When considering whether to accept your current position, you probably viewed employer-provided life insurance as a perk. If your benefits package includes group term life insurance with coverage above $50,000, though, you could feel differently come tax time. The IRS doesn’t include employer-provided life group term life insurance coverage up to $50,000 in your taxable income, and won’t increase your income tax liability. If your policy exceeds $50,000, though, the employer-paid cost is included in the taxable wages reported on your Form W-2. This is called “phantom income.” You may not see the funds in your bank account, yet they’ll come back to haunt you nonetheless. For tax purposes, the cost of group term life insurance is set by a table prepared by the IRS. Even if your employer’s actual cost is lower than what’s listed on the table, your taxable income is determined by the one pre-established in the table. As a result, the amount of phantom income an older employee could be taxed for, is often higher than that which they’d pay for similar coverage under an individual term policy. As an employee ages and their compensation increases accordingly, this tax trap worsens. If you’re concerned that the cost of employer-provided group term life insurance could be impacting your taxes, look at Box 12 of your W-2 (With code “C”). Does a specific dollar amount appear? If so, that dollar amount indicates your employer’s cost for group term life insurance coverage you receive in excess of $50,000, less any amount you paid for the coverage. You’ll be liable for local, state, and federal taxes on the figure seen here, as well as any associated Social Security and Medicare taxes. Of course, the amount in Box 12 is already included as part of your total “Wages, tips and other compensation” in Box 1 of the W-2. It’s also the Box 1 amount reported on your tax return. Is the ultimate tax cost disproportionate to the benefits you’re receiving? If so, ask your employer whether they have a “carve-out” plan (a plan that excludes selected employees from group term coverage). If they don’t, ask whether they’d be willing to create one. After all, some of your coworkers may be interested in opting-out, too! Carve-out plans can be quite flexible. Here are two ways one could work in your favor for tax purposes: If you or your employer have questions about how group term coverage impacts employees’ tax bills, we can help! Have questions? Smolin can help Contact the team at Smolin to learn how you can make the most of employer provided benefits﹘without suffering unnecessary tax penalties.Invisible “income,” higher taxes
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FAQs
The Tax Consequences of Employer-Provided Life Insurance? ›
The cost of employer-provided group-term life insurance on the life of an employee's spouse or dependent, paid by the employer, is not taxable to the employee if the face amount of the coverage does not exceed $2,000. This coverage is excluded as a de minimis fringe benefit.
How is employer-provided life insurance taxed? ›Overview. The cost of employer-provided life insurance is deductible to the employer and taxable to the employee. An employer that provides life insurance for an employee is entitled to deduct premiums it pays as a business expense if it has no beneficial interest in the policy.
Is employer owned life insurance tax-deductible? ›Although the premiums paid by the company aren't tax-deductible, the death benefits usually are tax-free. Plus, the growth in the policy's cash value is tax-deferred. This tax setup, along with the ability to record the COLI policy's cash value as an asset, can strengthen a company's financial standing.
Do I have to pay taxes on money received from a life insurance policy? ›Answer: Generally, life insurance proceeds you receive as a beneficiary due to the death of the insured person, aren't includable in gross income and you don't have to report them.
What happens to life insurance through an employer? ›Coverage is tied to your employment
Employer-paid life insurance plans typically end when the employee leaves the company. You can always search for an independent plan if this happens, but the quotes you receive then may be higher than they would be now. That's because life insurance costs vary by age.
Employers can generally exclude the cost of up to $50,000 of group-term life insurance from the wages of an insured employee. The IRS requires that the “value” of employer provided group term life insurance in excess of $50,000 be reported as taxable income to covered employees.
Is employer paid life insurance pre or post tax? ›Types of pretax deductions include, but are not limited to, health insurance, group-term life insurance and retirement plans. And while employees are not required to participate, it's often in their best interest to do so.
Is employer life insurance an asset? ›The death benefit of a life insurance policy is not considered an asset, but some policies have a cash value, which is considered an asset. Only permanent life insurance policies, like whole life, can grow cash value.
How do I avoid tax on life insurance proceeds? ›If you want your life insurance proceeds to avoid federal taxation, you'll need to transfer ownership of your policy to another person or entity.
Are employer insurance contributions taxable? ›If an employer pays the cost of an accident or health insurance plan for his/her employees (including an employee's spouse and dependents), then the employer's payments are not wages and are not subject to social security, Medicare, and FUTA taxes, or federal income tax withholding.
Do you get a 1099 for life insurance proceeds if you? ›
Do you get a 1099 for life insurance proceeds? You won't receive a 1099 for life insurance proceeds because the IRS doesn't typically consider the death benefit to count as income.
What are the tax advantages of life insurance? ›Tax-advantaged growth
The cash value of your whole life insurance policy will not be taxed while it's growing. This is known as “tax deferred,” and it means that your money grows faster because it's not being reduced by taxes each year. This means the interest you make on your cash value is applied to a higher amount.
Generally, beneficiaries do not pay income tax on money or property that they inherit, but there are exceptions for retirement accounts, life insurance proceeds, and savings bond interest. Money inherited from a 401(k), 403(b), or IRA is taxable if that money was tax deductible when it was contributed.
Is employer life insurance taxed? ›The IRS doesn't include employer-provided life group term life insurance coverage up to $50,000 in your taxable income, and won't increase your income tax liability. If your policy exceeds $50,000, though, the employer-paid cost is included in the taxable wages reported on your Form W-2.
Is it worth getting life insurance through employer? ›Enrolling in your employer's group life insurance plan can have several benefits, like no medical exam and less insurability requirements. However, group life insurance doesn't offer enough coverage for everyone – plus you may not be able to take your policy with you if you leave your job.
Can I cash out my employer life insurance? ›If you no longer want the policy, you can surrender it to the insurer and receive its current cash value. You can also borrow money from the insurer, using the policy's cash value as collateral.
How are employer paid premiums on a group life insurance plan treated for tax purposes? ›You cannot deduct life insurance premiums from your income taxes. If your employer pays for a life insurance, the premium paid on policy amounts above $50,000 is considered part of your taxable income. Interest generated from whole life insurance policies are not taxed until the policy is cashed out.
Do corporations pay tax on life insurance proceeds? ›Although they are not taxable income, life insurance proceeds are nevertheless part of the corporation's earnings and profits for dividend purposes and IRC § 531 purposes.
Will an employee be taxed on the cost of group life insurance paid by the employer quizlet? ›What part of group life insurance-if any-is tax exempt for employees? -The cost of the first $50,000 of coverage is tax exempt for employees. In other words, the premium charged for the first $50,000 of coverage is not taxable to the employee. But the cost of any amount over that level of coverage is taxable.