The value of health insurance provided to a same-sex partner or spouse is often taxable. Note that I use the word “often” rather than “always.” It all depends on if your partner or spouse qualifies as your medical dependent. We talked about that last week. But here’s a brief refresher. A person is your medical dependent if:
- They live with you all year.
- You provide more than 1/2 of their support.
You don’t have to claim a dependency exemption for a person in order for that person to be your medical dependent. If the person qualifies as your medical dependent, you should not be taxed on the health benefits provided to them. Many employers get this wrong.
As I cautioned last week, it’s not as easy as it sounds to say someone is your medical dependent. For example:
- Simply making more money that someone else does not mean that you provided more than 1/2 of the person’s support. Use the support worksheet in Publication 501 to verify support.
- Once someone qualifies as a medical dependent, you need to keep providing more than 1/2 of their support so they continue to be your medical dependent.
- Couples living in a community property state will likely have a hard time proving that one provided more than 1/2 of the other’s support.
- You may want to seek the advice of a tax pro who specializes in LGBT tax issues.
Some of you may want code and IRS citations for this, so you can go to battle with your employer or help your clients. So here are the citations:
- Code Section 105(b) and Treasury Regulation 1.106-1 both say employer-paid health benefits are not taxable if they are provided to a taxpayer, the taxpayer’s spouse or the taxpayer’s dependents as defined in Section 152.
- Section 151 authorizes a tax deduction for dependents. Section 152 contains the definition of a dependent. Prior to 2004, there was no income test under Section 152 (though there WAS an income test in Section 151 but not in Section 152).
- So prior to 2004, there was no income test for determining if someone is a medical dependent.
- Starting in 2005, the language of Section 152 was changed — Congress added a gross income test there. BUT, Congress altered the language of Section 105(b) to say that the gross income test still doesn’t apply for medical purposes.
- Because Treasury Regulations come from the Treasury Department, not Congress, Congress could not change the language in Regulation 1.106-1. To address this issue, the IRS issued Notice 2004-79, which states that the new gross income test under Section 152 DOES NOT APPLY to determining a medical dependent under Regulation 1.106-1.
- Thus, a person can be a medical dependent even if you can’t claim them as a dependent on your tax return.