Money from Germany

[Markus W]

I am a German living in the US and want to wire about $100K into my bank account here in the US. But my case is a bit different from than what I find here in other posts. I terminated an investment life insurance early to pay debt over here. My annual contributions to the insurance were all made with after-tax money I earned here in the US and sent to Germany and some savings I still had in Germany. The life insurance was set up so that all capital gains are tax-free in Germany after 12 years of running as life insurance at which point the insurance becomes a retirement insurance. After now 20 years I terminated the insurance early and need the $$ over here. Am I correct in that I do not need to pay any taxes in the US? Is there any distinction between contributions vs capital gains? Also, I don't have a German bank account anymore and thought to have my dad wire me the $$. I read here that this may become an issue? Should I open my own account first in Germany for this transfer? In either case, what IRS forms would you recommend, if any?

Thank you so much for your help!

Best

Markus

[tagteam]

Please check back here later. I will page Champ @pk.

[Opus 17]

There are two distinct questions here.  

The money transfer is easy.  There are no taxes on transferring your own money from bank to bank, even if the bank is overseas.  The banks will report the transfers as part of routine reporting, you don't have to do anything.  However, if at any time during the year you control a foreign bank account with more than US$10,000 in it, you must report that fact online in an FBAR report. 

https://www.irs.gov/businesses/small-businesses-self-employed/report-of-foreign-bank-and-financial-a...

If this is your money, being temporarily held in your father's bank account, then technically you still don't need to file any forms.   There is a form 3520 that you file if you receive a gift of more than $100,000 from a foreign person.  Even though this might look like a gift to an outsider, it sounds like this is your money all along, so I do not think form 3520 is needed.  

The income question is also fairly easy, but you're not going to like the answer.  If you are a person subject to US tax law (meaning you are a US citizen or green card holder living anywhere in the world), then you report and pay US tax on all your world-wide income.  The cash surrender value of a life insurance policy is taxable income as ordinary income (not capital gains) to the extent that the payout is more than the cost basis.  You will also owe state income tax if you live in a state that has income tax.  The cost basis is the total of your after-tax premiums.

To determine the cost basis, you need to know the US$ value of the premiums you paid, this means going back and figuring out your premiums for each year, in DM or Euros, and converting that to USD equivalent.  The Treasury Department publishes annual average conversion rates you can use instead of looking up the daily rate for every single payment.

https://www.irs.gov/individuals/international-taxpayers/foreign-currency-and-currency-exchange-rates

Then the amount of income is the difference between the premiums (in USD) and the payout (in USD on the date you received it).  The income is taxable as of the date you cashed out the policy, even if you did not transfer the cash to the US right away.   If the payer was a US company they would issue a 1099-R.  Since the payer is not a US company, you will have to prepare a substitute 1099-R in Turbotax.  Enter the total payout as box 1 and the taxable amount (determined from your own records) as box 2a.  

If you also paid tax on this income in Germany, you can claim a deduction or credit on your US tax return. 

[Opus 17]

Lastly, because you may have a lump sum of income that has no federal tax withheld, you should plan to make an estimated tax payment as soon as you can, probably 22%-36% of the amount, depending on your total income.  Even then, you might owe a penalty for underpayment.  If the IRS does assess a penalty for underpayment, you can ask for a waiver when that happens.

Estimated payments can be made at www.irs.gov/payments. 

[Markus W]

Thank you for your reply!

A follow-up, if you don't mind: For all sense and purposes the money is my German retirement account (retirement "insurance") which I set up from the US in 2004, because my employer here didn't, and because I expected to go back eventually. At the end of this 30 year contract in 2034 I could have chosen a lump sum or annual retirement payments until the end of my life. By canceling this insurance early, the current lump sum I receive is barely above the sum of all of my payments (a net gain of ~9,000 EUR), and I have a table in my original contract to show this. The insurance starts to produce more significant gains in the last 10 years only, which I don't benefit from, since I'll cancel it in December. If I understand you correctly, I should report these ~ 9,000 EUR (~$10,000) to the IRS, using 1099-R? I can live with that, even though all gains of this insurance are tax-free in Germany (since it ran longer than 12 years). But to determine the exact cost basis over the course of 20 years sounds horror!

[Opus 17]

@Markus W 

The taxable part is the amount that is more than what you invested, which sounds like $9000.  If audited, the IRS is going to want to see reasonable, reliable proof of what you invested.  That doesn't necessarily mean you need 20 years worth of canceled checks. If you have a table of your premiums, that's probably good enough, although you will have to convert the premiums from DM or Euros into dollars using the average conversion rate for each year, then add up the total in USD.  

You won't get a 1099-R, so when you tell Turbotax you have retirement income "not reported on a 1099-R", the program will guide you to prepare a substitute 1099-R.  The program may ask you for the tax ID number of the payer, which you also won't have since they are a foreign payer.  I don't know the workaround for that, but @dmertz  may know.  

[pk]

@Markus W , while I generally agree with my colleague @Opus 17 , I have doubts about  the tax treatment of  the pension scheme you are talking about.  The tax treaty between US and Germany talks  ONLY about  pension from gov t. sources in the two countries.  As far as I know Germany has different kinds of  pension schemes  ( both defined benefit and defined  contribution  )  including some specifically for professionals .   This is further complicated by lack of knowledge  on whether this "pension" that you are talking about is based  is your private  insurance or one that is shared with your employer ( I am assuming that you worked  for a German entity / branch thereof in the USA).  The treaty and its updated protocols/ technical explanations etc. leave me kind insecure in hazarding a guess as to the taxability of the income/ gain.

Therefore any explanation as to what you actually did and the type of plan that you contributed to  would be most helpful.

I do understand  that if nothing better comes out of this discussion, then @Opus 17  would be correct in treating this as  a pure  and unqualified  investment  where all the gain is taxable to the US.

pk