Taxing and reporting of Foreign Life insurance ULIP policy of tax return

@Nkm171964 , Namaste ji.

 What I get from your post is that you have invested  in an ULIP in India ( and under Indian laws ).  As I understand these have two components -- one is  a life insurance and another is  "investement " in the market -- these work together .  There is a black out period  and thereafter there is also a loan and/or partial withdrawal facility, generally.  I am not familiar with the Bajaj version -- I know about the HDFC  and a few others including some US ones in the market in India.

  A.      While  the value of the  ULIP policy is growing ( and assuming that you do let it run to maturity ), absent any distributions  there is NO constructive receipt/ distribution and you may be able to not have to declare the gains ( i.e. no mark-to-market ).  I say "may be " because  it is possible that IRS may claim that this is a PFIC account requiring you to recognize  un-realized gains /losses i.e. mark-to-market..  This would become a bit complicated because you would have to  recognize gain based on market value of the investment component and your contributions till that point . This would also mean that your basis  in the investment would change  and that when you finally take distribution  there may be no more taxation.  This would put you in a bind because if India taxes based on final value  ( I thought  these are taxed advantaged  investments under section 10 and 30 of the IITC  ??  ) because foreign tax credit does not work very well when  there is large Foreign tax but very low US tax on the same income  ( US-India Tax Treaty -- double taxation clause )

B.   Your questions:

1- I paid one year premium in April. So, in the coming 2024 tax return next year, what do I need to declare on my return?  US tax would consider this as a personal expense -- so no recognition.  ( absent a mark-to-market recognition -- see discussion  above )   I need to investigate this more 

2- Is premium deductible and what proof do I need in order to claim deduction?    None , even if this is not PFIC.  This is not a tax advantaged  investment / savings account like the 401s.

3- For tax return 2024, what information would I need to collect from the Insurance company for reporting purposes?   No matter whether PFIC or not , you would still need the amounts paid in ( your basis for the growth/investment component) and the total value of the investment at the end of the Calendar year.

4- The policy is also an investment, and the total policy amount has so far increased by 10%. Even though the policy will mature in 10 years, do I need to report this increase of 10% in the account value on my 2024 tax return and pay taxes? I will not receive any money until the policy matures.   See earlier comments.

5- For a question for long term- When policy matures, Indian government may collect taxes from me on any investment profits in Policy amount. Do I have to also pay taxes in US then? I have heard there is a treaty between India & US to avoid double taxation for a situation like this. Any help and clarification would be really appreciated.  See my general comments  above in A.

6- If I don't have to pay any tax on investment profits until policy matures in 10 years, but what information should I still collect NOW in 2024 that I might need to report on my 2024 tax return in US?   If  the contract allows no recognition/distribution till maturity  ( not  generally true for PFICs ), then you will need all the  records to show  pay-ins  for the investment component and the valuation over the years.   As I said I am not more inclined to believe that this will be treated as a  PFIC and therefore  need to  check on this a bit more.

BTW ---  if you have not signed the contract yet ( just getting ready to do so ) , please consider discussing this  with an tax attorney  ( there are many in Florida and NJ ) familiar with Indian Tax code  and  PFICs etc.   Generally  investments in PFIC  is discouraged  because of the mark-to-market requirements.

Is there more I can do for you ?

Namaste Nalin ji

pk

Hi PK, TY for your detailed and direct response. It is best so far, I have found online anywhere.

First, I always do my own taxes using TTax. But this topic looks complicated.

1-Is Ttax smart and well programmed enough to guide me thru to do it on my own for year 2024 or should I seek a good tax accountant? I don't want to make any mistakes that IRS later would come back to haunt me:)

2- For your question in answer#6- I have already opened this policy in April 2024 and paid one year premium. Next premium is due in April 2025. So I guess the contract is signed already.

3- Just to clarify- The policy is for my wife (we file jointly) and I am the policy holder and pay the premium. So is there different tax filing requirement due to this new item on our taxes OR no change there?

4- Bajaj being an Indian company, does not provide any tax documents at the end of the year except for Premium Paid statement. if you know, what individual pieces of policy information do I need to collect for my tax reporting? I do have an entire policy document they have provided me and also, I have an online account where I can check policy/investment amounts on a daily basis. Can I find all the info that you mentioned on my policy?

