Discussion:Life insurance proceeds
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| Revision as of 01:25, 15 July 2006 Bengoshi (Talk | contribs) (Hmm...interestin) ← Previous diff |
Current revision Scot1 (Talk | contribs) (This is an inter) |
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| {{ForumReplyPost|UserID=Bengoshi|Date=15 July 2006|Text=Hmm...interesting question. I thought group-term life ins premiums were usually paid by employer and excluded from employee's gross income (up to $50,000 in coverage). I'm not familiar with this area either, but I think I see what you're saying -- the proceeds are essentially like income in respect of decedent? Doesn't IRC 101 still permit exclusion provided proceeds are payable by reason of employee's death? The theory is that it's like an inheritance, which isn't subject to income tax.}} | {{ForumReplyPost|UserID=Bengoshi|Date=15 July 2006|Text=Hmm...interesting question. I thought group-term life ins premiums were usually paid by employer and excluded from employee's gross income (up to $50,000 in coverage). I'm not familiar with this area either, but I think I see what you're saying -- the proceeds are essentially like income in respect of decedent? Doesn't IRC 101 still permit exclusion provided proceeds are payable by reason of employee's death? The theory is that it's like an inheritance, which isn't subject to income tax.}} | ||
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| + | {{ForumReplyPost|UserID=Scot1|Date=15 July 2006|Text=This is an interesting question, from IRS website......... | ||
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| + | IRC section 79 provides an exclusion for the first $50,000 of group-term life insurance coverage provided under a policy carried directly or indirectly by an employer. There are no tax consequences if the total amount of such policies does not exceed $50,000. The imputed cost of coverage in excess of $50,000 must be included in income, using the IRS Premium Table, and are subject to social security and Medicare taxes. | ||
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| + | A taxable fringe benefit arises if coverage exceeds $50,000 and the policy is considered carried directly or indirectly by the employer. A policy is considered carried directly or indirectly by the employer if the employer pays any cost of the life insurance, or the employer arranges for the premium payments and the premiums paid by at least one employee subsidize those paid by at least one other employee (the “straddle” rule). | ||
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| + | Because the employer is affecting the premium cost through its subsidizing and/or redistributing role, there is a benefit to employees. This benefit is taxable even if the employees are paying the full cost they are charged. You must calculate the taxable portion of the premiums for coverage that exceeds $50,000. | ||
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| + | A policy that is not considered carried directly or indirectly by the employer has no tax consequences to the employee. Because the employees are paying the cost and the employer is not redistributing the cost of the premiums through an insurance system, the employer has no reporting requirements. | ||
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| + | Example 1 - All employees for Employer X are in the 40 to 44 year age group. According to the IRS Premium Table, the cost per thousand is .10. The employer pays the full cost of the insurance. If at least one employee is charged more than .10 per thousand of coverage, and at least one is charged less than .10, the coverage is considered carried by the employer. Therefore, each employee is subject to social security and Medicare tax on the cost of coverage over $50,000. | ||
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| + | Example 2 - The facts are the same as Example 1, except all employees are charged the same rate, which is set by the third-party insurer. The employer pays nothing toward the cost. Therefore there is no taxable income to the employees. It does not matter what the rate is, as the employer does not subsidize the cost or redistribute it between employees. | ||
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| + | It sounds like in your situation the policy is not considered carried directly or indirectly by the employer therefore the $50K limit does not apply. But as to taxability to the beneficiary due to the pre-tax nature of the way the premiums are paid, you may have a problem. | ||
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| + | We have a payroll service arm in our firm and we never pre-tax disability insurance premiums due to the fact that if disability payments were paid they would be taxable. | ||
| + | }} | ||
Current revision
Discussion Forum Index --> Tax Questions --> Life insurance proceeds
| 14 July 2006 | |
| We have a group-term life insurance policy at work. Premium are paid, just as the medical insurance premiums, pre-tax. Can you tell me if the life insurance proceeds ($100,000)would be taxable to the beneficiary due to the fact the premiums were paid pre-tax via payroll deduction?
Thank you. | |
| July 14, 2006 | |
| Life insurance proceeds aren't taxable. I've never understood how that works, tho', since intuitively we know that paying for something pre-tax, esp. by someone else like an employer, oughtta create taxable income. But it doesn't. Interested to hear the theory behind that one. | |
| 15 July 2006 | |
| Hmm...interesting question. I thought group-term life ins premiums were usually paid by employer and excluded from employee's gross income (up to $50,000 in coverage). I'm not familiar with this area either, but I think I see what you're saying -- the proceeds are essentially like income in respect of decedent? Doesn't IRC 101 still permit exclusion provided proceeds are payable by reason of employee's death? The theory is that it's like an inheritance, which isn't subject to income tax. | |
| 15 July 2006 | |
| This is an interesting question, from IRS website.........
IRC section 79 provides an exclusion for the first $50,000 of group-term life insurance coverage provided under a policy carried directly or indirectly by an employer. There are no tax consequences if the total amount of such policies does not exceed $50,000. The imputed cost of coverage in excess of $50,000 must be included in income, using the IRS Premium Table, and are subject to social security and Medicare taxes. A taxable fringe benefit arises if coverage exceeds $50,000 and the policy is considered carried directly or indirectly by the employer. A policy is considered carried directly or indirectly by the employer if the employer pays any cost of the life insurance, or the employer arranges for the premium payments and the premiums paid by at least one employee subsidize those paid by at least one other employee (the “straddle” rule). Because the employer is affecting the premium cost through its subsidizing and/or redistributing role, there is a benefit to employees. This benefit is taxable even if the employees are paying the full cost they are charged. You must calculate the taxable portion of the premiums for coverage that exceeds $50,000. A policy that is not considered carried directly or indirectly by the employer has no tax consequences to the employee. Because the employees are paying the cost and the employer is not redistributing the cost of the premiums through an insurance system, the employer has no reporting requirements. Example 1 - All employees for Employer X are in the 40 to 44 year age group. According to the IRS Premium Table, the cost per thousand is .10. The employer pays the full cost of the insurance. If at least one employee is charged more than .10 per thousand of coverage, and at least one is charged less than .10, the coverage is considered carried by the employer. Therefore, each employee is subject to social security and Medicare tax on the cost of coverage over $50,000. Example 2 - The facts are the same as Example 1, except all employees are charged the same rate, which is set by the third-party insurer. The employer pays nothing toward the cost. Therefore there is no taxable income to the employees. It does not matter what the rate is, as the employer does not subsidize the cost or redistribute it between employees. It sounds like in your situation the policy is not considered carried directly or indirectly by the employer therefore the $50K limit does not apply. But as to taxability to the beneficiary due to the pre-tax nature of the way the premiums are paid, you may have a problem. We have a payroll service arm in our firm and we never pre-tax disability insurance premiums due to the fact that if disability payments were paid they would be taxable. | |
