You have probably heard the term “imputed income” while researching life insurance and the following will explain what life insurance imputed income is and how you can calculate it for your budget requirements.
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What is Imputed Income Life Insurance?
Basically, the IRS requires that you are to be taxed on the value of your employer-provided group term life insurance policy if it is over $50,000. The amount that is taxable is called the “imputed income” even though you do not receive cash from this source you are taxed as if you had in the amount that is equal to the value of the coverage itself.
This is because the monthly premiums on what you pay towards the policies are taken out before they are taxed. Therefore, the imputed income on life insurance, if the policy is $100,000, would be $50,000 as that is how much will go beyond the before-tax limitation. However, this amount of taxable income can be lowered if you contribute money to the fund after it has been taxed. After-tax contributions subtract from the imputed income for life insurance because the taxes have already been paid.
Basically, you are getting a life insurance policy through your employer which is only taxed if the benefit amount is over $50,000. So in essence you are getting a 50% rate reduction if the total amount of the benefits were $100,000. You can also reduce this amount even further on your imputed income life insurance by contributing money to the policy that has already been taxed.
Group life insurance plans are generally somewhat limited over the plans that you can purchase individually. The idea behind these plans is for employers to protect their employees in case something unexpected happens to them away from their work. This practice has been encouraged by the $50,000 limit on policies that are not taxed by the IRS at that point.
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The taxes that you will pay on this policy if it is over $50,000 will depend on how much it is over and your age. Generally speaking, the older you are, the more that you will pay in taxes because you are considered more likely to use the policy. You will need access to the age table provided by the IRS as part of your calculation to pay the excess taxes.
Life Insurance Imputed Income Calculation:
There is a simple formula that is available which will help you calculate the amount of imputed income for life insurance so that you’ll know what is needed to be paid.
For example, if you are 50 years old and the life insurance policy is $60,000, you subtract the $50,000 which leaves $10,000. Take the $10,000 and divide by $1,000 which is 10 and times that by 23 cents which is $2.30 per month. Over a year, that’s $27.60 which is an amount that can be reduced by what you contribute in after-tax income.
The only other variable is your age which means that the older you are, the more you will pay in terms of taxes on the imputed income life insurance policy.