Understanding Imputed Income For Life Insurance

Imputed income life insurance is a term used to describe the tax implications of employer-subsidised life insurance. When group term life insurance (GTL) policies have death payouts that exceed $50,000, the IRS treats the amount over that cutoff as taxable income. This portion of taxable coverage becomes what is known as imputed income. Imputed income includes the benefits an employee receives that are not part of their salary and wages.

Group term life insurance (GTL) policies

Imputed income includes the benefits an employee receives that are not part of their salary and wages. The calculation and reporting of imputed income depend on whether the GTL plan is considered 'discriminatory', how the premium is paid (employer-paid, employee-paid pre-tax, or employee-paid on an after-tax basis), and whether the plan is considered 'carried' by the employer under Section 79 of the Internal Revenue Code (IRC) and other corresponding regulations.

If your GTL insurance death benefit payout is above $50,000, the IRS considers it as imputed income, which will likely cause tax implications. Employers include this information on employee W-2 forms as taxable wages. The biggest factor an employee needs to understand is if the life insurance is considered a basic plan, where the employer pays the entire cost of the term life insurance.

Fortunately, the imputed income from a group term life insurance policy exceeding $50,000 is relatively straightforward to calculate. For example, consider a 54-year-old employee with $75,000 of life insurance coverage through a company-sponsored group life insurance plan. First, we can ignore the initial $50,000, leaving us with $25,000 of taxable coverage. Next, per the IRS rules, we can divide that $25,000 by $1,000. Using the IRS table, we see that $0.23 per $1,000 is the tax rate owed by our 54-year-old employee. The result is 25 multiplied by $0.23, giving a monthly imputed income of $5.75.

Tax implications

Imputed income is a term used to describe the benefits an employee receives that are not part of their salary and wages. In the context of life insurance, imputed income refers to the death benefit payout from a group term life insurance (GTL) policy that exceeds $50,000. The portion of the payout that exceeds this threshold is considered taxable income by the IRS and is subject to tax implications.

When an employee receives a death benefit payout from a GTL policy that exceeds $50,000, the excess amount is treated as imputed income and is taxable. This means that the employee will owe taxes on the portion of the payout that exceeds $50,000. The tax rate applied to this imputed income depends on the employee's age and is determined by the IRS. The employer is responsible for including this information on the employee's W-2 form as taxable wages.

The calculation of imputed income depends on various factors, including whether the group term life insurance plan is considered "discriminatory", how the premium is paid (employer-paid, employee-paid pre-tax, or employee-paid on an after-tax basis), and whether the plan is considered "carried" by the employer under Section 79 of the Internal Revenue Code (IRC) and other corresponding regulations. Even supplemental group term life insurance plans can, under certain circumstances, be considered carried by the employer.

It is important to note that not all benefits are considered imputed income. Popular benefits such as health insurance and health savings accounts do not fall into the category of taxable income.

Calculating imputed income

Imputed income life insurance refers to the tax implications of employer-subsidised life insurance. Group term life insurance (GTL) policies are often offered by companies to employees as a tax-free benefit, but only if the policy coverage is $50,000 or below. If the death benefit payout exceeds $50,000, the IRS treats the amount over that cutoff as taxable income, or imputed income.

The calculation of imputed income also depends on whether the group term life insurance plan is considered "discriminatory", how the premium is paid (employer-paid, employee-paid pre-tax, or employee-paid on an after-tax basis), and whether the plan is considered carried by the employer under Section 79 of the Internal Revenue Code (IRC) and other corresponding regulations.

Imputed income and the straddle rule

Imputed income is a term used to describe the benefits an employee receives that are not part of their salary and wages. This includes employer-subsidised life insurance, which is a common perk of full-time and salaried jobs. Companies often use group term life insurance (GTL) policies to offer employees life insurance. The IRS treats this as a tax-free benefit if the policy coverage is $50,000 or below. However, when these group life insurance policies have death payouts that exceed $50,000, the IRS considers it as imputed income, which will likely cause tax implications.

The calculation and reporting of imputed income depend on several factors, including whether the group term life insurance plan is considered "discriminatory", how the premium is paid (employer-paid, employee-paid pre-tax, or employee-paid on an after-tax basis), and whether the plan is considered "carried" by the employer under Section 79 of the Internal Revenue Code (IRC) and other corresponding regulations.

For example, consider a 54-year-old employee with $75,000 of life insurance coverage through a company-sponsored group life insurance plan. First, we can ignore the initial $50,000, leaving us with $25,000 of taxable coverage. Next, per the IRS rules, we can divide that $25,000 by $1,000. Using the IRS table, we see that $0.23 per $1,000 is the tax rate owed by our 54-year-old employee. The result is 25 multiplied by $0.23, giving a monthly imputed income of $5.75.

It's important to note that not all benefits are considered imputed income. Some popular benefits, such as health insurance and health savings accounts, do not fall into the category of taxable income.

Imputed income and health insurance

Imputed income is a term used to describe the benefits an employee receives that are not part of their salary and wages. When it comes to life insurance, imputed income comes into play when the death benefit payout from a group term life insurance (GTL) policy exceeds $50,000. In such cases, the portion of the payout above $50,000 is considered taxable income by the IRS, resulting in tax implications for both the employee and the employer.

The calculation of imputed income depends on various factors, including the nature of the group term life insurance plan, how the premiums are paid (employer-paid, employee-paid pre-tax, or employee-paid on an after-tax basis), and whether the plan is considered \"carried\" by the employer under Section 79 of the Internal Revenue Code (IRC).

It's important to note that not all benefits are considered imputed income. For example, health insurance and health savings accounts are popular benefits that do not fall into the category of taxable income.

When dealing with imputed income and life insurance, it's essential to understand the specific rules and regulations outlined by the IRS. These rules can vary based on the employee's age, the amount of coverage, and other factors. Consulting with a tax professional or referring to official IRS guidance can help ensure compliance and a thorough understanding of the tax implications.

In summary, imputed income in the context of life insurance refers to the taxable portion of a group term life insurance payout that exceeds a certain threshold. This can have implications for both employees and employers, and it's important to be aware of the specific rules and calculations to ensure compliance with tax regulations.

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