

In this guide, we review the duty to submit an annual tax return (Form 1301) and the mechanism of the Surtax (Mas Sevef).

1. Obligation to Submit an Annual Tax Return (Form 1301)

Unlike standard salaried employees whose income tax is deducted at source by their employers, high earners are legally obligated to file a full annual income tax return with the Tax Authority, even if all their income comes from wages. This filing duty applies whenever total taxable income from all sources exceeds 721,560 ILS per year.

Which income sources count toward the annual threshold?

  • Gross salary and employment compensation.
  • Business profits and independent professional earnings.
  • Capital gains from stock market trading and interest income.
  • Rental income from residential or commercial real estate (even under reduced tax tracks).
  • Lottery winnings, prizes, and gambling proceeds.

2. The Surtax (Mas Sevef) โ€“ The Additional 3% Tax

Surtax is an additional progressive tax levied at a rate of 3% on taxable income exceeding the annual statutory limit of 721,560 ILS (approximately 60,130 ILS per month on average).

It is important to emphasize that Surtax applies only to the portion of income above the threshold. For example, if your total annual taxable income is 750,000 ILS, the 3% surtax will apply strictly to the 28,440 ILS difference.

3. Personal Effort Income vs Capital Income

The Tax Authority makes a crucial distinction between income types:

  • Personal Effort Income: Wages or business profits. Taxed according to standard marginal income tax brackets (up to 47%), plus the 3% surtax (reaching up to 50% combined marginal tax rate).
  • Capital & Passive Income: Gains from stock sales, corporate dividends, or real estate appreciation (Mas Shevach). Surtax adds 3% on top of standard capital gains tax rates (typically increasing 25% to 28%).

Why consult a CPA?

Filing an annual report for high earners is far more than filling out forms. It represents a prime opportunity for strategic tax planning: utilizing tax credits for donations (Section 46), pension contribution tax breaks, offsetting capital losses against profits, and utilizing real estate tax spreading options.

At Bernstein & Co. Certified Public Accountants, we specialize in financial advisory for high-net-worth individuals and families. We construct precise annual returns, calculate optimal surtax liability, and protect your capital. Contact us for professional, confidential, and tailored service.