Student Question of the Week: Income Tax – Gross Income Calculation
Student Question from: John C.
Course: Income Tax – Gross Income Calculation
Student Question:
Hi. I just wanted to verify that the employee premium in the example below is not prorated between the “tax-free” and taxable insurance coverage. And, if it’s not, why?
Here is my calculation: 5 x 4.5% + 7 *0.5 % = 26% x 3000 = $780
Example: An employee age 44 is covered under a group term plan providing life insurance of $150,000 for all 12 months. The employee pays $50.00 for this coverage for the year. Table I is used to calculate the monthly cost of the $100,000 coverage that exceeds the $50,000 that is tax-free.
| Table 1 Rates for Group Term Life Insurance | |
| 5-Year Age Bracket | Cost per $1,000 of Insurance for One-Month Period |
| Under age 25 | $.05 |
| 25 to 29 | .06 |
| 30 to 34 | .08 |
| 35 to 39 | .09 |
| 40 to 44 | .10 |
| 45 to 49 | .15 |
| 50 to 54 | .23 |
| 55 to 59 | .43 |
| 60 to 64 | .66 |
| 65 to 69 | 1.27 |
| 70 and above | 2.06 |
Using Table I rates, 100 times $0.10 equals $10.00 of monthly costs. The annualized cost over 12 months is $120.00. After subtracting the employee’s payment of $50.00 for this coverage, the employee recognizes $70.00 in taxable income for the year.
Instructor Response:
Good question, John. Let’s look at this a different way to see what is happening here. The employee is getting $150,000 of coverage. The total cost of this coverage is $15 per month for 12 months = $180.
The employee is paying $50 of this cost; thus, the employer is paying the remaining $130 of this cost. So, the ONLY tax question we need to consider is if the employer is providing a taxable benefit to the employee by paying that $130 and, if so, how much is that taxable benefit to the employee? The issue we are considering has nothing to do with what the employee is paying; it is all about whether or not the employer is providing a taxable benefit.
To get our answer, the first $50,000 of coverage paid by the employer costs $5 x 12 = $60. Since the first $50,000 of coverage provided by an employer does not result in a taxable benefit for the employee, this $60 of premiums is tax-free to the employee. The remaining $70 of premiums being paid by the employer is for employer-paid coverage beyond $50,000 and is, therefore, a taxable benefit to the employee.
