Hello again from Phil Hodgen, and Happy 2016.

Work here

We are hiring.

You can see the job listings at One admin/office manager, one accountant. That’s what’s on the plate at the moment.

But there will be more job listings to come in the next few months.

International Tax Lunch – Today

You are getting this at 6:00 a.m. Pacific time. At noon (Pacific time) today, our International Tax Lunch series for 2016 will kick off. I will be talking about the foreign earned income exclusion and Form 2555. Quick. Go to and sign up so you can get the last-minute email with the conference call dial-in information.

Or just hit “Reply” and email me. We will make sure you get the announcement email so you can call in.

Also. If you want to come to our new offices in Pasadena, we would love to see you. Email me (just hit “Reply” and send me an email) and we will get your lunch request. (Yes, we will feed you!)

Foreign Life Insurance and Americans Abroad

Martha Myron in Bermuda sent me an email with a topic suggestion. It is a good one. This is a tax problem that happens a lot, seems boring (therefore not a tax problem), and yet can make a mess for Americans abroad.

Life insurance. Specifically, life insurance issued by non-U.S. insurance companies. Here is Martha’s suggestion:

USCITS / US green card holders / US tax persons abroad being sold foreign life insurance. You do not have to told the serious misconceptions here, and the hurdles that these individuals have no idea they are going to have to cope with. A recent scenario – the foreign life insurance salesman (selling whole life or variable, of course) told the dual citizen with the US that it was just fine because the individual was earning less than 90,000 under the exemption. Foreign salesperson is not a US CPA / EA or US international tax attorney and actually has never been exposed to any US tax. This might be a topic to add to your PFIC series.

The Problems With Foreign Life Insurance

I am not going to write the Encyclopedia of Foreign Life Insurance, but here are the risks that an American Abroad faces when purchasing a life insurance policy.

Excise Tax

There is an excise tax to pay every time you pay a premium on a foreign life insurance policy, annuity, or sickness and accident insurance.

  • 1% of Premium Paid. A U.S. person who buys such a policy is taxed. The tax is 1% of the premium paid.
  • Form 720. You are required to file Form 720 to report the premium payment and remit your excise tax.
  • Resource. Look at the IRS audit technique webpage for a good overview.

Form 8938

Life insurance and annuity policies with cash value are reportable on this form. They are “specified foreign financial accounts”.

FinCen Form 114

The Dreaded FBAR. Life insurance policies are reportable here, too. 31 CFR § 1010.350(c)(3)(ii).

The PFIC Risk

There is another risk entirely. This is, I think, the risk that Martha pointed out.

In some circumstances, you might have been sold a financial product that is called an “insurance policy”, but from the point of view of the U.S. tax system, it is not an insurance product at all.

If this is the case, you are treated (by the U.S. tax system) as owning an investment account full of assets. That “insurance policy” you bought will contain assets of various types, some of which are almost certainly mutual funds. Foreign mutual funds. These are Passive Foreign Investment Companies, or PFICs. This means:

  • You have to file Form 8621 to report all of the mutual funds held as part of the investment account in that insurance policy.
  • If, during the time the life insurance policy is active and you are alive, the insurance company buys and sells mutual funds, you will have actual taxable sales under the excess distribution rules.
  • When you die, your estate will be treated as having sold the PFICs inside the “insurance policy” for fair market value, again triggering tax under the excess distribution rules.

Estate tax

Worse yet, the death benefit when you die could be taxable.

If this is not an “insurance policy” under the definitions in the Internal Revenue Code, then you have an asset that will be subject to estate tax. The account is just an investment account with stuff in it. When you die it owns the death benefit from the insurance policy. That could be a big number — big enough to cause estate tax problems.

Your heirs, instead of receiving cash tax-free (from the U.S. tax system, that is), will face the possibility of filing Form 706 for you, and paying an estate tax.


A couple of weeks ago, an unexpected email hit my inbox. A newsletter, it said, would be starting up again after a two-year hiatus.

Read this — an excerpt from the first issue of this revived newsletter. It recounts one of Simo Hayha‘s kills as a WWII sniper in the Finnish Army.

Simo Hayha exhales, his breath showing in the cold air. He shifts his posture, placing as much of his weight as he can against the hard tissue of his body. The small muscles twitch; bone does not twitch.

He looks through the iron sights of his Model 28-30 rifle, closes his left eye, and then re-opens it for depth perception. The Soviet officer is perfectly in the rifle’s trajectory.

The marksmanship instructors always said that the best shot is the one that surprises you. You must pull the trigger so slowly it’s almost a surprise when the gun flares to life. Simo applies gently pressure, unnoticeably tensing the pad of index finger on the trigger, touching it as if he were carefully applying medicine to a young child’s gums, a child that had been crying from new teeth coming in.

The loud crack of the rifle flaring to life shocks Simo, he’s surprised and flinches, but the flinch doesn’t matter – the lead slug has had its gunpowder activated and has already left the rifled barrel.

The bullet’s trajectory is pinpoint-perfect. In milli-seconds, it will strike the invading officer in his breast, near his heart, severing flesh and tendon. The young Russian will crumple sideways into the snow, immediately enter shock, and be on the brink of death before his comrades reach him.

But, wait!

The bullet has not yet struck the Soviet; freeze this landscape in your mind. Simo Hayha is mid-flinch at the surprise of the rifle roaring to life; the young officer is milling about on the cold land, oblivious to the fact that his life is nearing conclusion; the bullet hangs in mid-air, its trajectory set; this scene has almost entirely played out, but not yet; it’s not over yet, we’re at a moment frozen in time.

Who could stop reading at that point?

Here is what I find compelling about the newsletter:

  • It is extremely well written. This is not a one-off event. Read anything he has written and you will see the same care and intentionality.
  • It contains simple suggestions that you can understand and actually, y’know, do. These things can you make your life better.
  • The only way to read the newsletters (at the moment at least) is to sign up. You cannot go to the website and read prior episodes. This is intensely interesting to me as a marketing strategy — that an author would deliberately make it harder for people to find him and his work.

Go to The Strategic Review and sign up. Highly recommended. The author is Sebastian Marshall.

Logging Out

That’s it for this Friday. See you in a couple of weeks.

Remember, this newsletter is not legal advice and you’d be a damn fool to use this newsletter to make tax or legal or life decisions. Go hire someone competent.