Taxation in US on Foreign life insurance

Forum|Forum|5 years ago
September 20, 2020
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Being a resident alien, does a foreign life insurance (insurance + investment) that pays back some amount every year after a certain period needs to be reported as taxable income during tax filing? Or do I even have to report this life insurance at all?

For instance, a foreign whole life insurance for which the I pay a premium of ~$3000/year for 10 years, and it would start paying me ~$1200/year after completion of 6 years until the 10th year. After 10 years, the amount paid to me would be ~1585/year until 99 years of age. In this case-

This amount that would be paid back every year, does this count as taxable income and needs to be reported?
If yes, would this have to be reported from the 1st year even if nothing is paid back to me or from the year it starts paying back?
If my family (a foreign person) pays for the premium for my life insurance policy, would I have to report this insurance in US?

Not A Product Question

PressburgTax

Foreign life insurance needs to be reported at minimum on your FinCEN114 and Form 8938. There are very steep penalties for not reporting this foreign account on either of these two forms. The payments of the insurance would be reportable but you will need to calculate what portion is return of your investment and what portion is taxable income. Since this can be a complex calculation I would highly recommend hiring a professional with international tax experience to help you out.

Anonymous

Reporting Requirements Triggered by Foreign Life Insurance
Apart from having to pay tax on your foreign life insurance policy, you will also have to report that you have to pay tax on it and report your ownership of it. That means submitting:

Form 720 for the excise tax described above - filed quarterly
Form 8833 for when Form 720 does not apply, thanks to a treaty-based exemption
Form 8621 for each PFICs associated with the policy
Form 8938 for “specified foreign financial accounts” such as the policy
FinCen Form 114 for foreign financial accounts, such as the policy

When it comes to the IRS there are five (5) main considerations involving foreign life insurance, U.S. taxation, and reporting.

Taxation – Income Generated by the Policy

There is no particular exemption from U.S. tax for foreign life insurance policies. In other words, if your foreign life insurance policy generates income, then you are required to report the income on your U.S. tax return. This holds true, even if the income is accrued but not distributed (in other words, it is growing with in the fund).

* If your foreign life insurance policy is considered a PFIC, there may be far more complex tax factors to consider.

The IRS levies a 1% excise tax on the foreign life insurance premiums that you pay each year. The tax is submitted along with a form 720, and is submitted quarterly to the IRS. Therefore, for each year that you pay foreign life insurance premiums, you would submit four (4) form 720s (one for each quarter).

FinCEN114 (FBAR) required to be filed annually by any U.S. person if the person has more than $10,000 in annual aggregate total in their foreign accounts. Unfortunately, foreign life insurance policies are considered foreign accounts. Therefore, you have to include the surrender value of your foreign life insurance policy in your calculation. And, if your foreign life insurance policy surrender value (either alone or when combined with your other accounts) exceeds $10,000 in annual aggregate total – you have to file.

FATCA Reporting (Form 8938)

FATCA is the Foreign Account Tax Compliance Act. It is similar to the FBAR, but has higher threshold requirements for filing, depending on a person’s marital status and whether they are considered a U.S. Resident or Foreign Resident.

Failure to Report a Foreign Life Insurance Policy

If you have not properly disclosed your foreign life insurance policy to the IRS of FinCEN, you may be subject to fines and penalties. With that said, there are various tax amnesty programs that you can use to safely get yourself into compliance.

Are You Out of Offshore Compliance?

If you are out of compliance, you should speak with an Attorney before making any affirmative representations or statements to the IRS.

Different Options for Amnesty

At the current time, there are 4 main options for IRS Foreign Amnesty/Voluntary Disclosure:

• IRM (Internal Revenue Manual) Voluntary Disclosure
• Streamlined Domestic Offshore Procedures
• Streamline Foreign Offshore Procedures
• Reasonable Cause/Delinquency Filings

Speak with Experienced Counsel

IRS Voluntary Disclosure law is a specialty. It is important that you speak with an experienced State Bar Board Certified Tax Law Specialist. In IRS offshore disclosure.

vympel001

Hello,

Thank you so much for sharing this information. Is there a penalty if you do not file Form 720 for payment of foreign life insurance premiums? Specifically are there any criminal penalties? Can I go to jail for this? I have a foreign life insurance policy where I pay an annual premium of $1300.

I was told by my CPA that the form 720 requires an EIN but that is only possible to obtain if you have a small business. I am an individual who is employed by a company and not a business owner. I am a salaried professional. Can you please guide me on how I should be proceeding on this.

Thanks

balaji-sudarsan

If the foreign insurer is located in the treaty country (here India which is in the treaty, exempt from taxation) are we still required to file form720? I think we just have to file 8833 along with 720 to indicate the exempt. Please let me know if the understanding is correct.

ilovemorty

Hi, did you find anything more out about how to do this?

DaveF1006

Yes, you will need to claim the interest, dividends, or capital gains that are paid to you as taxable income. However, if any of the principal is surrendered back to you, that is not counted as taxable income.

You would start reporting this income when you start receiving payments. As far as your relatives paying your premiums, they do not need to report this as gift unless the Life insurance policy was theirs and they transferred it to you. As long as you were the owner of that policy, you do not need to report their participation in the payment of the premiums.

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taxprora

Hello

So, exactly how and where do you report the growth inside foreign life insurance policies? Would this growth be considered interest, dividend or capital gain? No payments have been received yet. In one case, one policy was discontinued due to non payment of premium and one was surrendered and added as premium into another, which is still active. Thresholds met for FBAR, but not for Form 8938.

Thank you