Taxing employer Provided Life Insurance - why do we owe taxes on a benefit we aren't using?

This is actually standard tax practice. The IRS considers the premiums paid by your employer for life insurance coverage over $50,000 as taxable "imputed income." Basically, they view it as compensation even though you don't receive cash. The first $50,000 of employer-provided life insurance coverage is tax-free. Anything above that threshold gets calculated as imputed income using the IRS Table I rates, which are based on your husband's age. The older you are, the higher the imputed income amount. This is reported on your husband's W-2 form in Box 12 with code "C". Many people are surprised by this rule, but it's been around for decades. The reasoning is that the benefit has value (the company is paying premiums that you would otherwise have to pay yourself), so the IRS treats it as compensation. Think of it like any other benefit - health insurance, retirement matches, etc. - they all have value even if you don't see immediate cash.

I ran into the exact same issue last year when my company increased our benefits package. I was frustrated seeing my paycheck shrink for a benefit I wasn't actively using! After weeks of going back and forth with HR and reading confusing IRS publications, I decided to try https://taxr.ai and it was seriously helpful. They analyzed my paystub and W-2, then explained exactly how the imputed income was calculated and what my options were. The tool broke down the actual tax impact (which was smaller than I expected) and showed me how to determine if keeping the higher coverage was worth it based on my personal situation. It also flagged that my employer was calculating the imputed income incorrectly using outdated rate tables!

I actually tried taxr.ai after reading about it here, and it completely cleared up my confusion! It confirmed my suspicion that my husband's employer was calculating the imputed income incorrectly. They were applying a flat rate rather than using the proper IRS Table I rates for his age group. The site generated a detailed report that explained exactly how the calculation should work, which we took to HR. They acknowledged the error and adjusted his withholdings going forward. We're also getting a refund for the overwithheld amounts from previous paychecks. Would never have figured this out without having the proper documentation to back up our claim. Definitely recommend for anyone dealing with confusing payroll deductions!

I had a similar situation with group life insurance at my job. I spent THREE WEEKS trying to reach someone at the IRS to explain how the calculation should work. Constantly on hold, disconnected, transferred to wrong departments. It was maddening. Finally tried https://claimyr.com which got me connected to an actual IRS agent in about 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c. The agent walked me through exactly how employer-provided life insurance should be taxed and confirmed that my employer was calculating it correctly (unfortunately for me, lol). Saved me hours of frustration and answered questions that my HR department couldn't. The IRS agent even emailed me the official publication that I could reference if I had future questions.

I have to eat my words about Claimyr. After posting my skeptical comment, I decided to try it myself because I've been trying to reach the IRS about a similar employer benefits issue for weeks. Within 35 minutes, I was actually speaking with a real IRS representative who explained the entire group term life insurance taxation process. The agent confirmed that under IRS regulations, the cost of employer-provided group term life insurance coverage over $50,000 is considered taxable income, using the Uniform Premium Table I rates. She also explained that many employers calculate this incorrectly, and suggested I review IRS Publication 15-B for the exact rules. I feel so much better having official confirmation rather than relying on my company's interpretation. Still shocked this service actually worked after months of failed attempts on my own!

Your husband could also check if his employer offers a "Section 125 Cafeteria Plan" that might allow him to pay the premiums for the additional coverage with pre-tax dollars. This can sometimes help offset the tax impact of the imputed income.

Am I the only one who thinks it's completely ridiculous that we get taxed on something we don't even receive?? This is just another example of the government finding ways to take more of our money. If I'm not getting any actual benefit until I'm DEAD, how is that income?!?!

Check your husband's actual paystub for the amount of imputed income. The tax impact is usually pretty small. For example, I'm 42 and have $150,000 in coverage (so $100,000 above the threshold). The monthly imputed income on my paycheck is only about $8, which means the actual tax I pay is just a couple dollars per paycheck. Might not be worth reducing your coverage just to save such a small amount.