Upon termination of employment or retirement, severance payments and retirement grants exceeding statutory exemption ceilings are subject to income tax withholding.

1. Why Retirement Grants Are So Dangerous for Your Tax Rate?

Receiving a large lump-sum severance grant in a single tax year can push your annual taxable income into the highest marginal tax bracket (up to 47%), causing you to lose tens of thousands of Shekels unnecessarily if Form 161 is filed without tax optimization.

2. Tax Reduction Tools & Preventing Traps

Retiring employees have several statutory tools to reduce or eliminate severance taxation:

  • Exemption Ceiling: Severance is tax-exempt up to 1 month salary per year worked (up to 13,750 ILS per year of service).
  • Tax Spreading (Priasat Mas): Spreading taxable severance amounts forward up to 6 tax years (or backward 4 years) to utilize lower marginal tax brackets and personal credit points.
  • Pension Continuity (Retzifut Pensia): Retaining severance funds within the pension fund to pay tax-free monthly pension annuities upon retirement.
  • Severance Continuity (Retzifut Picuim): Deferring tax liability when transitioning to a new employer.

3. Warning โ€“ Form 161 Errors Are Costly

Filing Form 161 without prior CPA tax planning can lock in irreversible tax withholding decisions. Once severance funds are paid out, tax mistakes cannot be fixed retroactively.

Bernstein & Co. performs comprehensive retirement tax planning before you sign Form 161.

Severance grant tax exemption limit of 13,750 โ‚ช per year of service, generating up to 25,000 โ‚ช in tax savings.