Owen778

That seems a very strange position to take. If you report a US endowment as retirement income, then it is subject to ordinary income tax rates. I can see no way to justify only paying tax on a UK endowment at long-term capital gains rates.

mrken30

A lot of CPAS try and make uk stuff fit into a similar us tax vehicle. They are not always correct and at the end of the day do not necessarily have to fall with the consequences of getting it wrong

Owen778

But the strange thing here is that the CPA's logic doesn't follow even if you accept his or her assumptions.

celticgrid

Having been round the endowment loop a few years back I can tell you that the CPA is wrong, simply because there is no defined correct way of reporting such an endowment. Ask 10 CPAs and you'll get 11 different answers. That's why the subject comes up on BE time and time again. Folks just have to go with the reporting method that they feel most comfortable defending in an audit.

global360

Some further thoughts on my justification for trying to claim foreign tax credit in regard to US taxation of a maturing UK (qualified) endowment policy.

As I understand it, my UK endowment insurance policy did not have any tax advantages during the 25 year period (the policy started after 1984 so no tax relief on premiums and most importantly no "tax-free build up"). In contrast, UK whole life policies benefit from "tax-free build up". I believe US insurance products also generally benefit from "tax-free build up".

HMRC recognizes that the investments underlying endowment policies have already paid basic income tax. Thus, basic rate tax payers do not pay any tax on chargeable gains EVEN on non-qualified maturing endowment policies. The tax calculation on chargeable gains for higher rate tax payers provides a credit at the basic rate of tax .

I would appreciate any suggestions on how a UK insurance company may be persuaded to provide a tax certificate (or a tax letter) to a US tax resident in relation to a qualified endowment policy? Such a tax letter would be redundant for HMRC purposes, but invaluable for the purpose of claiming foreign tax credit on a US return. Unfortunately, current UK law requires insurance companies to provide tax certificates only on non-qualified policies.

Owen778

I think you are confused. No, I'm sure you are confused. While I'm still struggling to understand exactly what you're trying to say, I think I understand it well enough to say this:

If they underlying investments have already been taxed, it is your endowment provider who paid that tax, not you, even if its impact was passed on to you through lower returns. You cannot claim a credit for foreign tax not actually paid by you.

Moreover, if this was actually possible, which it isn't, you would have to pay US tax based on the gain in the underlying investments, not a gain calculated from what your provider paid minus your cost basis (your total endowment contributions). It is easily possible you would owe the IRS more by looking at the underlying investments.

Pulaski

This. End of story!

mrken30

Technically I don't pay the interest on my savings directly to HMRC, my bank does, I hope. But I can still claim that back from HMRC. Admittedly I don't get a foreign tax credit and it does show up on my statement. Maybe next year it will be a foreign tax credit.

Pulaski

No, you pay. It is a debit to your bank account based on the interest your money earns. The bank is an agent for HMR&C collecting tax from you and paying it to HMR&C on your behalf, which is why you get the tax credit.