5- Not sure if it relates- but I have other accounts in India that I report on FBAR filing every year. I suppose, this new policy would be added there now. 

6- Any further info to assist me in this is greatly appreciated. Thanks in advance.

@Nkm171964 , thank you for your response  and explanations thereof.  Since we are talking about tax year 2024, I will take a little time to study the area a little bit more and come back  ( have to attend to 2023 tax year posts first )-- please forgive the delay.

pk

Ok Thank you PK. Yes tax return is not due until January. Only if I have to collect any information, then I need to start now. But please take your time.

Hi PK, when you do get a chance, please let me know what information should I collect for Tax re turn 2024.  Also, is there anything I need to do in USA to take advantage of treaty that US has with India on double taxation? Another words, if India eventually taxes my Life Insurance investment gains, then is there paperwork I need to do here in US that would help me avoid paying tax again (i.e. proof of Indian tax payment or withholding etc).

Thanks.

@Nkm171964 ,  sorry for the delay in responding.

My source for my opinion  are  IRC sections 7702, section 1297, form 8621 and instructions for the form 8621.  While I cannot find any data  on  Bajaj ULIP for purposes of the  Income Test and/or Asset Test  called out in  section 1297(b) and (e), I am pretty sure that the IRS will still classify this  as a PFIC.  I would strongly recommend you to be at least familiar with these sections.

Because my personal opinion is that you being a  participant in PFIC ( even though one policy  in  thousands at least ), perhaps  there should be another look at this.  Major  taxing issue with PFICs is that the income from these  ( as defined  in section 1297 and 7702 ) is viewed as ordinary income rather than capital  gain when final distribution occurs.  Sop if I assume that this policy  does not distribute/ declare  any income ( dividends, interest, gain ) i.e. none constructively received by the participant, then why not view this as an annuity with both aggregation and growth periods  being concurrent.  If this is allowed then when the policy is terminated,  (a) you recognize the whole gain as described in section 7702  as ordinary gain and  pay taxes on it per the US rules ( very similar to what you would for a pension or an annuity total distribution; (b)  this would also have the advantage  of being a foreign sourced income  and therefore  taxes paid to India would be eligible  for  FTC.  As I said this is my own opinion but I have NO case law  to support  my view.  And actual  execution of this view should cause NO loss of taxes  to the IRS or the state if one assumes that during the life of this contract, your world  income is the same or grows.  This will not be the case if  your world income decreases during this period.

Is there more I can do for you ?

Thank you PK for detailed explanation. I understand the topic much better and will read those section before end of the year.

Just one question still remains>> Without having to read these tax sections you recommend, for tax return 2024, do I have to still collect information and report? What are likely names for pieces of information I should collect to make a chart for next year?

Regards

Nalin [removed]

[email address removed]

@Nkm171964      

Nalin ji    Namaste

Recognizing that  the result of  recognizing an insurance  company as a PFIC means  (a)  the income from this is ordinary  and (b)  the life benefits  are taxable,  the following items at least will need to be retained  for  filing when the contract is terminated : 

              (a) yearly amounts of contribution in US$  ( can use yearly average  exchange rate published by the US Treasury ) ;

              ( b) yearly valuation of the account  ( either share price or whatever the  insurance entity provides  ) again in US$

              (c)  any distributions must be recognized as  either interest / dividend earnings and taxed ( even if it is re-invested )

              (d)  when the final distribution  or payout occurs ( for any reason ), you must recognize the taxable  portion ( return amount LESS total contribution ) as ordinary income per PFIC rules.

This is what comes to mind and is intended only as a directional attempt.

Is there more I can do for you ?

Namaste ji

pk

Hello!

I am in the same boat. I was unaware of PFIC and although I have included the ULIP-linked Policy in FBAR as an account for several years, I was not filing Form 8621 myself. Neither TurboTax nor the other software I have been using recently (HRB) prompted me during their tax prep questionnaire.

I just checked the complete list of forms available in their software (I used the download version) for the last couple of years, and Form 8621 is not part of it at all. So it looks like that will need to be done on your own OR you have to get a tax preparer to work with you.

I am also checking with a local CPA whose initial response was that unless it is realized (i.e., you have sold or surrendered the policy and the proceeds have been credited back to your bank account), Form 8621 does not need to be filed. They are going to double-check and come back to me on that.

