Paying Tax on Insurance Premiums and Benefits
Being aware of your tax situation and where you can avoid paying it could bring considerable savings to both individuals and businesses.
Insurance is a necessity because it protects you from uncertainty. Without this safety net in place, you could end up with out-of-pocket expenses that take you a lifetime to repay. With apologies to Benjamin Franklin, “death and taxes” are the only certainties in life.
But there is undoubtedly a way to minimize the latter part of that idiom. Specific tax considerations go hand-in-hand with insurance premiums and benefits, and you’ll want to learn where you can avoid paying tax and where it’s a requirement.
Tax savings are available to both individuals and businesses that depend on the type of insurance. So let’s look at the ways you might save on your next tax bill:
Tax savings for employees
On a personal level, learning how your taxes and insurance policies are connected can save you money now and in the future.
When it comes to employer-paid life insurance, the premiums paid on these policies count as taxable income, but only if the plan covers an individual for over $50,000. When a policy becomes larger than that number, the premiums are exposed to federal taxation for the excess.
If you have disability insurance, things are a little more complicated, and you’ll have to consider your options carefully. The gist is that self-employed individuals can deduct insurance premiums on policies that cover business overhead while sick or disabled, but not on policies that cover lost wages.
In addition, if you deduct your overhead-covering premiums from your taxes, the benefits you receive become taxable income. If you don’t deduct the premium, however, the benefits aren’t taxable. Carefully decide whether or not to deduct your insurance premiums based on your situation.
Disability benefits are also taxable if your employer pays for your disability insurance. Basically, if you get sick and receive disability benefits, you’ll pay income tax on them.
From a healthcare standpoint, employees who don’t have access to group health coverage can fund a healthcare savings account and receive tax savings. Through this account, you can put tax-deductible money away for medical expenses and then withdraw it, tax-free, when you need it. This policy is like investing in personal medical insurance, and you get tax benefits along with it.
There are many ways for individuals to use insurance for tax benefits, so make sure you’re up to date on the latest rules and regulations to maximize your savings.
Business insurance tax considerations
Things are a little more complicated when buying business insurance, and tax savings (and penalties) could come in various ways.
For starters, if you have a global presence, you’ll likely want a policy in every country where you have operations, so it’s consistent with local insurance regulations and tax law.
These insurance considerations are also essential for taxes because if you go with a U.S.-based insurance company that isn’t licensed to insure you in a foreign country, the IRS could view any reimbursement you see as taxable income. Depending on your organization’s configuration and the amount of your payout, you could be on the hook for paying up to 21% on this income.
You could also have to pay taxes or financial penalties in the country where the loss occurred, putting you even further in the hole.
As a rule, you should purchase an insurance policy in every country in which you’re operating to avoid these tax problems if you need to file a claim.
Loss of key personnel
You can protect all kinds of things with business insurance, including the loss of key personnel. The idea is that if an influential individual within the organization passes away or otherwise becomes incapable of working, your insurance will offset some of the financial casualties associated with that loss.
As far as taxes go, you cannot deduct your premiums as a business expense because your organization is a beneficiary of the payout. At the same time, the company isn’t responsible for paying federal income on the proceeds.
Property and liability insurance
Your business will undoubtedly have property and liability insurance because these policies protect the organization from significant losses, many of which will be outside your control.
You are permitted to deduct the premiums for this insurance from your taxes because they’re considered ordinary and necessary expenses for tax purposes. If the reimbursement you receive is less than your financial loss, the difference also becomes tax-deductible.
Life insurance for employees
We went over some life insurance considerations for employees, but it also has tax considerations for the organization.
If you’re offering to pay life insurance premiums for your employees, it could go a long way toward attracting high-quality talent. The more you provide for workers, the easier it gets to retain this talent for years to come, as well.
From a tax standpoint, C corporations can deduct these premiums from their taxes because they won’t benefit from the payout. As mentioned before, this rule only covers policies with payouts up to $50,000. After that, the excess costs count as taxable wages for your employees.
Split-dollar life insurance policies, where you and a worker share the insurance costs and payout benefit, are not eligible for deductions because the company stands to profit from the plan.
The assistance you need
When you’re unsure about your taxes and whether or not a premium is deductible, you’ll want an expert on your side. Provident CPA & Business Advisors is standing by to answer your tax questions and offer professional advice. Contact us to learn more about our tax strategy services.