RDP/same-sex marriage revisited

[appelman]

This is a somewhat messy question. First the general issue: If you amend a RDP/SSM federal return to have one partner claim the other as a dependent, can the higher income partner take an above-the-line deduction for the employer-provided family health care insurance that was reported on his W2 as imputed wages (federal, but not state)?

Now the specifics: Clients are in a California same-sex marriage. In 2008 and 2009 they have filed federal returns as single. One partner has an AGI around 63K and has itemized deductions of 25-29K. On his W2, federal wages exceed state wages by 5-6K, the difference being employer-provided family health insurance. Other partner had self-employment income of 5K in 2008 and 2K in 2009, and he takes a standard deduction. We could amend the federal returns, applying the recent CCA that calls for allocation of income and deductions according to California community property laws, and obtain a modest reduction in tax. However, since this allocation appears to be elective, at least for years prior to 2010, we could instead amend 2009 to claim the lower-income spouse as a dependent. The low-income spouse earns too much to be a dependent in 2008, but he still could be a dependent FOR HEALTH INSURANCE PURPOSES. These amendments would be even more beneficial than the community property allocations ONLY IF we could claim an above-the-line deduction for the employer-provided health care insurance that was included in Box 1 of the W2 of the higher-earning partner in each year. But can we? And if we can, how would we go about documenting it? Would we have to get the employer to issue an amended W2?

I'd appreciate anybody's thoughts on this.

[taxmom34]

I'm thinking you could claim the lower income person as a dependent and as such you could claim any medical expenses including the premiums , on the federal return. seems to meet all the requirements. (this is just off the top of my head)

[appelman]

RDP/same-sex marriage revisited

The big question is whether you can claim them "above the line," rather than on Sched A, and if so, how.

[AJsTax]

Above the line

is for self employed coverage only. Any employer sponsored plan is not eligible and must be claimed on Sch A.

[New York Enrolled Agent]

The big question is whether you can claim them "above the line," rather than on Sched A, and if so, how.

I'm not sure I fully understand your reference to "above the line" but I think you are asking if the cost of the health insurance could be excluded from gross income.

This might be of help - A Q&A from CCA 2000117038

QUESTION #66: What if the employer does not have a section 125 plan, but offers health insurance coverage to a domestic partner and his or her child? Is this a taxable fringe benefit to the employee?

ANSWER: Employer-provided coverage under an accident or health plan for individuals other than the employee, the employee's spouse or DEPENDENTS is included in the employee's gross income. Code section 106. The term "dependent" is defined in section 152(a) of the Code.

In your first post you wrote: "The low-income spouse earns too much to be a dependent in 2008, but he still could be a dependent FOR HEALTH INSURANCE PURPOSES." I think you might be confusing the ability to have a "medical" dependent under §213 (where the gross income test can fail) and the exclusion under §106. I think §106 requires the individual to be a dependent under §152 and the gross income test must be met. §213 specifically allows the gross income exception - §106 does not.

[appelman]

Above the line

I'm not sure I fully understand your reference to "above the line" but I think you are asking if the cost of the health insurance could be excluded from gross income
....
In your first post you wrote: "The low-income spouse earns too much to be a dependent in 2008, but he still could be a dependent FOR HEALTH INSURANCE PURPOSES." I think you might be confusing the ability to have a "medical" dependent under §213 (where the gross income test can fail) and the exclusion under §106. I think §106 requires the individual to be a dependent under §152 and the gross income test must be met. §213 specifically allows the gross income exception - §106 does not.

Yes, that IS what I'm asking. Your comparison of Secs 106 and 213 almost convinced me. However, Sec 106 itself does not seem to mention Sec 152, but look at the following:

"Prop Reg § 1.106-1. Contributions by employer to accident and health plans.

The gross income of an employee does not include the contributions which the employer makes to an accident or health plan for compensation (through insurance or otherwise) to the employee for personal injuries or sickness incurred by the employee, the employee's spouse, or the employee's dependents (as defined in section 152 determined without regard to section 152(b)(1), (b)(2), or (d)(1)(B)).*** "

Also, if you look at Sec. 105:

"(b) Amounts expended for medical care.
...gross income does not include amounts referred to in subsection (a) if such amounts are paid, directly or indirectly, to the taxpayer to reimburse the taxpayer for expenses incurred by him for the medical care (as defined in section 213(d) ) of the taxpayer, his spouse, his dependents (as defined in section 152 , determined without regard to subsections (b)(1) , (b)(2) , and (d)(1)(B) thereof)..."

And 152(d)(1)A and B read:

"(1) In general.
The term “qualifying relative” means, with respect to any taxpayer for any taxable year, an individual—

(A) who bears a relationship to the taxpayer described in paragraph (2) ,

(B) whose gross income for the calendar year in which such taxable year begins is less than the exemption amount (as defined in section 151(d) ), "

So the disregarding of 152(d)(1)B would imply that the income test does NOT apply.

But in any case, certainly in my 2009 scenario the partner meets ALL tests to be a dependent, but the insurance has been added to W2 income. Is AJsTax right that on an amended return the best we can do is take a Sched A deduction?

[New York Enrolled Agent]

"Prop Reg § 1.106-1. Contributions by employer to accident and health plans.

The gross income of an employee does not include the contributions which the employer makes to an accident or health plan for compensation (through insurance or otherwise) to the employee for personal injuries or sickness incurred by the employee, the employee's spouse, or the employee's dependents (as defined in section 152 determined without regard to section 152(b)(1), (b)(2), or (d)(1)(B)).*** "

Ok - I found the proposed regulation (good find by you). Here is what the preamble says:

In addition, the proposed regulations would revise the first sentence of §1.106-1 in order to update the definition of dependent in light of section 207 of the Working Families Tax Relief Act of 2004, Public Law 108-311 (118 Stat. 1166) and Notice 2004-79 (2004-2 CB 898), see § 601.601(d)(2).

Have you considered asking the employer for an amended W-2 form? Show the employer the evidence that the partner is a dependent and perhaps they may change it for you. As an alternative, it seems you could also do a negative adjustment on line 21 backing out the cost of the partner's health insurance and attaching a disclosure on Form 8275 stating the exclusion from gross income based on the proposed reg. Proposed regs are not the same authority as temporary or final regs but I would think the IRS would not challenge your disclosure excluding the cost as gross income given the proposed regulations.

[appelman]

Thanks.

Thanks. It might be worth a try.

[joanmcq]

I have a couple like this. One is entirely supported by the other. The working spouse/partner needs to file with their employer forms that claim the other partner/spouse as a dependent, and then the cost of the insurance is not imputed into the wages on the W-2. I don't know if it can be backdated. The insurance is a deduction from wages on the Sch CA for the CA return regardless of whether the partner/spouse qualifies as a dependent.