1. Most foreign insurances cannot enjoy tax incentives for US life insurance
In fact, in the United States, only life insurance can enjoy unique tax incentives. Some non-U.S. insurance is likely not recognized by the IRS as qualified life insurance, resulting in unnecessary tax burdens. All qualified American life insurances need to go through 7-Pay tests. Once the amount limit is exceeded, they will be considered MEC (Modified endowment contract). Some people's investments to avoid taxes and investments that violate the original intention of life insurance will be considered MEC. In this case, the death compensation is still exempt from income tax, but if the policy holder wants to withdraw during the holding period, the income part needs to be taxed. If you are under 59 years old at the time of withdrawal, you will face an additional 10% fine. If you want to continue paying the fee after
meets the definitions of 7-pay and MEC, there is also an upper limit under the current insurance amount, and the additional insurance will also face the problem of re-examination. During this period, if the premium paid in any year exceeds the corresponding limit, the policy will be recognized as MEC, and later withdrawals will no longer enjoy tax exemptions and there will be certain fines.
Compared with insurance in the mainland and Hong Kong, China, the United States has stricter regulations on insurance. The 7702 regulations stipulate the maximum amount that policyholders can put into their life insurance policies for tax-free investment.
2. Foreign life insurance will be charged additional taxes.
is also a US dollar product. In the past few years, Hong Kong's life insurance products have been highly praised, and there are also many friends who go to Hong Kong to buy insurance. However, it should be noted that insurance in Hong Kong is a product designed to adapt to Hong Kong's tax laws and does not have the same requirements. Therefore, the money put in often exceeds the maximum allowed by the IRS IRS 7702 clause. At this time, the insurance product you originally purchased, called "life insurance", in the view of the US tax law, this policy contract has become an investment product recognized as a MEC. The part that exceeds the tax exemption requires capital gains tax. Since
is not life insurance, there is naturally no way to talk about the benefits of life insurance such as "delaying tax payment", "tax exemption", "enjoying tax incentives" and so on. Then next, when you become a tax resident in the United States, you face the problem of paying taxes.
requires regular tax payments, and the procedures are complicated.
The IRS stipulates that U.S. tax residents who purchase insurance products outside the United States need to pay additional taxes for premiums. This tax is called "Foreign Insurance Taxes".
This means that from the moment you become a tax resident in the United States, if you are paying premiums for an overseas insurance policy, the IRS requires you to fill out the form every quarter and you need to file taxes every quarter. The specific tax rate, according to the IRS standard, if the premium is $10.10, then the tax is 11 cents.
The astonishing tax rate held by long-term
At the same time, for non-US life insurance policy products that do not meet the definition of Regulations 7702, if the cash value part of the policy has dividend gains, it is considered a personal capital gain in the eyes of the US government and needs to pay personal income tax.
is calculated as 18% federal tax. Assuming that the annual return on investment is 6.00%, if you invest $1,000 per month into the policy starting at the age of 35, invest $12,000 per year, and continue to pay for 25 to 60 years old, then by the age of 60, you will spend $64,507 more taxes than the policy with a total tax exemption of cash. If you reach the age of 80, considering the cash value of the policy and the tax payment, you will pay an extra $380,000 in taxes.
According to the provisions of the IRS, the premium paid by U.S. tax residents to purchase overseas insurance must pay 1% of the tax (according to sections 4371 and 4372 of the Tax Regulations). In addition, the taxes and ownership must be reported, which means that relevant forms such as 720, 8833, 8621, 8938, 114 must be submitted.
