Matured Endowment and Tax Return..again
#16
Re: Matured Endowment and Tax Return..again
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.
Last edited by nun; Jan 29th 2014 at 2:43 pm.
#17
Re: Matured Endowment and Tax Return..again
Anyway if we accept that we are going to declare the gain as interest so it's taxed at ordinary income tax rates the next issue becomes how often do we declare that income. The endowment mortgage will get UK tax deferral, but not US.....so do you have to pay US tax annually on the gains.
I'd feel uncomfortable deferring US tax until the payout.
However, I wouldn't normally recommend holding this kind of policy long term. Not only are they terrible investments, but even the U.S. tax treatment that can generally be agreed on (ordinary income on profit, no relief on losses) is unfavorable compared to U.S. based investments, whether stocks (qualified dividends, long term capital gains) or deferred income (IRA, 401k).
So the question of what to do with the policy won't arise over the long term if it is divested. Obviously anyone with one of these needs to consider the whole picture, especially the life cover and whether they can replace it.
Last edited by JAJ; Jan 31st 2014 at 1:35 am.
#18
Re: Matured Endowment and Tax Return..again
Another option is to include it as "Miscellaneous Income-Other Reportable Income". It's not really bank interest. This populates line 21 of form 1040.
#19
Re: Matured Endowment and Tax Return..again
Avoiding all these issues is why it's important to do your research before you move. I would not feel comfortable doing the reasonable things mentioned because they ignore some annoying principles of tax to come up with a convenient solution. It's a solution, but it's arguable if it's correct and would not be the solution of a professional. Now if I actually had an endowment mortgage I would be tempted by the "reasonable" solution. Still it's the tax deferral aspect that really worries me
Last edited by nun; Jan 31st 2014 at 3:35 am.
#20
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Joined: Mar 2014
Posts: 4
Re: Matured Endowment and Tax Return..again
OK let me start by apologizing for resurrecting this thread and this subject for the umpteenth time - I can hear the collective groaning coming through my speakers...
That said, after having read most of the threads on this forum and elsewhere, I still do not understand the consensus view against the following point - and this is:
Endowment proceeds are free of UK tax if they are a qualifying policy
The USUK treaty has the facility to accept a tax relief granted in one country - in the other.
Now I realize the treaty also says neither state really has to follow any of the rules, the US wants its pound of flesh and that the general consensus of the forum suggests UK endowment proceeds are US taxable - but why?
Has there been any known cases on the forum where the IRS has confirmed not declaring the lump sum from a qualified endowmwnt as income is wrong? That during an audit the above premise was incorrect and that a penalty was invoked for working on the basis of it?
I hardly expect the IRS to come back and declare the inclusion of it as income to be wrong and as mentioned several times its what the IRS thinks that really matters.
I'd really appreciate any insight as to why this 'equivalent tax relief' approach is incorrect in the absense of any definitive rule or evidence to the contrary.
That said, after having read most of the threads on this forum and elsewhere, I still do not understand the consensus view against the following point - and this is:
Endowment proceeds are free of UK tax if they are a qualifying policy
The USUK treaty has the facility to accept a tax relief granted in one country - in the other.
Now I realize the treaty also says neither state really has to follow any of the rules, the US wants its pound of flesh and that the general consensus of the forum suggests UK endowment proceeds are US taxable - but why?
Has there been any known cases on the forum where the IRS has confirmed not declaring the lump sum from a qualified endowmwnt as income is wrong? That during an audit the above premise was incorrect and that a penalty was invoked for working on the basis of it?
I hardly expect the IRS to come back and declare the inclusion of it as income to be wrong and as mentioned several times its what the IRS thinks that really matters.
I'd really appreciate any insight as to why this 'equivalent tax relief' approach is incorrect in the absense of any definitive rule or evidence to the contrary.
#21
Re: Matured Endowment and Tax Return..again
The USUK treaty has the facility to accept a tax relief granted in one country - in the other.
Now I realize the treaty also says neither state really has to follow any of the rules, the US wants its pound of flesh and that the general consensus of the forum suggests UK endowment proceeds are US taxable - but why?
Has there been any known cases on the forum where the IRS has confirmed not declaring the lump sum from a qualified endowmwnt as income is wrong? That during an audit the above premise was incorrect and that a penalty was invoked for working on the basis of it?
I hardly expect the IRS to come back and declare the inclusion of it as income to be wrong and as mentioned several times its what the IRS thinks that really matters.
I'd really appreciate any insight as to why this 'equivalent tax relief' approach is incorrect in the absense of any definitive rule or evidence to the contrary.
#22
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Joined: Mar 2014
Posts: 4
Re: Matured Endowment and Tax Return..again
If one takes the approach of defining what an endowment is in the US - then I agree the proceeds probably SHOULD be included as income.
However, perhaps I'm reaching a little here (or maybe a lot) but I'm looking at it from the tax relief angle.
http://www.treasury.gov/resource-cen...s/uktreaty.pdf
In that document:
Article 1 para 2 states:
2. This Convention shall not restrict in any manner any benefit now or hereafter
accorded:
a) by the laws of either Contracting State; or
b) by any other agreement between the Contracting States
accorded:
a) by the laws of either Contracting State; or
b) by any other agreement between the Contracting States
Article 1 para 7:
7. Where under any provision of this Convention income or gains arising in one of the Contracting States are relieved from tax in that Contracting State and, under the law in force in the other Contracting State, a person, in respect of the said income or gains, is subject to tax by reference to the amount thereof which is remitted to or received in that other Contracting State and not by reference to the full amount thereof, then the relief to be allowed under this Convention in the first-mentioned Contracting State shall apply only to so much of the income or gains as is taxed in the other Contracting State.
