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US taxation of foreign annuities

by: Anthony Parent   2016-03-02

 

Annuities have some big advantages for those seeking a future stream of income. Generally, and we will talk about the foreign variable annuity exception below, annuities allow you to do a type of income tax deferral. This means you can have a larger payout in the future. Because of this, annuities are particularly useful for those that are closest to retirement age or currently retired and are trying to make sure they don't run out of money.

 

Other benefits of annuities are that you don't have to worry if you qualified for other tax-deferred retirement accounts such as 401(k)s and IRAs -- as you don't need to be employed. Plus, there is no annual contribution limit for an annuity. When you cash out, you can choose to take a lump-sum payment from your annuity, but many retirees prefer to set up guaranteed payments for a specific length of time or the rest of your life as this provides a steady stream of income.

 

Annuities are also a great choice for those who aren't insurable, but are looking for some of the same benefits as whole life insurance policy.

 

The benefits of foreign annuities

The benefit of foreign annuities is that in some countries the interest rates paid are higher. Also, for some US persons, buying a foreign annuity makes sense as they happen to be living in that country where it was sold or are a citizen of that country. So there can be convenience factors.

 

The downsides of foreign annuities - tax & reporting

The first downside is that if your foreign annuity is worth over $10,000, or it, along with any other foreign accounts adds up to more than $10,000, you will now have an FBAR filing obligation. Penalties for not filing the FBAR can be 50% of account value, assessed numerous times.

 

The second downside is that tax code section 1275 classified a fixed annuities as "a debt instrument." Therefore, deferral is not allowed and taxes must be paid each year on accrued earnings not actually received. On the other hand, foreign variable annuities are taxable only upon distribution of the earnings.

 

If you have unreported income from offshore assets, you may want to look into whether or not you need to use a voluntary disclosure plan. Click here to get more information on the most popular disclosure programs.

 

And the worst part of the taxation of foreign annuities

There are limited cases, essentially where the taxpayer has some control over the annuities, that foreign annuities may be considered PFICs -- Passive Foreign Investment Companies. Not only is accrued (yet unpaid) income taxed per year, but  PFIC accounting is incredibly onerous and adds significant costs.

 

If you have unreported accounts that you are concerned about, contact us. We can help you undersand with all your filing requirements. Call us at 888-727-8796 or email info@irsmedic.com. 


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