MATH HUB Flashcards
DI policies pay a tax-free disability benefit. Usually, it is limited to 60% of net pre-tax pre-disability income, calculate this example.
Salary x 60% = DI benefit
$80,000, x 60% = $48,000
Calculate the amount of disability benefit for business owners & self employment.
Business income — expenses x 60%
($70,000 - $12,000) x 60% = $34,800
Calculate the amount of disability benefit for business owners & self employment. with unearned income
- Business income — expenses + unearned x 60%
- Prorated DI benefit — unearned income = DI benefit
- ($70,000 — $12,000) + $20,00 x 60% = $46,800
- $46,800 — $20,000 = $26,800
What are the calculations for residual disability?
- If client can earn 80% or more of his income after disability, he will not be able to get residual disability
- Full-time income (before disability) = $80,000
- Part-time income (after disability) = $32,000,
- DI Benefit = $3,000 (45% of his income)
Pre-disability income — part-time income ÷ Pre-disability income = Percentage
- $80,000 — $32,000 ÷ $80,000 = 60%
While working part-time, Jorge would receive 60% of his maximum disability benefit, or $1,800 a month ($3,000 × 60%). Combined with the $2,667 a month that Jorge would earn in salary ($32,000 ÷ 12), he would total $4,467 a month (or $53,604 a year)
Amount of benefit
August earns $65,000 annually and receives an additional $5,000 in royalty income. His royalty income will continue in the event of a disability.
What is the maximum DI coverage an insurance company would offer August?
The maximum DI coverage an insurance company would offer August is $37,000.
(65,000 + 5,000) × 60% = $42,000
42,000 - 5,000 = $37,000
- Check it:
Total annual before-tax income = 65,000 + 5,000 = $70,000
(37,000 + 5,000) ÷ 70,000 = 0.6 = 60%
Ref 2.2.2.1
Amount of benefit
Edeline is self-employed and earns $36,700 as a hair stylist annually. She also has $5,880 annual income from a trust fund her parents set up for her.
What is the maximum DI coverage an insurance company would offer Edeline?
The maximum DI coverage an insurance company would offer Edeline is $19,668.
(36,700 + 5,880) × 60% = $25,548
25,548 - 5,880 = $19,668
Check it:
Total annual before-tax income = 36,700 + 5,880 = 42,580
(19,668 + 5,880) ÷ 42,580 = 0.6 = 60%
2.2.2.1
Marcus is a financial advisor and earns 80,000 annually.
He was previously employed by a financial company that will continue to pay him a level income of $1,500 monthly regardless of his working status.
What is the maximum DI coverage an insurance company would offer Marcus?
The maximum DI coverage an insurance company would offer Marcus is $40,800.
Additional income on an annual basis = 1,500 × 12 = $18,000
(80,000 + 18,000) × 60% = $58,800
58,800 - 18,000 = $40,800
- Check it:
Total annual before-tax income = 80,000 + 18,000 = $98,000
(40,800 + 18,000) ÷ 98,000 = 0.6 = 60%
Continued
Rose earns $7,000 in royalties annually from a book she wrote.
This income will continue for her lifetime regardless of her working status.
Rose’s main source of income is her job as director of a continuing education firm which pays $120,000/year.
What is the maximum DI coverage an insurance company would offer Rose?
The maximum DI coverage an insurance company would offer Rose is $69,200.
(120,000 + 7,000) × 60% = $76,200
76,200 - 7,000 = $69,200
- Check it:
Total annual before-tax income = 120,000 + 7,000 = 127,000
(69,200 + 7,000) ÷ 127,000 = 0.6 = 60%
Deva was earning $90,000 when she took out her disability income replacement policy, which covers 60% of her income.
Two years ago, Deva reduced her work hours and she now earns $75,000.
If Deva were to become disabled now, what would her maximum monthly benefit be?
If Deva were to become disabled now, her maximum monthly benefit would be $3,750 per month.
75,000 × 60% = 45,000
45,000 ÷ 12 = $3,750
Cole took out a disability income replacement policy several years ago which would cover 60% of his income. He was earning $32,000 a year, but since the store he works at was bought by a new chain, his salary is now $28,000.
