Explanation Letter To: Person R From: X Subject: Explaining the tax effects of each option. Sir, The greatest overall tax benefit will be provided by the purchase of the group-term life insurance. An amount of $15,000 cost will be able to be deducted by Incorporation L under all three options. Hence, as the options must be evaluated over possible ranges of age and income, because of the fact that each employee’s ages and taxable income are unknown, the preferable option is the one that provides the maximum benefit at the lowest tax cost. Option 1: The amount of $2,500 received by each employee will be subject to tax. Based on the marginal tax rate of each employee, there is tax cost for each employee. More than the $40,000 employees, the $100,000 officers will most likely be in a higher tax bracket. In order to purchase insurance for various marginal tax rates, the after-tax amount available for the employee is: Marginal tax rate 24% 22% 12% Amount received $2,500 $2,500 $2,500 Tax paid (600) (550) (300) Amount available for insurance $1,900 $1,950 $2,200 Table (1) It is impossible that, equivalent to that under the other two options, the insurance coverage can be purchased by the individual employees, after paying taxes. This option has the least benefit to the employees with the highest tax cost. The employees who want a lower amount of insurance than Incorporation L’s offers under the two other options, or who do not wish to purchase insurance, have the flexibility for purchasing as per their individual needs. This is one advantage that this option offers. Option 2: As per the IRS table, the premiums for insurance coverage in excess of $50,000 will be taxed for all the employees. The premiums on $150,000 [ ( $ 100 , 000 × 2 ) − $ 50 , 000 ] of coverage will be included in the gross income by the officers. The premiums on $30,000 [ ( $ 40 , 000 × 2 ) − $ 50 , 000 ] of coverage will be included in the gross income by the other employees. The tax effect will depend on the employees’ marginal tax rates, and the amount included in gross income will depend on the age of the employees. An amount of $.60 per year per thousand dollars of coverage will be included by the employees under 25, in the gross income. An amount of $1

Concepts in Federal Taxation 2019 (with Intuit ProConnect Tax Online 2017 and RIA Checkpoint 1 term (6 months) Printed Access Card)

26th Edition

ISBN: 9781337702621

Author: Kevin E. Murphy, Mark Higgins

Publisher: Cengage Learning

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Chapter 4, Problem 88TPC

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Write a letter to Person R explaining the tax effects of each option.

Solution Summary: The author explains the tax effects of each option. The greatest overall tax benefit will be provided by the purchase of group-term life insurance.

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