Taxation in US on Foreign life insurance

[Nik57]

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?

[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.

[bubub1234]

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

[ToddL99]

First, you should contact a local CPA experienced in preparing this form - it is not an income-tax matter, the focus of this community.

Instructions for Form 720 (03/2021) mention penalties and interest, but do not provide much detail. The term "penalties and Interest" does not include imprisonment. The most severe monetary penalty is to pay the excise tax yourself (est. $13/year) . Also, some of foreign insurance premiums may be exempt from this tax by treaty. You can also apply for an EIN  - you do not need to have a business, just a reporting requirement.

From: Instructions for Form 720 (03/2021):

"Penalties and Interest: If you receive a notice about a penalty after you file this return, reply to the notice with an explanation and we will determine if you meet reasonable-cause criteria. Don't include an explanation when you file your return."

Foreign Insurance Taxes

Policies issued by foreign insurers (IRS No. 30).

Enter the amount of premiums paid during the quarter on policies issued by foreign insurers. Multiply the premiums paid by the rates listed on Form 720 and enter the total for the three types of insurance on the line for IRS No. 30.

Section 4371(3) tax on foreign reinsurance premiums no longer applies.

The 1% tax doesn’t apply to premiums paid on a policy of reinsurance issued by one foreign reinsurer to another foreign insurer or reinsurer, under the situations described in Rev. Rul. 2008-15, 2008-12 I.R.B. 633. See Rev. Rul. 2016-03, 2016-3 I.R.B. 282, available at IRS.gov/IRB/2016-03_IRB#RR-2016-03. 

Who must file.

The person who pays the premium to the foreign insurer (or to any nonresident person such as a foreign broker) must pay the tax and file the return. Otherwise, any person who issued or sold the policy, or who is insured under the policy, is required to pay the tax and file the return.

Treaty-based return positions under section 6114.

Foreign insurers and reinsurers who take the position that a treaty of the United States overrules, or otherwise modifies, an internal revenue law of the United States must disclose such position. This disclosure must be made once a year on a statement which must report the payments of premiums that are exempt from the excise tax on policies issued by foreign insurers for the previous calendar year. This statement is filed with the first quarter Form 720, which is due before May 1 of each year.

You may be able to use Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), as a disclosure statement.

At the top of Form 720, write "Section 6114 Treaty." If you have no other transactions reportable on Form 720, complete Form 720 as follows.

1. If this is your final return, check the Final return box.

2. Write "None" on lines 1 and 3.

3. Sign the return.

You need an EIN to file Form 720. If you don't have an EIN, see Employer Identification Number (EIN), earlier.

Where to file your treaty-based return positions under section 6114.

All filers should mail Form 720 with the attached Form 8833 or disclosure statement to the address listed under Where To File, earlier. See the Cautionunder Private Delivery Services (PDSs), earlier.

[bubub1234]

Okay, Thank you for your very prompt response. 

Since, I paid the premiums in 2019 and 2020, I was supposed to file Form 720  in 2019 and 2020. Will it be a problem if I file these forms in 2021 for the past years? Will this cause a penalty? Thank you

[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.

[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

[DaveF1006]

Yes, the growth can be a combination of interest, dividends, and capital gains. Unless you have a specific breakdown on the amount of dividends, interest, capital gains, this would be reported as other income on your tax return. Here is how to report.

1. Log into your account
2. Select Wages and income>other income
3. Miscellaneous Income, 1099-A, 1099>start
4. Scroll to the bottom of the page to Other Reportable Income
5. Other taxable income, answer yes
6. Then give a brief description of the income and the amount. in this instance, it will be earnings from a life insurance surrender.

On the policy that was surrendered, you would need to report the earnings from that policy as income even though the amount surrendered was used as a premium to pay another policy.

@taxprora 

[taxprora]

Thank you for your response. So, just to confirm:

1. Growth on all policies irrespective of whether they are active or surrendered or discontinued, needs to be reported.

2. Form 8938 will not be needed, since the total fund value of all policies does not meet the threshold.

3. No calculation is required when reporting this income, just do the math and provide the final amount?

A follow up question:  If there is interest income from a foreign bank account, is that also reported as Other income, or would that go on Schedule B like interest from a US bank account.

I appreciate your help very much.

[DaveF1006]

No. income growth in a life insurance policy is not reported as income.  Only if the policy is relinquished then the growth that exceeds the policy basis may be taxable on when it is surrendered., if this is what you mean.

Now, for FBAR reporting purposes, you would report the present values of the active policies each year, which includes the growth for that year. 

The 8938 will not be needed if the policies exceed more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.  If you are filing Married Filing Joint, those amounts will double.

Yes, just do the math. You are responsible for that. The foreign interest would be reported like domestic interest from a 1099-INT and reported in the interest and dividend section of your tax return.