If Cole were to become disabled now, what would his maximum monthly benefit be?
If Cole were to become disabled now, his maximum monthly benefit would be $1,400 per month.
28,000 × 60% = 16,800
16,800 ÷ 12 = $1,400
Kasia was earning $90,000 when she took out a DI policy for 60% of her income with a 20% FPO rider.
How much of an increase would the FPO rider allow for per month?
According to the rider, Kaisa would be entitled to an increase of 20% of her current policy benefit. This amounts to $900/mo.
Rationale:
Kasia’s current DI insurance would pay her $4,500 per month:
(90,000 × 60%) ÷ 12 = $4,500
4,500 × 20% = $900
Kasia’s FPO would allow for an increase of up to $900 per month, without medical underwriting, if she financially qualifies.
Kasia was earning $90,000 when she took out a DI policy for 60% of her income with a 20% FPO rider.
A little over a year later, she received a raise to $93,500.
What is the maximum amount per month that Kasia’s DI policy will pay, based on her new salary?
Based on her new salary of $93,500/year, Kasia would qualify for $4,675 per month of DI coverage.
Rationale:
Kasia’s increase is subject to the 60% rule as applied to her new salary:
(93,500 × 60%) ÷ 12 = $4,675
This represents the maximum amount Kasia’s DI policy will pay based on the 60% rule.
Kasia was earning $90,000 when she took out a DI policy for 60% of her income with a 20% FPO rider and she now is earning $93,500 this year.
What is the allowable increase that Kasia qualifies for, based on these calculations?
a) 900
b) 175
Kasia qualifies for an allowable increase of $175 per month of coverage without medical underwriting.
Rationale:
Remember, Rule #2 states that the applicant’s increase is maximized at whichever is LESS of the 20% allowance or 60% qualification. Since Kasia already has a policy worth $4,500/mo, the most she can increase her policy to is the difference between that amount and 60% of her present salary.
Check to see if this is less or more than the 20% FPO allowance:
4,675 - 4,500 = $175
$175 < $900
Therefore, Kasia qualifies for an allowable increase of $175 and can raise her coverage from $4,500 per month to $4,675 per month without medical underwriting.
She cannot use all of the FPO 20% allowance of $900 because it would calculate to an amount that exceeds the 60% rule for her new salary.
(4,500 + 900) × 12 = $64,800
64,800 ÷ 93,500 = 0.693 (69%)
Melissa was earning $56,000 when she took out a DI policy for 60% of her income with a 20% FPO rider. Melissa’s income has since increased to $64,000 and she would like to increase her DI policy.
What is the allowable increase that Melissa qualifies for, based on these calculations?
Melissa can exercise the FPO to acquire an additional $400 of coverage.
Current Coverage = (56,000 × 60%) ÷ 12 = $2,800
FPO rider allowance = 2,800 × 20% = $560
Financial qualification based on current salary = (64,000 × 60%) ÷ 12 = $3,200
Qualified increase = 3,200 - 2,800 = $400
Therefore, Melissa is qualified to use $400 of the $560 FPO allowance. She can raise her coverage from $2,800 per month to $3,200 per month without medical underwriting.
Brian works full time installing solar panels, earning $90,000 per year. He took out a DI policy with a standard residual disability clause and a 60% income benefit for this wage. Seven months ago, Brian was injured and was completely off work, collecting his DI coverage after the required waiting period. Starting next month he can return to work 2 days per week.
What is the maximum disability benefit Brian received for the months he was eligible for the full coverage?
Brian received 60% of his pre-disability income according to his coverage, $4,500.
90,000 × 60% = $54,000
54,000 ÷ 12 = $4,500
[Ref. 2.2.4.6]
Brian works full time, 5 days per week installing solar panels, earning $90,000 per year. He took out a DI policy with a standard residual disability clause and a 60% income benefit for this wage. Seven months ago, Brian was injured and was completely off work, collecting his DI coverage after the required waiting period. Starting next month he can return to work 2 days per week.
