In addition, the report does not refer to the "West Bank" and Gaza Strip as "occupied" or "under occupation", language used by all USA administrations in reference to Judea and Samaria and all the territories, including Jerusalem, captured by Israel in the 1967 Six Day War.
Palestinian President Mahmoud Abbas said the change was part of President Trump's plan to "liquidate" the Palestinian cause.
And another semantic change that appeared in last year's report showed up again this year, with a section titled "Israel, Golan Heights, West Bank and Gaza", instead of its previous "Israel and the Occupied Territories" heading.
The document also suggests that the entire city of Jerusalem is a part of Israel.
"The world's greatest and most important superpower understands what the left in Israel is finding hard to accept", said Shlomo Ne'eman, head of the Gush Etzion Regional Council, in response to the change of language in the annual report.
Israeli Prime Minister Benjamin Netanyahu said "what we've uncovered today is just the tip of the iceberg".
When asked about the change on such a sensitive Middle East subject, a senior U.S. official told reporters in Washington "there's no change in our outlook or our policy vis-a-vis these territories and the need for a negotiated settlement there".
"'Occupied territory' has a legal meaning to it".
The move came amid intensified efforts by Israel to win US recognition of its claim to sovereignty over the strategic plateau it captured from Syria in the 1967 Middle East war and effectively annexed in 1981, a step not recognized internationally.
Israel also occupied Syria's Golan Heights in the same war and annexed the territory in 1981.
Last month, Republican lawmakers in both chambers of Congress introduced bills "to ensure that Israel retains control of the Golan Heights". "In the Six Day War, we liberated our homeland from the Arab occupation, and not the other way around".
Formal U.S. acceptance of Israel's territorial claim could bolster Netanyahu's re-election prospects in a closely contested race as he battles corruption allegations, which he denies.
The shift arrives amid comments from USA lawmakers like Senator Lindsey Graham expressing support for recognition of Israeli sovereignty over the Golan Heights, which the Jewish state initially captured in 1967 during the Six-Day War and annexed for all intents and purposes in 1981.
"We are not going to allow Hezbollah to establish a terror infrastructure on the Golan capable of striking Israeli civilians", said Lieutenant Colonel Jonathan Conricus, Israeli military spokesman.