mandpete

I have searched through the forums and cannot find the answer I am looking for.

We have an endowment policy that matured this year. Since we moved here we have paid in far in excess of the final maturity value. Seeing as though we made a considerable loss on this policy do we have to declare it on our tax return? If so, I cannot find a way of entering it in Turbo Tax.

We have another endowment policy which matured this week and will have the identical situation on our 2014 return. We kept paying into these policies because of the life insurance factor and dismal early surrender values.

lansbury

When I had an endowment policy mature the tax liability was calculated as the amount the policy paid out, minus the total amount I had paid into the endowment part of the policy since its start. So I paid tax on the profit.

If you are saying your total premiums for the endowment part exceed the return on the policy I believe you can use the loss to offset other earnings.

dunroving

Not only that, but I'd say it would be a very strong case for an endowment mis-selling appeal.

My two endowments underperformed by 30%+ on the projected maturity value, but I still made about 50% "profit" on the amount I paid in. I've never, ever heard of a situation where the maturity amount was less than the payments. That is shameful.

mandpete

Thanks Lansbury, it is hard to put in writing but this is our situation:

£10,000 value of policy when we moved to USA
£11,000 final maturity value
£5,000 contributions paid in since moving to USA
£4,000 deficit

These are not the actual figures involved but are more or less equivalent in percentages for both policies. I am not all that concerned about declaring the losses but would like some reassurance that we are ok to not include the payouts on our 2013 and 2014 tax returns.

Reading from other threads it would appear we do not have to declare any profits we may have potentially made in the years before we left the UK, is this correct? We made a potential loss every tax year since moving here.

We received considerable mis-selling compensation for both policies just in the nick of time several years ago.

lansbury

For US tax it is £11,000 (converted to dollars), less all the premium payments paid since the day you started the policy. What the policy has made since you came to the US, or the payment you made in the US are irrelevant. It is the total premium payments and final maturity value is how my CPA worked my liability out.

You are meant to deduct from the premium payments the amount which went to purchase the life insurance part of the policy, if you know or can get that information.

My CPA told me that was incorrect. You do not pay tax on individual years profit, or use a loss in a given year. The liability comes at the maturity date. But UK endowment policies don't fit neatly into US tax.

mandpete

So after totaling contributions for the past 25 years we made a grand total profit of $3,000.00, all of which was added before we moved over here.
I have scoured all the documents I have and cannot not find a breakdown of what percentage was life insurance.

I have an added problem now in that I have no idea how to enter this information into Turbo Tax. It only seems to ask about foreign earned income from employers and then advises to file an FBAR. I will keep trying and see if I can figure it out.

lansbury

I never was able to work out what the life insurance percentage was. I even wrote to the insurance company when the policy matured, but they never answered. Hopefully nun or theOAP may answer about the profit made before you came over. My CPA is fairly converse with UK stuff but he isn't infallible and if nun or theOAP say something different they should be listened to.

I use a CPA and not Turbo Tax because I found in the past it doesn't cover all UK eventualities. Never knew if I had got a correct return or not. Now my UK income is just pensions, and I have no further UK investments to mature, I might try it again. I need a free version that I can use to compare against what the CPA prepares.

notonuksoil

We have two endowments one for each child that mature on their 18th birthdays, they are also life insurance policy's one on my life and one on OH.

One child is 15 the other is 12, not sure if we are meant to put this on our tax return.

Any ideas?

Yorkieabroad

That's what my CPA said too. It makes it consistent with say the sale of a property that may have made a significant gain before moving to the US, lost value since the move, but Uncle Sam still gets his cut of the "pre-immigration" gain.

JAJ

Probably, the profit should be declared as "other income". Unless there's another category on the 1040 which is more suitable.

Cook_County

You may want to ask the endowment company how they think it should be taxed for a US person. They may possibly be able to assist.

Some people consider an endowment a PFIC. It certainly goes on an FBAR and 8938. The question to be answered is not if it is taxed in the US; but how.

From a US perspective it is not insurance because it will not fit the specific US legal requirements for insurance. It is also not a US modified endowment contract (MEC); again because it will not fit the specific US legal requirements for a MEC. An endowment is a certainly a foreign entity; so if the maturity of such an investment produces a gain; should it be taxed as a PFIC gain?

nun

I tend to agree that UK endowment policies are PFICs and as such tax should be paid each year on any gains at income tax rates. Waiting to include gains on a US return until the policy matures is probably not correct and when the gains are paid they would not qualify for capital gains treatment.

nun

Yes, but they are not good....probably PFICs with strict annual reporting requirements. This link also mentions that they might be "non-qualified insurance policies", but that also requires annual reporting. UK endowment policies are obviously not specifically covered in the IRS code so there is room for interpretation. My advice is to seek a professional opinion, but the bottom line is that they will be US taxable and reportable.

As with most foreign accounts IRS taxation is complex and open to interpretation, but there are some opinions regarding UK endowment policies.

1) They count as FBAR accounts and must be included in your annual FBAR calculations.

2) Any interest and gains (or losses) must be included annually on your 1040. The interest and gains are not tax deferred. How they are to be taxed depends on the policy's investments. It will probably be difficult to get any information from the UK policy administrators as they have no reason to comply with US taxation requirements.

3) If the policy is invested in a PFIC that would require annual PFIC 8621 filing.

4) Any lump sum payment must be included on your 1040, whether that would be income or PFIC gains I don't know.


http://www.taxationweb.co.uk/forum/e...us-t16098.html

JAJ

It's all "maybe" and "some people consider" but realistically, it's not a PFIC unless the IRS and/or a tax court say it is. And there is no indication that the IRS has even the slightest interest in pursuing this argument.

Someone else has made the sensible point that the Internal Revenue Code does not give specific guidance for every single kind of foreign investment. In the absence of that, and using general principles to determine what "income" actually is, simply declaring the profit realized as ordinary income is an entirely reasonable approach. An audit is unlikely, and in the case of an audit, it's highly unlikely that this would be questioned.

Paying a tax professional is likely to be pointless as the answer will still be "maybe" and probably just leads to over-complication.

Foreign endowments generally do need to be declared on FBAR, also on form 8938 if the filing threshold is exceeded. This policy, and any others held, should be declared for 2013. There's no consensus on whether prior year FBARs really need to be filed if there is no tax underpaid.

mandpete

After going through Turbo Tax several times I have decided to enter the small profit we made as interest. This was the only category it seemed to vaguely fit into. I am not ready to file yet so if anyone has a better solution please let me know.