How much part-time employment income will Brian be earning?
Brian’s part-time employment income is $3,000.
2 ÷ 5 = 0.4 = 40%
90,000 × 40% = $36,000
36,000 ÷ 12 = $3,000
[Ref. 2.2.4.6]
Lamar’s income is $56,000 per year. He has a DI policy with a standard residual disability clause and a 50% benefit of this income. Lamar was injured in a serious cycling accident and was off for a year, living off his DI coverage after the standard waiting period passed. Today his doctor advised him he can start back at work part-time. He will be able to work enough to make $19,600 per year.
Calculate how much residual disability benefit coverage Lamar is entitled to collect.
Lamar is entitled to $1,516.67 per month in residual DI benefits.
Total coverage Lamar was entitled to = 56,000 × 50% = $28,000
28,000 ÷ 12 = $2,333.33 per month
Percentage of coverage to be paid = (56,000 - 19,600) ÷ 56,000 = 0.65 = 65%
Benefit entitlement = 2,333.33 × 65% = $1,516.67
[Ref. 2.2.4.6]
Kunani was earning $42,000 when she took out a DI policy with a standard residual disability clause and a 50% benefit of her income. Kunani was injured and has not worked for two years. Recently her doctor told her that she can start a return-to-work program on a part-time basis. She will earn 25% of her pre-disability income in this first phase of the program.
What will Kunani’s total monthly income be until she can return to work in an increased capacity?
Kunani will be able to earn $2,187.50 per month until she can return to work on an increased capacity.
Total coverage Kunani was entitled to = 42,000 × 50% = $21,000
21,000 ÷ 12 = $1,750/mo
Part-time employment income = $42,000 × 25% = $10,500
10,500 ÷ 12 = $875 per month
Percentage of coverage to be paid = (42,000 - 10,500 ) ÷ 42,000 = 0.75 = 75%
Benefit entitlement = $1,750 × 75% = $1,312.50
Total monthly income = 875 + 1,312.50 = $2,187.50
[Ref. 2.2.4.6]
Mackenzie works 5 days per week earning $78,000 as a programmer. He took out a DI policy with a standard residual disability clause and a 45% benefit of this income. He was injured and completely off work for 8 months. After the 90-day waiting period he qualified for benefits. He’s better and can now work 3 days per week.
What will Mackenzie’s new total monthly income be until he can return to work in an increased capacity?
Makenzie will receive $5,070 per month until he can return to work in an increased capacity.
Total coverage Mackenzie was entitled to = 78,000 × 45% = $35,100
35,100 ÷ 12 = $2,925/mo
Part-time employment income:
3 ÷ 5 = 0.6 = 60%
78,000 × 60% = $46,800
46,800 ÷12 = $3,900 per month
Percentage of coverage to be paid = (78,000 - 46,800 ) ÷ 78,000 = 0.4 = 40%
Benefit entitlement = $2,925 × 40% = $1,170
Total monthly income = 1,170 + 3,900 = $5,070
Victoria is a member of an employer-group DI program which provides maximum long-term disability coverage of 65% of salary, or $4,500 per month, whichever is less. Victoria earns $85,000 a year.
If Victoria needs to make a claim for DI coverage, what is the maximum she could receive?
Victoria would qualify for $4,500, which is the plan maximum and the lower of the two amounts.
Income-based maximum coverage: (85,000 × 65%) ÷ 12 = $4,604.17
Group Plan maximum coverage = $4,500
[Ref. 2.3.4.3]
Donna is a member of an employer-group DI program which provides maximum long-term disability coverage of 70% of salary, or $4,000 per month, whichever is less. Victoria earns $65,000 a year.
If Donna needs to make a claim for DI coverage, what is the maximum she could receive?
Donna would qualify for $3,791.67, which is her income-based maximum and the lower of the two amounts.
Income-based maximum coverage: (65,000 × 70%) ÷ 12 = $3,791.67
Group Plan maximum coverage = $4,000
[Ref. 2.3.4.3]
Jamie works for a company that offers group DI coverage. The non-evidence maximum amount of LTD coverage is 50% of salary. The maximum overall benefit is set at 70% of salary, to a maximum of $5,000 a month.
