Looking for the answer to the question below related to  Management ?

Jonas has disability insurance through his employer. The employer pays 75% of the premium, and Jonas pays the other 25%. What is Jonas’s tax liability for any benefits paid from the disability plan?

 Options:

A) Taxes must be paid on all benefits received B) No taxes are payable on any benefits received C) Taxes must be paid on 25% of the benefits received D) Taxes must be paid on 75% of the benefits received

The Correct Answer Is:

• D) Taxes must be paid on 75% of the benefits received.

Answer Explanation:

Disability insurance provides financial support to individuals who are unable to work due to a disability. The tax treatment of disability insurance benefits depends on how the premiums for the insurance are paid. In Jonas’s case, his employer pays 75% of the premium, and Jonas pays the remaining 25%.

To understand why option D is correct, let’s break down the tax implications of this arrangement and also explain why the other options are not correct:

A) Taxes must be paid on all benefits received:

This option is not correct. Whether taxes must be paid on disability benefits depends on how the premiums were paid. If the premiums were paid with after-tax dollars, then benefits received are typically not subject to income tax.

However, if the premiums were paid with pre-tax dollars, the benefits would generally be taxable. In Jonas’s case, because his employer pays a portion of the premium (75%), it’s likely that the premium is paid with pre-tax dollars. Therefore, this option is not accurate as it assumes all benefits are taxable, which may not be the case.

B) No taxes are payable on any benefits received:

This option is not correct either. Disability benefits may be taxable if the premiums were paid with pre-tax dollars. Since Jonas’s employer covers a significant portion of the premium, it’s likely that the premium is paid with pre-tax dollars.

In such cases, the benefits received would be subject to income tax. So, this option is too simplistic and does not consider the tax implications of premium payment.

C) Taxes must be paid on 25% of the benefits received:

This option is not correct because it assumes that only a portion of the benefits is taxable. However, the taxability of disability benefits depends on how the premiums were paid, not the percentage of premium paid by the employee.

If the premiums were paid with pre-tax dollars, the benefits would generally be taxable, and the exact percentage paid by the employee (25% in this case) would not determine the tax liability. This option oversimplifies the tax rules related to disability insurance.

Now, let’s elaborate on why option D is the correct answer:

D) Taxes must be paid on 75% of the benefits received:

This option is correct because it takes into account the fact that Jonas’s employer pays 75% of the premium. When an employer pays a portion of the premium for disability insurance, it’s typically considered a taxable fringe benefit. This means that the portion of the premium paid by the employer is added to the employee’s taxable income.

Since Jonas’s employer covers 75% of the premium, this amount is considered taxable income for Jonas. When he receives disability benefits, he would generally be required to pay income tax on 75% of the benefits received because that portion of the premium was paid with pre-tax dollars.

The remaining 25% of the benefits (which corresponds to the portion Jonas paid for) would typically not be subject to income tax because it was funded with after-tax dollars.

In summary, the correct answer (option D) correctly considers the tax implications of disability insurance when an employer pays a portion of the premium.

It recognizes that taxes must be paid on the portion of the benefits that corresponds to the employer’s contribution (75%) because it’s considered taxable income, while the portion paid by Jonas (25%) is generally not subject to income tax as it was funded with after-tax dollars.

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