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Foreign Life Insurance Taxation – IRS Foreign Life Insurance Taxation

Foreign Life Insurance Taxation - IRS Foreign Life Insurance Taxation (Golding & Golding)

Foreign Life Insurance Taxation – IRS Foreign Life Insurance Taxation (Golding & Golding)

Foreign Life Insurance Taxation – IRS Foreign Life Insurance Taxation

Foreign Life Insurance Taxation: The IRS rules involving Foreign Life Insurance Taxation are hard. Common issues involve having to determine what the general tax rules are, if the proceeds are taxable in the U.S., how the IRS treats foreign life insurance policies — and how the taxation rules of life insurance in general impact other taxes.

A a common question our Tax Specialist team receives, is “Are life insurance proceeds taxable by the IRS?”

Let’s explore the basics.

Foreign Life Insurance Taxation

The IRS Foreign Life Insurance Taxation rules are complicated. IRS filing requirements will vary based on the type of income, and whether income is distributed or accrued (subject to complex foreign investment deferral rules)

Are Foreign Life Insurance Proceeds Taxable by the IRS?

When it comes to foreign life insurance proceeds, it is important to distinguish between a return of basis (which is not taxable, since it is not income) and if is proceeds (which are taxable).

Foreign Life Insurance Income includes: Dividends, Interest, Capital Gains, Distributions, Accrued Income, Bonus, PFIC, 720 & FATCA

Foreign Life Insurance Taxation IRS

Beyond income tax issues, the are also disclosure issues — but that is beyond the scope of this article. This article will focus exclusively on taxation issues. We have a separate article for you to learn about Foreign Life Insurance disclosure issues.When U.S. persons have life insurance policies abroad, foreign life insurance taxation becomes very important.

IRS Penalties for Foreign Life Insurance can be complicated, and you should consult an International Tax Attorney — and preferably a Board-Certified Tax Law Specialist.

Foreign Life Insurance Policy – What is it?

Foreign Life Insurance Policies are life insurance policies that are based overseas. They are very popular investment vehicles abroad. 

Common examples we represent clients with, include:

  • Prudential or ICICI policy in India
  • AIA policy in Singapore
  • Part of your Australian Superannuation

Foreign Life Insurance IRS

The taxation of Foreign Life Insurance Policy rules are (relatively) straightforward. In general, the taxation of Foreign Life Insurance Policy rules coincide with the general proposition that foreign income is taxable (subject to complex taxation rules, which may defer tax to a future date).

Dividends

Foreign Life Insurance Dividend payments are generally taxable as foreign passive income.

Interest

Foreign Life Insurance Interest payments are generally taxable as foreign passive income.

Capital Gains

Foreign Life Insurance Capital Gains payments are generally taxable as foreign passive income.

Bonus

Some Foreign Life Insurance Policies earn interest or dividend equivalents, which are referred to as“bonus” payments. The bonus is taxable as foreign passive income.

Surrender Value “Cash Out”

A Surrender Value is generally defined as what price the insurance company will pay the policyholder if there is a voluntary termination or other cancellation of the policy before it becomes due.

Depending on how much the surrender value is vs the amount of premiums will impact if the cash-out is taxed, or just considered a return of basis.

Is it Foreign Life Insurance or Unit Linked Life Insurance?

Life Insurance policies do not generally have an investment component, whereas a Unit Linked Life Insurance Policy combines life insurance with an investments component as well. Either policy is reportable on your U.S. Tax Return.

Foreign Life Insurance Policy

A Foreign Life Insurance Policy does not always have an investment component, or earn any income. Sometimes, it is just a regular term policy, which may or may not have a surrender value or “cash value,” and it pays out at death or disability.

Unit Linked Insurance Plans

As the name implies, the Unit Linked Insurance Plans combine the investment component, with the insurance component (not always life insurance). As with most insurance policies, the “pay-in” is via premiums.

But, unlike pure insurance policies — there is a second “investment component” as well, which is commingled with the investment, to provide an investment component along with the life insurance coverage.

Typical Unit Linked Insurance Plan Examples

A client comes to us with foreign life insurance, which is a hybrid life insurance with an investment component. Oftentimes the client refers to it as a “personal pension,” such as in the U.K.

In evaluating the life insurance investment, it turns out the foreign policy is more than just a “Life Insurance policy” — it is actually a life insurance policy that is linked to an investment.

Some common examples of Unit Linked Life Insurance, include:

Friends Life (aka Aviva)

Personal Pension in the UK or UK Offshore, such as Guernsey.

It generally will contain funds and shares, so at the end of the day, this may be considered a PFIC.

Singapore AIA

These are common life insurance policies, but they are not necessarily linked to an investment per se. There many flavors (linked and non-liked) and while some tend to take the shape more of “Life insurance” with some accrued interest — others are more investment focused linked insurance policies.

India LIC or Prudential

These may or may not have an investment component to it.

They can vary greatly depending on the type of policy.

When a U.S. Person is invested in these types of policies, and subject to U.S. Tax, they are referred to as “Expat Life Insurance.”

Are Foreign Proceeds Taxed in the U.S.?

Foreign Life Insurance is taxed and reported similar to regular foreign investment income. Generally, the accrued foreign life insurance income is taxed (even if it is not distributed, subject to PFIC rules).

The policy is reportable on many different IRS international reporting forms, including:

  • FBAR
  • Form 8938 (FATCA)
  • Form 8621 (PFIC)
  • Form 720

*We have a separate article focused on Foreign Life Insurance Policy Reporting instead of Taxation.

Out of Foreign Life Insurance Policy Compliance?

If you have not properly reported the foreign life insurance policy to the US government and/or include the income in your tax return, you could be subject to extensive fines and penalties.

What Can You Do?

Presuming the money was from legal sources, your best options are either the Traditional IRS Voluntary Disclosure Program, or one of the Streamlined Offshore Disclosure Programs.

Golding & Golding Specializes in Safely Disclosing Foreign Money

We have successfully handled a diverse range of IRS Voluntary Disclosure and International Tax Investigation/Examination cases involving FBAR, FATCA, and high-stakes matters for clients around the globe (In over 65 countries!)

Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

Golding & Golding, A PLC

We have successfully represented clients in more than 1000 streamlined and voluntary disclosure submissions nationwide, and in over 70-different countries.

We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe.

International Tax Lawyers - Golding & Golding, A PLC

International Tax Lawyers - Golding & Golding, A PLC

Golding & Golding: Our international tax lawyers practice exclusively in the area of IRS Offshore & Voluntary Disclosure. We represent clients in 70+ different countries. Managing Partner Sean M. Golding is a Board-Certified Tax Law Specialist Attorney (a designation earned by < 1% of attorneys nationwide.). He leads a full-service offshore disclosure & tax law firm. Sean and his team have represented thousands of clients nationwide & worldwide in all aspects of IRS offshore & voluntary disclosure and compliance during his 20-year career as an Attorney.

Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver. He has also earned the prestigious IRS Enrolled Agent credential. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo, and various Law Journals nationwide.
International Tax Lawyers - Golding & Golding, A PLC

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