Jamie earns $85,000 a year and has elected to take full coverage. Jamie would like to know what his coverage could provide, assuming he qualifies at the time.
How much could Jamie be covered for on a non-evidence basis?
Jamie could be covered for $3,541.67 on a non-evidence basis.
(85,000 × 50%) ÷ 12 = $3,541.67
[Ref. 2.3.4.3]
Jamie works for a company that offers group DI coverage. The non-evidence maximum amount of LTD coverage is 50% of salary. The maximum overall benefit is set at 70% of salary, to a maximum of $5,000 a month.
Jamie earns $85,000 a year and has elected to take full coverage. Jamie would like to know what his coverage could provide, assuming he qualifies at the time.
How much additional coverage could Jamie be eligible for with medical underwriting?
Jamie could be eligible for an additional $1,416.66 in coverage with medical underwriting.
(85,000 × 70%) ÷ 12 = $4,958.33
(85,000 × 50%) ÷ 12 = $3,541.67
4,958.33 - 3,541.67 = $1,416.66
Hedwig earns $48,000 a year as an editor. She has a company LTD policy that covers 66.67% of her pre-disability income with an all-source benefits maximum of 75%. Her accident happened at the office, so Hedwig also qualified for a Workplace Safety & Insurance Board payment of $900 per month.
What will her total income be per month from both sources?
Between both plans, Hedwig would receive $3,566.80/mo.
Hedwig’s disability coverage is 66.67% of her pre-disability income:
($48,000 × 66.67%) ÷ 12
= 32,001.60 ÷ 12
= $2,666.80/mo
The Workplace Safety & Insurance Board will provide her with $900 per month
Hedwig’s total monthly income will be:
2,666.80 + 900 = $3,566.80
Hedwig earns $48,000 a year as an editor. She has a company LTD policy that covers 66.67% of her pre-disability income with an all-source benefits maximum of 75%. Her accident happened at the office, so Hedwig also qualified for a Workplace Safety & Insurance Board payment of $900 per month.
Calculate the adjusted benefit monthly payment Hedwig will receive monthly as a result of her LTD policy coverage amount being offset.
Hedwig’s benefit coverage will be adjusted to $2,100/mo.
Calculate the maximum monthly all-source benefit allowance Hedwig is eligible for by applying the maximum percentage to her pre-disability income:
(48,000 × 75%) ÷ 12 = $3,000
The difference between her total actual monthly income and the all-source maximum amount allowed by the policy gives us the offset amount:
3,566.80 – 3,000 = $566.80
This is the amount by which the insurance company will reduce Hedwig’s benefit payment. Recall that her benefit payment was calculated by applying the percentage allowed to her pre-disability wage.
($48,000 × 66.67%) ÷ 12= $2,666.80 per month
Her revised payment will therefore be:
2,666.80 - 566.80= $2,100.00
Blaise earns $37,000 a year. Her employer provides an LTD policy that covers 66.7% of each employee’s pre-disability income with a benefit maximum of 75%.
Blaise has been off work for 1 year with support from her DI benefits. Blaise will now also qualify for an Employment Insurance benefit of $360 per month.
Will Blaise’s LTD payment be offset with the addition of her EI income?
YES
With the additional EI income, Blaise’s total income is 78% of her pre-disability income.
Total coverage Blaise has been entitled to:
(37,000 × 66.7%) ÷ 12 = $2,056.58 per month
Total new income with added EI benefit:
2,056.58 + 360 = $2,416.58
2,416.58 × 12 = $28,998.96
28,998.96 ÷ 37,000 = 0.783 = 78%
Blaise earns $37,000 a year. Her employer provides an LTD policy that covers 66.7% of each employee’s pre-disability income with a benefit maximum of 75%.
Blaise has been off work for 1 year with support from her DI benefits. Blaise will now also qualify for an Employment Insurance benefit of $360 per month.
What is the new offset amount Blaise will receive through the LTD policy?
The adjusted LTD DI benefit payment that Blaise will receive is $1,952.50/ month.