In the event of a future audit and the result of that audit suggesting the approach used was incorrect, is there precedent that any interpretation used that results in lower tax is automatically tax evasive rather than an honest belief the interpretation was correct?
#23
Re: Matured Endowment and Tax Return..again
The proceeds of an endowment are not generally taxable income, as far as I understand. The profit on disposal of an endowment - if any - is normally taxable income. Is there any profit involved?
If it's taxable income, the tax treaty doesn't really protect because, except for a few clauses, the U.S. can ignore it as it applies to U.S. residents and citizens.
The tax code doesn't explain exactly what to do and the IRS have never published any specific fact sheet or guidance, so you should simply take a reasonable approach. An audit is unlikely and even if one was to occur, it's not clear they would really have a problem with a reasonable approach.
The statute of limitations normally expires after 3 years, in some cases 6.
Make sure you include it on the relevant information reports, if applicable. Notably FBAR and form 8938.
If it's taxable income, the tax treaty doesn't really protect because, except for a few clauses, the U.S. can ignore it as it applies to U.S. residents and citizens.
The tax code doesn't explain exactly what to do and the IRS have never published any specific fact sheet or guidance, so you should simply take a reasonable approach. An audit is unlikely and even if one was to occur, it's not clear they would really have a problem with a reasonable approach.
The statute of limitations normally expires after 3 years, in some cases 6.
Make sure you include it on the relevant information reports, if applicable. Notably FBAR and form 8938.
#24
Re: Matured Endowment and Tax Return..again
An audit is unlikely and even if one was to occur, it's not clear they would really have a problem with a reasonable approach.
#25
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Joined: Mar 2014
Posts: 4
Re: Matured Endowment and Tax Return..again
Thanks for your insights JAJ
If the policy is a TEP, cashed in within 10 years and a host of other events that 'unqualify' it, then I agree the profit is taxable. If it is qualified and remains qualified at the point it is cashed out or comes to term, then I can't see why it wouldn't be tax-free.
While that certainly seems to be possible, if every clause 'can be ignored' then there is little point having a treaty at all. My point is that if there is a reasonable interpretation of the 'spirit' of the treaty, which (to me at least) suggests a tax break in one country is be a tax break in the other, then isn't that as reasonable an approach as any?
Personally, I think this is the key. Not to try to hide the money but to declare it and take the position that it is not taxable.
Personally, I think this is the key. Not to try to hide the money but to declare it and take the position that it is not taxable.
#26
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Joined: Mar 2014
Posts: 4
Re: Matured Endowment and Tax Return..again
For that to happen, one needs to be audited and be found to be in contravention of the rules - which of course is not impossible.
However, with the treaty itself 'suggesting' at the very least, that tax-free gains maybe transferable across the pond, its a pretty expensive exercise to voluntarily pay tax on a sizable chunk of money when it is far from definitive that it is necessary to do so.
I'd guess there are many definitive tax rules that people are exploiting. How economic is it for the IRS to expend the resources pursuing people over a ruling that is grey at best?
#27
Re: Matured Endowment and Tax Return..again
I don't think it is a grey area. A member of BE is a tax professional licenced in both the US and UK and has stated on BE that the profits on an endowment policy are taxable. The tax professional I use, who has a Brit in his office, was of the same opinion.
You can assess the likelihood of getting away with it, but what is your tolerance for risk. Unfortunately paying take on endowment profits is a downside of living in the USA.
You can assess the likelihood of getting away with it, but what is your tolerance for risk. Unfortunately paying take on endowment profits is a downside of living in the USA.
#28
Re: Matured Endowment and Tax Return..again
I don't think it is a grey area. A member of BE is a tax professional licenced in both the US and UK and has stated on BE that the profits on an endowment policy are taxable. The tax professional I use, who has a Brit in his office, was of the same opinion.
You can assess the likelihood of getting away with it, but what is your tolerance for risk. Unfortunately paying take on endowment profits is a downside of living in the USA.
You can assess the likelihood of getting away with it, but what is your tolerance for risk. Unfortunately paying take on endowment profits is a downside of living in the USA.
#29
Re: Matured Endowment and Tax Return..again
Yes, our accountant said the same when we he did our 2012 taxes. Luckily, my UK endowment is fairly small.
#30
Re: Matured Endowment and Tax Return..again
While that certainly seems to be possible, if every clause 'can be ignored' then there is little point having a treaty at all. My point is that if there is a reasonable interpretation of the 'spirit' of the treaty, which (to me at least) suggests a tax break in one country is be a tax break in the other, then isn't that as reasonable an approach as any?
A number of people have already told you that any profit is taxable. This is generally the U.S. tax treatment of endowments and a reasonable approach might be to apply the same tax treatment as would apply to a U.S. policy. If you feel that another tax treatment is appropriate then do your own research, however you can't use a tax treaty clause unless it is one of the few that are open to U.S. residents/citizens. Read the whole treaty and this will become apparent.
You've still not told us if there is any profit. Endowments are not good investments and often there is no profit on redemption.