Foreign Life Insurance Taxation – IRS Income Tax | Proceeds Taxable?
- 1 Foreign Life Insurance Taxation
- 2 Are Foreign Life Insurance Proceeds Taxable by the IRS?
- 3 Foreign Life Insurance Taxation IRS
- 4 Foreign Life Insurance IRS
- 5 Is it Foreign Life Insurance or Unit Linked Life Insurance?
- 6 Are Foreign Proceeds Taxed in the U.S.?
- 7 Out of Foreign Life Insurance Policy Compliance?
- 8 Beware of Copycat Law Firms
- 9 4 Types of IRS Voluntary Disclosure Programs
- 10 Learn How Attorney & Tax Prep Fees are Charged in Offshore Voluntary Disclosure
Foreign Life Insurance Taxation – IRS Income Tax | Proceeds Taxable?
Foreign Life Insurance Taxation: The IRS rules involving Foreign Life Insurance Taxation are hard. Common issues involve determining what the general tax rules are, if the proceeds are taxable in the U.S., how the IRS treats foreign life insurance policies and taxation rules of life insurance in general.
There are various complex issues, with a common question our Tax Specialist team receives, being “Are life insurance proceeds taxable by the IRS?”
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 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.
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).
Foreign Life Insurance Dividend payments are generally taxable as foreign passive income.
Foreign Life Insurance Interest payments are generally taxable as foreign passive income.
Foreign Life Insurance Capital Gains payments are generally taxable as foreign passive income.
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.
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:
- 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.
Who Decides to Disclose Unreported Foreign Life Insurance Policies?
What Types of Clients Do we Represent?
We represent Attorneys, CPAs, Doctors, Investors, Engineers, Business Owners, Entrepreneurs, Professors, Athletes, Actors, Entry-Level staff, Students, Former/Current IRS Agents and more.
You are not alone, and you are not the only one to find himself or herself in this situation.
Sean M. Golding, JD, LL.M., EA (Board Certified Tax Law Specialist)
Our Managing Partner, Sean M. Golding, JD, LLM, EA earned an LL.M. (Master’s in Tax Law) from the University of Denver and is also an Enrolled Agent (the highest credential awarded by the IRS, and authorizes him to represent clients nationwide.)
Mr. Golding and his team have successfully handled several hundred IRS Offshore/Voluntary Disclosure Procedure cases. Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.
He is frequently called upon to lecture and write on issues involving IRS Voluntary Disclosure.
Less than 1% of Tax Attorneys Nationwide are Board Certified Tax Law Specialists
The Board Certified Tax Law Specialist exam is offered in many states, and is widely regarded as one of (if not) the hardest tax exam given in the United States for practicing Attorneys. Certification also requires the completion of significant ethics and experience requirements.
In California alone, out of more than 200,000 practicing attorneys (with thousands of attorneys practicing in some area of tax law), less than 350 attorneys are Board Certified Tax Law Specialists.
Beware of Copycat Law Firms
Unlike other attorneys who call themselves specialists or experts in Voluntary Disclosure but are not “Board Certified,” handle 5-10 different areas of tax law, purchase multiple keyword specific domain names, and even practice outside of tax, we are absolutely dedicated to Offshore Voluntary Disclosure.
*Click here to learn the benefits of retaining a Board Certified Tax Law Specialist with advanced tax credentials.
4 Types of IRS Voluntary Disclosure Programs
There are typically four types of IRS Voluntary Disclosure programs, and they include:
- Traditional (IRM) IRS Voluntary Disclosure Program
- Streamlined Domestic Offshore Procedures (SDOP)
- Streamlined Foreign Offshore Procedures (SFOP)
- Reasonable Cause (RC)
Learn How Attorney & Tax Prep Fees are Charged in Offshore Voluntary Disclosure
Learn about how experienced and reputable dually-licensed tax law specialists charge attorney and tax preparation fees.
Contact Us Today; Let us Help You.
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, and has also earned the prestigious Enrolled Agent credential. Mr. Golding is also a Board Certified Tax Law Specialist Attorney (A designation earned by Less than 1% of Attorneys nationwide.)