Maximum all-source coverage = (37,000 × 75%) ÷ 12 = $2,312.50
Offset amount = total income - maximum coverage = 2,416.58 - 2,312.5 = $104.08
Adjusted benefit entitlement = 2,056.58 - 104.08 = $1,952.50
Lester earns $135,000 a year. His employer provides the employees with an LTD policy that covers 65% of their pre-disability income with an all-source benefits’ maximum of 70%. He has developed a severe disability with a prolonged diagnosis. Lester will also qualify for $750 per month from CPP disability benefits.
What will Lester’s LTD policy pay monthly after all qualifications are met?
Lester’s LTD policy will pay him $7,125.00 per month.
Chapter 2 - Taxation of group disability insurance benefits
Eddy is a member of a disability plan at work. The premium is split between himself and his employer. Employees pay 75% and the employer pays 25%. The total premium cost to date is $4,750.
Eddy was injured and is now eligible for $14,600 in group LTD benefits. He has not made a previous claim.
How much of Eddy’s benefit disability income will be taxable?
[Ref. 2.3.5]
Of the $14,600 Eddy receives in coverage, $11,037.50 will be taxable.
Total premiums paid = $4,750
Eddy’s portion = 4,750 × 75% = $3,562.50
Premium refund deducted from benefits paid = taxable income:
14,600 - 3,562.50 = $11,037.50
[Ref. 2.3.5]
Taxation of group disability insurance benefits
Sherry is a member of a disability plan where the premium is split between herself and her employer, 50/50. The total premium cost to date for the policy is $6,900. Sherry was injured last year. She had no previous claims. After she passed the waiting period, Sherry received $25,450 in group LTD benefits.
How much of Sherry’s benefit disability income will be taxable?
[Ref. 2.3.5]
$22,000.00 of Sherry’s benefit income will be taxable.
Total premiums paid = $6,900
Sherry’s portion = 6,900 × 50% = $3,450
Premium refund deducted from benefits paid = taxable income:
25,450 - 3,450 = $22,000
[Ref. 2.3.5]
Taxation of group disability insurance benefits
Sloan is a member of a disability plan where the premium is split between himself and his employer. Sloan pays 25% and his employer pays 75%. Premiums to date have cost a total of $3,560.
Sloan was injured and received $10,360 last year in group LTD benefits. He is in the 34% marginal tax bracket.
Calculate the amount Sloan will owe in taxes on this benefit income.
[Ref. 2.3.5]
Sloan will owe $3,219.80 in taxes on his benefit income.
Total premiums paid = $3,560
Sloan’s portion = 3,560 × 25% = $890
Premium refund deducted from benefits paid = taxable income:
10,360 - 890 = $9,470
Tax payable = 9,470 × 34% = $3,219.80
[Ref. 2.3.5]
Taxation of group disability insurance benefits
Heather is a member of a disability plan at work. The premium cost is split 50/50 between the employer and the employees. To date, $7,360 has been spent in total premiums for the policy. Heather will receive $42,200 in group LTD benefits this year due to an accident. Heather’s marginal tax rate is 36%.
How much of this benefit income will Heather have to live off after the taxes are paid?
After the $13,867.20 in taxes are paid, Heather will have $28,332.80.
Total premiums paid = $7,360
Sloan’s portion = 7,360 × 50% = $3,680
Premium refund deducted from benefits paid = taxable income:
42,200 - 3,680 = $38,520
Tax payable = 38,520 × 36% = $13,867.20
Amount of benefit income Heather will keep = 42,200 - 13,867.20 = $28,332.80
[Ref. 2.3.5]
Chapter 4 - Deductibles and co-insurance
Janine is a member of a plan that has a $100 deductible for chiropractic visits. She just went for her first visit which cost her $60, and submitted the claim.
Will she get reimbursement for the claim?
NO
Janine will not get a reimbursement, however she will only have $40 of her deductible remaining for this year.
100 - 60 = $40
[Ref. 4.3.2.1]
Deductibles and co-insurance
Franka is a member of a plan that has a $180 deductible for physiotherapy. She just went for her first visit which cost her $120, and submitted the claim.
