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

[Nkm171964]

Hello,

I am US citizen & file married filing jointly. I opened a Foreign Life insurance policy (ULIP) by Bajaj Allianz in India this year (2024) for 5-year premium payment terms and total 10-year policy maturity. I have some questions that I need to clarify before 2024 US tax return is coming due in new year.

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?

2- Is premium deductible and what proof do I need in order to claim deduction?

3- For tax return 2024, what information would I need to collect from the Insurance company for reporting purposes?

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.

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.

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? 

Thanks in advance,

Nalin M

[email address removed]

[tagteam]

I'm not sure @pk can help but I'll page him anyway. Please check later.

[pk]

@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

[Nkm171964]

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.

[pk]

@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

[Nkm171964]

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.

[Nkm171964]

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.

[pk]

@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 ?

[Nkm171964]

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]

[pk]

@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