3. Foreign life insurance declaration is strictly
Americans hold foreign insurance, such as life insurance, critical illness insurance, accident insurance, etc. The declaration requirements are very strict, involving:
- declares 1% of the premium paid every quarter as consumption tax;
- fills in the 7720 tax form, declares the paid premium and pays consumption tax;
- fills in the 8938 tax form, and declares the insurance details they hold;
- If the value of the insurance account exceeds 10,000 US dollars, according to the reporting requirements for the financial account from the United States, (Report of Foreign Bank and Financial Accounts, FBAR Fat Dad) , you need to fill out Form 114 tax form declaration and check tax.
accepts supervision of the Overseas Account Act
and the United States has signed FABRs with more than 7,000 financial institutions, of course, including insurance companies such as Hong Kong. And the applicable groups of FBAR are U.S. tax residents, that is, U.S. nationality, green card holders and foreigners who have passed the residence test.
not only has the above tax risks, but also its own financial information will be investigated. According to the FATCA Act of the U.S. Government, financial institutions around the world need to inform the U.S. government of U.S. tax residents (green cards and citizens) of their overseas financial assets for U.S. government to check . Of course, these financial institutions include insurance companies such as Hong Kong. In addition, according to the Feika Act, insurance with savings dividend function is counted as an overseas financial account and needs to be declared.
4. American insurance enjoys the preferential policy of "delayed/income tax exemption"
The death compensation of American life insurance is exempt from income tax, which to a certain extent reduces the impact of inheritance tax and allows children to obtain more assets. However, the death compensation for US life insurance belongs to the holder's assets. When the insured and the holder are the same person, the death compensation will still be included in the holder's estate.
In the United States, every family needs to declare the total income of the whole family in the previous year (including overseas income) every year. minus the part that can be deducted, calculate a tax amount at the tax rate, compare it with the tax paid, and refund the more and make up for the less.
Official data from the IRS in 2019 show that for high-income families, the tax rate is as high as 37% if the annual income exceeds 600,000 US dollars. Such a high tax rate is daunting, and purchasing an American Life Insurance policy can help immigrant customers enjoy some tax exemption policies, including:
- A, cash value growth tax exemption within the policy;
- B, part of the cash value exceeds the policyholder's tax base, can be loaned through the policy;
- C, tax-free loan (on the premise of the policy taking effect);
- D, income tax exemption when the policy's death compensation is paid to the beneficiary;
- E, benefits paid before the insured's death due to long-term chronic diseases or terminal illnesses are tax-free;
- F, the amount of the insurance refund does not exceed the policyholder's tax base, and no income tax is required.
5, paired with irrevocable trust ILIT (not suitable for everyone)
When used with irrevocable trust ILIT, it can provide better protection for asset isolation.
cannot be modified or cancelled after establishing an irrevocable trust. The principal may transfer all rights and interests in the policy to the trustee, and the trustee shall be the owner of the policy. The beneficiary has irrevocable, legally determined future gains.
So how does ILIT protect asset isolation?
- On the one hand, ILIT will provide beneficiaries with a certain degree of asset protection. When the beneficiary faces economic disputes or lawsuits, ILIT will not be considered to be owned by the beneficiary, making it extremely difficult for the court to prove that the property belongs to the beneficiary, thereby achieving the protection of asset isolation.
- On the other hand, ILIT can solve the problem that children cannot plan and use well for immigrant families due to large amounts of funds left to minors at one time.
In ILIT, you can plan wealth distribution in advance for the first housing purchased by the beneficiary after graduation, marriage of the beneficiary and having children and other major life events.
6. Solve passive income
People who have just immigrated to the United States will encounter this problem: In this new living environment, how to solve the problem of future life and passive income in old age?
of course is to configure an American life insurance policy, and pay a fixed amount of money every year. After several years, the accumulated amount of cash value in the policy will be very considerable. For example, if a non-smoking man who immigrated to the United States deposits $58,000 per year and deposits for 5 years, the total premium is $290,000 and the insurance amount is $2,000,000. When he was 60, he could withdraw $51,366 from his cash value account tax-free every year, which not only perfectly solved the problem of passive income for the elderly, but also when he was 100, the total tax-free withdrawal reached $2,106,006, and the rest could be left to the next generation $872,191.
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