What amount of the $20,000 disability pay must Jack include in gross income if Jack's employer paid $3,000 in disability premiums for Jack as a nontaxable fringe benefit and Jack paid the remaining $2,000 of premiums?

Question

BlackTom AI · Accepted Answer

Begin by identifying the key facts: Jack receives $20,000 in disability pay. The $5,000 total premiums for the disability policy are funded as follows: $3,000 was paid by the employer as a nontaxable fringe benefit, and Jack paid the remaining $2,000 of premiums with after-tax dollars.

Next, recall the tax rule for disability benefits: the portion of disability income that is taxable equals the portion of the premium costs that were paid by the employer (i.e., funded with pre-tax dollars or as a nontaxable fringe benefit). Conversely, the portion funded by the employee with after-tax dollars is not taxed when the benefits are received.

Apply the rule to the numbers: the total premium cost is $5,000, and the employer paid $3,000 of that amount. Therefore, 3,000 of the 5,000 premium costs were funded by the employer, which is 3,000/5,000 = 60% of the disability benefits.

Compute the taxable amount of the disability pay: 60% of $20,000 equals $12,000. This is the portion that must be included in gross income.

Evaluate each answer choice:
- $3,000: This would reflect only the employer-paid premium amount, but the rule requires proportionate inclusion of benefits, not just the premium cost. It underestimates the taxable portion.
- $8,000: This amount does not correspond to any proportional calculation based on the given premium split and total benefits, so it is inconsistent with the rule.
- $12,000: Correct based on 60% of the $20,000 benefits being attributable to the employer-paid premiums (3,000 of 5,000 total premiums).
- $20,000: This would imply all benefits are taxable, which ignores the portion funded by after-tax employee premiums and contradicts the proportional rule.

In summary, the correct taxable amount is the portion of the $20,000 disability pay funded by the employer, i.e., $12,000, since 60% of the premium costs were employer-paid.

SU25-BL-BUS-A329-2695 Quiz 5

What amount of the $20,000 disability pay must Jack include in gross income if Jack's employer paid $3,000 in disability premiums for Jack as a nontaxable fringe benefit and Jack paid the remaining $2,000 of premiums?

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