Taxation of In-Kind Benefits

Background

In general, only cash income is subject to the income tax. In-kindPaid or given in goods and services rather than in money. benefitsbenefits that are received as goods or services rather than as cashare not. Examples of in-kindPaid or given in goods and services rather than in money. benefits include public housing, the insurance value of MedicareMedicare is the federal health insurance program for people who are age 65 or older, certain younger people with disabilities, and people with End-Stage Renal Disease (ESRD), (permanent kidney failure requiring dialysis or a transplant). coverage, and some food assistance programs.

Taxing in-kindPaid or given in goods and services rather than in money. benefits would require taxpayers to make monetary payments on nonmonetary income. Doing so would impose a significant burden on people with low and moderate incomes because they have less money available. Taxing the value of pensions would mean that people would be asked to pay taxes on future income. Another frequent problem is the difficulty of determining an appropriate value of in-kindPaid or given in goods and services rather than in money. income, such as insurance benefits.

At the same time, the exclusion of in-kindPaid or given in goods and services rather than in money. benefits from taxation raises some concerns. First, excluding all in-kindPaid or given in goods and services rather than in money. benefits from taxation narrows the tax base. Thus, higher tax rates are needed on other forms of income. Many employer-provided benefits are not subject to tax. These include transportation benefits, flexible spending account contributions, and tuition assistance. This reduces the progressivityIn taxation, a situation in which people with lower income pay a smaller percentage of their income than do people with higher income. of the tax system since those with low and moderate incomes do not have access to such benefits.

Another issue involves the tax exclusion for employer-sponsored health insurance. An unlimited exclusion for employer-provided health insurance can create an incentive to obtain more expensive coverage. This reduces the incentive for health care cost containment.

TAXATION OF IN-KIND BENEFITS: Policy

TAXATION OF IN-KIND BENEFITS: Policy

Medicare and other in-kind benefits

Policymakers should not tax the actuarial value of MedicareMedicare is the federal health insurance program for people who are age 65 or older, certain younger people with disabilities, and people with End-Stage Renal Disease (ESRD), (permanent kidney failure requiring dialysis or a transplant). or the value of other in-kindPaid or given in goods and services rather than in money. benefits.

Health insurance

Eligibility for the exclusion for employer-provided health insurance should be determined based on the employer’s coverage rules.

When structured correctly, the exclusion for employer-sponsored health insurance may be an important method of encouraging health insurance coverage. Any revenue derived from the taxation of amounts above that threshold should be used to finance health insurance for families and individuals with low incomes or who are uninsured (see also Individual- and Employment-Based Group Plans).

Other employer-sponsored benefits

Limitations on the exclusions for other employer-provided benefits—such as life insurance, tuition, and parking—are a desirable method of broadening the tax base and making the income tax more progressiveIn taxation, a situation in which people with lower income pay a smaller percentage of their income than do people with higher income..

Pensions

Lawmakers should maintain the tax-deferred status of employer-provided pensions as a critical way of promoting retirement savings.