I'm also looking for guidance. I purchased 4 mutual funds in India in Sep 2024 and so far haven't realized any gains via dividends or sold any funds. Do I need to file 8621 for 2024 tax return? If yes, how can I use QEF or section 1296 as it seems like a simple option?

I have statement from mutual funds which shows investment cost, current NAV on Dec 31st 2024 etc. Dividend paid is 0. I have unrealized gain on 3 funds and unrealized loss for 1 fund.

Appreciate the support.

-ma2025

@thalaivar , I don't believe that you have to file 8621 yet --  see this from the instructions of form 8621:

"   Passive Foreign Investment Corporation (PFIC)
Generally, a U.S. person that is a direct or indirect
shareholder of a PFIC must file Form 8621 for each tax year
under the following five circumstances if the U.S. person:
1. Receives certain direct or indirect distributions from a
PFIC,
2. ...

"

What I was trying to do in my earlier  post  to @Nkm171964 , is  to bring awareness  to the PFIC regs.  Many are surprised to find that  the ULIPs are generally considered to PFIC  ( and not an insurance entity ).

Is there more I can do for you ?

@ma2025  please tell me more about the Mutual Funds  -- are these only in India  or are these also available in US market ?  Names would help ?   Earlier discuss ion really was about Market Linked Life -Insurance.   Mutual Funds may or may not be PFIC ( depending on exact facts and circumstances ).

I will come back once I hear from you --yes ?

pk,

mutual funds are in India and are not available in US market

examples - ITI Flex Cap Fund, Sundaram Financial Serv Opp. , UTI Balanced Advantage Fund

Thank you for the response! That’s what I found out from my research as well. 

Hi PK, you had helped to explain the foreign life policy reporting to me last year. I need your help again. I have tried to get a good accountant, but no one is really knowledgeable about filing and reporting foreign life policy from India. I have to pay taxes this year to IRS so I only have until 4-15.  So please help:

1- Do I need to file form 720 for excise tax(1% of premium? If yes, how do I do one payment for whole 2024? I have read that I needed to pay quarterly and file 720 quarterly, but it is too late for me and I never made any payments yet (total yearly payment may be like $120 which 1% of the premium)?

2-For form 8938- Do I have to file it? I do not have any dividend, interest, distribution or bonus etc. Bajaj Allianz is a no-participating policy.  I do have two funds where premium was invested but value only grew internally by end of the year. 

3- Is turbtax having these forms or I have to download them or there is an online filing I can do like I have to for FBAR 114 for my other bank account?

4- Can I file my taxes normally via Turbotax & any of the other forms separately online?  

Thanks in advance. 

@Nkm171964 ,  I could not remember our earlier discussions on the ULIP that you own -- so had to go back and find those first.  Having read the earlier thread, 

(a) I do not understand your reference to "Excise Tax " and  therefore form 720.   Please tell me how  your  owning ULIP based   life insurance  is connected to Excise tax in the USA.  Form 720 is generally ( and I am not really familiar with operations of  excise taxes in general ) used to report and pay taxes collected  on behalf of the IRS.

(b) Form 8938 -- FATCA form -- is an information only form if you meet  the  threshold .  It is filed  along with your  tax return.

(c) FBAR form 114  at  FinCen.gov is an on-line filing only form and again it is required if you meet the threshold  requirement  ( generally due by the tax filing date without regard to any extensions ).

Here is a good comparison of  FBAR and FATCA regs/ requirements --:

Comparison of Form 8938 and FBAR requirements | Internal Revenue Service

 FATCA form  ( 8938) is available  and supported by Turbo Tax.

Please answer  my questions about form 706 -- why you think you need to file one.

I will circle back once I hear from you.  You can indeed  PM  me if you wish.

Namaste ji

Hi PK, not sure what happened but I had written a lengthy response last week. Anyways, here is my response to your questions. All of this is coming from your explanations, and then I also read IRS documents and other online articles from Golding & Golding (and some others). At this point, I just want to do the forms on my taxes and finish as deadline is 4-15 and I owe taxes from some other income. So to err on the side of caution, please just let me know which forms I should file (and be Complient) and in the process pay any taxes if needed.