What will the remaining deductible be after this claim is approved?
After this claim is approved, there will be a $60 deductible remaining on Franka’s policy for this year.
180 - 120 = $60
[Ref. 4.3.2.1]
Deductibles and co-insurance
Jackson is a member of a group plan that has an annual $230 deductible on dental benefits. He submitted his first claim for the current year in February. That was for a $200 standard cleaning. At that time, the dentist found a cavity. Jackson has to return in March to have this filled, at a cost of $300.
How much of the second visit will be reimbursed by Jackson’s plan?
Jackson will be reimbursed for $270 of the cost of the second visit.
Deductible = $230
First visit cost = $200 = deductible used
Remaining deductible = 230 - 200 = $30
Second visit cost = 300 - 30 = $270
Multiple Deductibles: Individual and Family
John and his spouse Beverly have one daughter, Chloe. Beverly is a member of a group extended health insurance plan that covers her whole family. For dental claims, the plan has a $120 individual deductible and a family deductible of $310.
Let’s look at what has happened this year:
In January, Beverly had a routine checkup for which she claimed $95. This was the first claim of the year. In March, John had a chipped tooth for which he claimed $190. Beverly went back in May to have an x-ray for which she claimed $75. Chloe saw the dentist in July for a fluoride treatment for which a claim of $105 was made.
- What was the remaining family deductible in March after John’s claim was processed?
- What amount was Beverly reimbursed in May?
- How much of Chloe’s claim was reimbursed in July?
[Ref. 4.3.2.1]
- What was the remaining family deductible in March after John’s claim was processed?
- The family deductible was $25 in March after John’s claim was processed.
- Beverly’s $95 claim in January reduced her $120 individual to $25. It reduced her family deductible of $310 to $215. John’s $190 claim entirely satisfied his $120 deductible, bringing it down to $0 and reduced the remaining family deductible of $215 to $25.
- What amount was Beverly reimbursed in May?
- Beverly was reimbursed $50 in May.
- *We know from before that the remaining family deductible was reduced to $25. When Beverly submits a $75 claim in May, she would be reimbursed $50. At the same time, she also eliminated her previously reduced individual deductible from $25 to $0, however; since the family deductible is satisfied, no other family members need to satisfy their individual deductible. *
- How much of Chloe’s claim was reimbursed in July?
- 100%, or $105, of Chloe’s claim was reimbursed in July because the family deductible was at $0.
- In the previous scenario, we saw that the family’s deductible was satisfied and reduced to $0. As such, Chloe need not satisfy her individual deductible, and 100% of her $105 claim is reimbursed.
[Ref. 4.3.2.1]
Multiple Deductibles: Individual and Family
Manny Da Rosa and his wife Flora have one son, Alejandro. Manny is a member of a group extended health insurance plan that covers his whole family. For dental claims, the plan has a $115 individual deductible and a family deductible of $400.
Let’s look at what has happened this year:
In February Alejandro had his first ever visit to the dentist, which cost $100. In April, Manny had an extraction that cost $200. In August Flora went to have some dental pain investigated the assessment cost $75. The assessment revealed a cavity which she had filled three weeks later in September, for a cost of $150. In October Alejandro also went for his first fluoride treatment at a cost of $110.
What is the total amount of claims reimbursements the Da Rosa family received from the plan between February and October after their last claim was processed?
The total amount of claims reimbursements the Da Rosa family received between February and October after their last claim was processed is $320.
First claim:
Alejandro’s claim brings his individual deductible down to $15 and family deductible down to $300. His claim is not eligible for reimbursement.
Second claim:
Manny’s claim brings his individual deductible down to $0 and the family deductible down to $100. As his $115 individual was satisfied, Manny’s $200 claim is reimbursed $85.
Third claim:
Flora’s claim brings her individual deduction down to $40 and the family deductible down to $25. Her claim is not eligible for reimbursement.
Fourth claim:
Flora’s second claim brings her remaining individual deductible of $40 to $0 and the remaining family deductible of $25 down to $0. Since the family deductible only needed $25 to satisfy, she’s eligible for $125 of reimbursement.
