My wife suffered a bad accident last year and thankfully recovered. She will receive a payment from a foreign insurance firm as compensation for her physical injuries. This payment can be either directed to her parent's foreign bank account or to her US bank account. She is a non-US citizen and is thinking of keeping the money in her parent's foreign bank account to financially support them. I have several questions that I'm hoping folks can help us with:
1) Are there any US tax consequences of directing an insurance payment to a foreign bank account? I presume no.
2) Are there any US tax consequences of directing the insurance payment to her US bank account? I also think the answer is no.
3) If she needs to transfer some of this money from the foreign bank account to the US in the future, would that incur taxes?
4) Do I need to report this insurance payment in TurboTax and if so, where/how?
Thanks very much.
Since your wife appears to be a US resident alien, she is a US person for income tax purposes and must follow all US tax laws. If she is not eligible for a green card or SSN, then she needs an ITIN. But you may already know this.
The payment is taxable income and must be reported only to the extent it exceeds her injuries. Payment for injuries, including pain and suffering due to physical injury, is not taxable. Payment for economic loss (lost wages, property damage) may be taxable. We would need more details to evaluate the settlement if it is for mixed purposes.
The money is taxable or not based on its nature, and it makes no difference if she receives it in a US bank account or foreign bank account.
If a US person owns a foreign bank account with more than $10,000US at any time during the year, an FBAR financial report must be filed, although no taxes are owed. This is not supported by TurboTax, but you can do it online at the IRS web site.
Any interest earned will be US taxable income, no matter where the account is located. If the interest is paid in foreign funds, it is taxed at the US$ equivalent as of the date paid.
There are no tax or reporting requirements for moving money that she owns between accounts that she owns, even overseas accounts.
If she gives any person more than $15,000 per person per year, she will have to file a form 709 gift tax return. The gifts over this amount must be reported, but no gift tax is owed unless her lifetime total of gifts plus estate are more than $11million.
Note that if she deposits the entire amount in her parents bank account, that is a gift to her parents that she may need to report depending on the amount. It would not trigger an FBAR report if she is not the owner of the account. If her parents then give her back some of the money, that is not taxable, but must be reported on form 3520 if the amount she receives as a gift from her parents is more than $100,000 per year.
It would likely be better to keep the money in an account in her own name, even if it is an overseas account. I suggest not placing money into her parents names unless it is a gift that she does not expect to be paid back or have a right to access those funds for herself.
One more thing. If you previously took an itemized tax deduction for medical expenses, or paid for some medical expenses from an HSA or an FSA, and that has now been reimbursed as part of the settlement, that represents taxable income because it is a repayment of a previous tax deduction. You would report this in the other miscellaneous income section as a taxable recovery.
Thank you Opus17 for a very comprehensive response. I really appreciate that you took the time to write that up and explain the different tax considerations so clearly. I agree that it seems better to put the money into an account in her name. To answer your question, the insurance payment is 100% for her injuries, and we did not use any pre-tax money (HSA or FSA) to pay medical expenses.