1- Form 720- IRS says a policy holder (Foreign life ins) should pay 1% excise on premiums paid to foreign companies like I have policy with. Line 30 on this form has a section for tax on foreign life policy payment.  IRS says as a US person, it is my responsibility. More is explained on their instructions. Other articles have said the same. So, I am so confused as to do I have to fill and report and pay this tax OR not? Hope you can assist further & clarify. In this form- you have to report quarterly and pay taxes twice a year I think. But since I was not aware of this form until recently, I did not do anything. But my annual premium was paid last year (April 2024) so what can I do on this form to meet that requirement for last year? 

2-Form 8938- Thanks for the comparison link from IRS. I know I do not meet the threshold since total values of the policy so far (and even totals for all bank accounts together) my married filing jointly status is much lower than requirement to file. So, I guess I am good with this one.

3- FBAR form 114- I file this form every year because I have some small value bank acct in India.  So I am familiar as to how to do it. But for a foreign life policy this year, what value should I be stating on this form? Is it is total value (at year end) of investment? Or a surrender value that the policy states how to calculate? I do not have other income or distribution or dividends etc. It is just the growth value in the invested funds of the ULIP policy. Just FYI- for 2024- total value of the policy with this growth is most likely more than the premium I paid and perhaps even more than surrender value that policy gives the formula to calculate. Any clarification on this would be deeply appreciated.

4- Form 8621- I also read that this form is necessary for PFIC declaration. I read IRS direction (and other articles) and looks like I do not meet the threshold to file this for total value policy has for shares in the funds that policy has invested in. But because there is conflicting info online, so to possibly meet PFIC requirements if any, it was also suggested, to err on the side of caution, file the top portion of the form 8621 only for each fund in the policy (policy has invested in 2 funds) and file. There is no tax due for this. So, can you please assist in clarifying as to how to file and submit it with my tax return? Also, should I do MTM method, if necessary (this is also confusing for me) even I am not sure is tax has to be paid on the growth of the funds which grew in value within the policy by year end, but I did not sell them or received anything from the funds or the policy.  

So far this is what I think I may need for taxes this year. And because I have to pay premium now next month for year 2 of the policy, it would help me to follow my obligation from start of the year. Thanks in advance.

@Nkm171964 , thank you for bringing this excise tax angle to my attention -- I was not aware of this.   So while I am studying this in more detail -- look at all the relevant  tax code sections and  Rev. Procs   ( will take a bit of time since I know nothing about excise tax ), please see this  page  from the IRS : --->   Exemption from Section 4371 excise tax | Internal Revenue Service.

I will come back on rest of your comments in a few--

 Again thank you  for helping me here on expanding my knowledge band.

pk

Thanks, PK, for exemption link for form 720. I looked at it. So, while India does have a treaty with US, but Bajaj Allianz life insurance is not listed (under letter B) for having closing agreement with IRS. I did find several Allianz corporations under letter A but they are all having address in Europe. So not sure I would be exempt. Perhaps best thing is to pay the 1% (about $120) of premium for 2024 to close the matter on this form. Then I will submit withing deadline for all future years. 

As for other questions, please do let me know what you find out. Thanks so much.

@Nkm171964  on your point 4 about form 8621 -- the easiest path here is  to file the form 8621 and choose Mark-To-Market.   I say this because  even though most  participants are small potatoes in the scheme of things  --- 1. it is hard to  get all the details  consistently to support the  other two choices  of "excess distribution " and   QEF etc.

2. Mark-To Market essentially means  this is a deemed sale  each year and matching  to FMV of the shares held .  

Granted this seems  unfair  but  PFICs  rules are draconian and in an effort to discourage  US persons from  shifting incomes elsewhere.  But it is the little guy that gets  crushed  ion the process.

The advantage of this is that since  this MTM -- your basis also changes along the way.  Thus the last bite  may be  more palatable.  The bad part of this is that  while US taxes are reduced  the  bite from India does not move accordingly.  Thus when finally disposed of, there may be large  Foreign Tax, very little  US tax and therefore Foreign Credit may be lost ( because no matter the accumulated / carried forward Foreign Tax Credit, the allowable is no more than the US tax on that foreign income.  It is a lose -lose proposition.

That is my understanding of the situation.

Is there more I can do for you ?

pk

TY PK.

so for 8621, I will file and MTM. And on 1040 return, I should calculate tax due on growth of total value and pay it as additional income? 

now only thing I need to clarify is how do I submit 1040, schedules and 8621 together? TTAx does not support 8621 I believe.

as for 720- Should I go ahead and send separately as has been suggested by some online e advise on 720?  TY