Response:
The total amount subject to tax will come to $7000
Thus option (d) would be the correct choice
Clarification:
According to IRS regulations, benefits received under a disability policy are fully taxable only if
The employee pays premiums on the policy entirely with pre tax dollars
In this instance, the premium was paid by the employee herself and is assumed to have been with pre tax dollars, thus it is fully taxable i.e 6500$
Consequently, the $500 sick pay from the welfare fund is categorized as earned income and is therefore fully taxable.
Thus the total taxable income amounts to $6500 + $500 = $7000
Consequently, option (d) will be the correct answer
