New Rules on Insurance Result in Income Tax Cut

Millions of U.S. workers will get a modest income tax cut this year because of a change in the way the federal government figures the value of group life insurance provided by their employers.

Final federal regulations released Thursday, and that take effect July 1, are based on updated mortality estimates showing that people are living longer and that women now make up roughly half the U.S. work force.

The Internal Revenue Service considers group life insurance a benefit to the worker that is taxable like regular income, with the first $50,000 in coverage exempt. The income shows up each year on W-2 forms under code “C.”

The bottom line of the change: An estimated 163 million workers with group term life insurance provided by employers will see cuts of 11% to 52% on the taxable income derived from that coverage, depending on a person’s age.

It is difficult to show how the change will lower the amount someone might owe Uncle Sam, given the many variables in an individual’s tax picture. But here are two examples of how it will reduce taxable income:

* Under current regulations, a 45-year-old worker who has $100,000 in death benefit protection pays taxes on $174 in annual income from that insurance policy. The new rules will cut that taxable income to $90, a reduction of 48%.

* A 55-year-old with $200,000 in group coverage will see taxable income for that policy reduced from $1,350 to $774, a cut of 43%.