Fifth claim:
Alejandro’s second claim is fully eligible for reimbursement as the family deductible was previously satisfied. This claim is paid fully, so that $110 is reimbursed.
Add up the reimbursed expenses: $85 + $125 + $110 = $320
[Ref. 4.3.2.1]
The Co-insurance Factor
Mike is a member of an employer’s group insurance plan that has a $150 annual deductible and a 90% co-insurance factor for physiotherapy claims. Mike fell off his bike last month and has had problems with his shoulder ever since. He decided to see a physiotherapist. Mike’s first visit included an assessment, ultrasound treatment, cryotherapy, and stretches. The visit cost Mike $265.
Calculate how much of this cost will be covered by Mike’s policy.
Mike’s policy will cover $103.50
265 - 150 = $115
115 × 90% = $103.50
[Ref. 4.3.2.1]
The Co-insurance Factor
Aliya is a member of an employer’s group insurance plan that has a $75 annual deductible and a 60% co-insurance factor for chiropractic claims. Aliya’s back was sore after she fell off her horse. She decided to see a chiropractor. On her first visit she had an initial assessment for new patients, an adjustment, and a cold laser treatment. The visit cost Aliya $125.
Calculate how much of this cost Aliya was responsible for after her claim was approved.
Aliya is responsible for $95 of the total claim.
Aliya had to pay the $75 deductible plus 40% of the remaining claim.
125 - 75 = $50
50 × 40% = $20
Total cost to plan member = 75 + 20 = $95
[Ref. 4.3.2.1]
Privately Held Corporations
Amaya owns a business that earns $160,000 annually. It is a sole proprietorship and her marginal tax rate is 35%.
She uses $95,000 for her daily living expenses and saves the remainder.
How much tax will Amaya owe if she continues to operate as a sole proprietorship?
[Ref. 5.1.3.1]
If Amaya continues to operate as a sole proprietorship, she will owe $22,750 in taxes on the investment income.
Undistributed income = 160,000 - 95,000 = $65,000
As a sole proprietorship, this amount would be taxed at Amaya’s personal MTR (35%)
65,000 × 35% = $22,750
[Ref. 5.1.3.1]
Privately Held Corporations
Amaya owns a business that earns $160,000 annually. It is a sole proprietorship and her marginal tax rate is 35%.
She uses $95,000 for her daily living expenses and saves the remainder.
Assuming incorporated businesses are taxed at 15%, how much tax would she pay as a privately incorporated business?
If Amaya’s business was a privately held corporation, she would owe $9,750 in taxes on the investment income.
Investment income = 160,000 - 95,000 = $65,000
As a privately held corporation, this amount would be taxed at 15%.
65,000 × 15% = $9,750.00
[Ref. 5.1.3.1]
Privately Held Corporations
Federico owns a business that earns $69,000 annually. It is a sole proprietorship and his marginal tax rate is 23%. He uses $63,000 for his daily living expenses and saves the remainder.
Assuming incorporated businesses are taxed at 15%, How much will Federico save in tax by operating his business as a privately held corporation?
Frederico would save $480 in taxes if he incorporates his business.
69,000 - 63,000 = $6,000
(6,000 × 23%) - (6,000 × 15%)
= 1,380 - 900
= $480
[Ref. 5.1.3.1]
Privately Held Corporations
Ed owns a business that earns $360,000 annually. It is a sole proprietorship and his marginal tax rate is 49%. He uses $230,000 for his daily living expenses and saves the remainder. (Assuming incorporated businesses are taxed at 15%)
How much more undistributed income will Ed have after tax if he operates his business as a privately held corporation?
Ed will have have $44,200 more after-tax undistributed income if he operates his business as a privately held corporation.
360,000 - 230,000 = $130,000
130,000 × 49% = $63,700
130,000 - 63,700 = $66,300
130,000 × 15% = $19,500
130,000 - 19,500 = $110,500
110,500 - 66,300 = $44,200
[Ref. 5.1.3.1]
