I will go to my tax advisor to get their recommendation, but I wanted to get experiences and opinions from you wonderful people because it’s fun.
I signed up for private health insurance, but the more I read, the more I think Uncle Sam is going to come and take a big piece if they do distribute money from the plan. Especially since they might see it as investment in a PFIC. That means I pay taxes on my Taiwan income, use that money to pay for insurance that could later be highly taxed. Taiwan May want to tax it too. I think I can save, invest, and make greater gains long-term, so I’m thinking about cancelling it.
Has anyone had experience with the US coming after distributions from private insurance?
I’ve not known it to actually happen, but it could. If the plan grows a cash value that exceeds your premiums, then you have an investment vehicle that would either be a PFIC or a foreign trust depending on the details. Different form and requirement for each.
Thanks for the response. So if my total contributions start to exceed the plan coverage, it falls into that criteria, or is it if the insurance company invests it in a way that has potential to grow beyond the premiums?
Hypothetically (assuming a $1M policy), if I pay in $200k, it grows to $201k and they pay out $1M, it’s not taxable, but if I pay in $1M and it grows to $1.1M and they do a payout of $1M, that’s when it will be seen as a PFIC/foreign trust?
It has to do with the design of the plan, not the current cash value. A PFIC is still a PFIC whether or not you actually pull cash out. The same is true for the foreign trust. I believe your original questions was regarding filing requirements rather than tax liabillity. Penalties have the potential to be far worse than any tax due. There is a test to determine the status of the policy (assets, income…).
If you payin 200k and they pay out 1M, the only way that isn’t going to be taxable is if 1) you die and that is a life insurance payout 2) you have qualifying medical expenses paid by those proceeds. Anything else and it is a taxable ROI. I agree with your original assessment that for a US taxpayer, this probably isn’t the best investment option (unless it really does pay those kinds of returns).
Understood on the $1M payout. It was more for understanding purposes, not an actually realistic example.
You mention a test to check the status of the policy. How would I go about doing that? Since it’s an insurance company, I’m guessing it falls under either a PFIC or a foreign trust.
I haven’t had it very long, so I’ll probably end up cancelling it. I have a healthy savings, so it’s not really something I would rely on. I think my fiancé peer pressured me into it mostly ha. She also doesn’t understand all the complications that come with taxes for Americans. Hell. She doesn’t even know much about her own taxes in Taiwan.