is foreign life insurance growth taxable?

[dsyhome0510]

I have a foreign life insurance policy inforce, paid premium annually, not distributed and the numbers are growing every year.

questions:

1) is this growth (gain) in the value taxable?

2) how do I categorize it as income (i don't receive anything), interest or dividend?

3) how to determine the number: this years surrender value minus last year surrender value as "gain"?

thanks for help

[pk]

@dsyhome0510 , very generally, this is not  income and generally not taxable till distribution. This is not generally a qualified  plan.  However, because this is foreign account "worth " something, it comes under FBAR and possible FATCA ----- you should file the FBAR form at least if the value ( cash) is => than US$10,000.

I would also hasten to add, the actual treatment may be different based on the country where it is  and whether you are a US person ( citizen/GreenCard / Resident for tax purposes ).

pk

[dsyhome0510]

PK:

thanks for reply.

I am a US person for tax purpose. The insurance company is AIA Singapore, seems not treaty exempted. Value is about $70k so I do need to report to FBAR.

The worst thing is, since I failed report it before,  now I have to go with FBAR Streamlined process, and it does require 3-years 1040X including the accounts in question. Then a nature question will be in the amend return, is the yearly gain in this new account taxable and reflected in the 1040X?

thank you

[pk · Accepted solution]

@dsyhome0510 , please  this link -- it covers  reporting requirements of financial assets for  FBAR  (FINCEN form 114)  and FATCA ( form 8938)-->https://www.irs.gov/businesses/comparison-of-form-8938-and-fbar-requirements

1. there is no tax implications for reporting the assets -- this is not income, even if the value is going up from year to year. Only when you take a distribution  then there will/ may be a tax consequence.  Note that foreign insurance  companies are  not considered "regulated / qualified",  although I would think unless  you had this before you became a US person, a company like AIA is probably quite familiar with  FBAR / FATCA requirments

2. Even if you have missed  filing the form 114 before, don't worry just go ahead and visit   www.Fincen.gov, and look for reporting FBAR and it will take you to BSA-efile -- you enter your details there and most of the time it allows for filing missing reports.  If not do it for at least 2020 and 2021 and then hold still.  If there is questions, just  tell them the facts  -- that you were unaware of  if this had to be reported.  Do this ASAP. see --https://bsaefiling.fincen.treas.gov/Benefits.html  and the button "File FBAR"

3. currently you do not meet the requirements of having to file form 8938 -- this is filed with your yearly return.

is there more I can do for you ?

pk

[dsyhome0510]

PK:

I am so grateful for your taking time reading and answering my questions.

Your reply answered this specific question, clearly. However my bigger questions/concerns are related to Singapore CPF.
I did not report my CPF account because I was told twice by CPAs in previous years that the CPF was not FBAR reportable. But last year it was raised by another CPA saying reportable. In searching this forum I found one Singaporean having the same issues, first believed reportable then convinced not reportable because CPF is a government managed retirement plan.

I am still confused about this but want to play safe, by going through the FBAR Streamlined procedure to correct noncompliance for a lower penalty.

The life insurance part surfaced during my thorough review on Singapore assets, so it is part of "aggregated" accounts value. It itself may not meet the 8938 threshold but if CFP (~150k) is reportable the total value is definitely over the threshold.

The title question was part of the preparation for the streamlined procedure, as it requires 3 years 1040X with made-up interest incomes from unreported accounts. While CPF statements stated the saving interest rate, the life insurance statement did not. So which part in the life insurance account is taxable became a question.

Maybe my understanding of "interest over a financial account" was totally wrong. Is the "interest" here more like a right or privilege rather and the "interest" as in bank savings? If this is the case, my interest over life assurance accounts is the right or command on the growing funds as whole, but not the grown value itself.

Your comments and clarifications are highly appreciated.

Thanks again.

[pk]

@dsyhome0510 , first my apologies for such a long delay in responding to your post.   Please do forgive.  At this point I am not sure if you still need the answer but just in case:

1. The Singapore CPF, just like Provident Funds in many countries in the South and South East Asia is somewhat akin  to US 401K type of  savings for retirement of the employee ( except for the compulsory aspect ).  The contribution by the employee  may or may not be  tax advantaged  and there may or may not be an employer  matching  contribution.   In all cases the growth is not taxed  ( i.e. counted as income ) till distribution ( often lump sum ) at retirement or earlier under some conditions.

2. These accounts all have "present day value"

3. These all also will be  distributed as and when the beneficiary  retires and /or dies.  Thus in many ways it acts as an investment.   account ( just managed by the administrator ).  Note that this is in contrast to Social Security equivalents ( which are not reportable  for FBAR and FATCA regs. )

4. Therefore  my conclusion is that  these need to be counted as foreign asset for purposes of FBAR and/or FATCA regulations.  

Does this answer your query ?

[pk · Accepted solution]

@dsyhome0510 , first my apologies for such a long delay in responding to your post.   Please do forgive.  At this point I am not sure if you still need the answer but just in case:

1. The Singapore CPF, just like Provident Funds in many countries in the South and South East Asia is somewhat akin  to US 401K type of   savings for retirement of the employee ( except  the compulsory aspect).  The contribution by the employee  may or may not be  tax advantaged  and there may or may not be an employer a matching  contribution.   In all case the growth is not taxed  ( i.e. counted as income ) till distribution ( often lump sum ).

2. These accounts all have "present day value"

3. These all also will be  distributed as and when the beneficiary  retires and /or dies.  Thus in many ways it acts as an investment.   account ( just managed by the administrator ).  Note that this in contrast to Social Security equivalents ( which are not reportable  for FBAR and FATCA regs. )

4. Therefore  my conclusion is that  these need to be counted as foreign asset for purposes of FBAR and/or FATCA regulations.  

Does this answer your query ?

[dsyhome0510]

PK:

Thank you for your detailed reply. 

I realized CPF and life insurance are FBAR/8983 reportable accounts, although too late. To make it compliance I need to submit 1040X by re-fill form 8938 and FinCen114 correctly. Your answers are valid and important as the growth in the accounts should not be filled in 1040 DIV and dose not impact the refund calculation. 

I would assume surrender value increase in life insurance should be treated the same way, not considered as income until distributed or surrendered?

How about mutual funds? the growth in the funds should be reported as income in 1040 DIV, right? but the loss in fund is nowhere to claim, just my bad luck?

Thanks again, for your valuable answers

Jason   

[pk]

@dsyhome0510 , major mistake on my part on the taxability of  CPF and  foreign Mutual Funds.   The comments on FBAR  ( FinCen 114 ) and FATCA ( IRS 8938 ) are still valid.   Admitting my error ( only explanation is that I was lulled  by the FBAR / FATCA question )and  , while logical, forgot that because Singapore does not have a tax treaty  or Totalization agreement with USA , 

1. Life Insurance   entity would be classed as  Passive  Foreign Investment Company ( PFIC )

2. Singapore CPF , while   compulsory / having some of the features of SSA in US and 401(K) in otherways, would still be classed  as more akin to PFIC.

Thus in both these cases  the Mark to Market ( MTM)  apply i.e. you must recognize  the yearly gains ( from earnings  and not contributions ) --- it is like  you sold the asset at the end of the year and bought the assets back on the  first of the next year.   Your  US basis  changes every year ( for US tax purposes ). 

I sort of remember having answered this topic earlier.

Please consider using a Tax Professional familiar with international taxing esp. PFIC / MTM  for this year. Thereafter you  should be able to do it yourself without any issues.

If you need  more on this , please leave a note and I will circle back.  

Please forgive my memory failure -- I am 82  and given to senior hours quite often

pk