Have you ever wondered why at the end of the year, your W-2 or 1099 told you that you had to report approximately $18 of income for your legal services benefit? [NOTE: This is not to say that you were required to pay $18 for this benefit. Instead, it meant that you were required to pay taxes on that amount based on your individual tax bracket.] So, if you pay taxes, you will pay federal taxes in the amount of $1.73 to $6.85 for the right to use this benefit. The reason why you pay this is because the United States Congress ended favorable tax treatment for group legal services plans in 1992. Prior to the change, the employers’ payments to operate the legal services plan was tax exempt to you. While it was income, just like wages and other benefits such as health, dental and vision coverage, there was a special section of the tax code, which excluded tax on group legal services plans. That provision, Section 120 of the Internal Revenue Code, expired on June 30, 1992 and has never been reenacted.
Categories: Tax Law