RDP/SSM -- an ethical question

[appelman]

Sometimes clients tell you more than you want to know. In the materials sent to me by a California same-sex married couple was a copy of an affidavit in which one spouse certified to the state of California (she is a state employee) that the other spouse qualifies as her dependent for medical purposes, thereby keeping the value of employer-provided family medical benefits from appearing as wages in her W2. The affidavit was executed in early 2010, at which time it was perfectly in order. However, once the new rules requiring application of community property law to RDP's and SSM's came into effect in mid-2010, it became almost impossible for one spouse to claim to have paid more than half the support of the other spouse, as is required to claim the medical dependency. My client tried to raise the question with her human resources department, but found that they really didn't understand what she was talking about. They did say that it was not practical to get a corrected W2 from the state.

I have discussed the implications of all this with my client and then pretty much left it up to her to decide what she wants to do. Do I need to go further and urge her to report the value of the family insurance coverage as unreported 2010 wages subject to social security and medicare tax? (I think if it were my own return, I would be inclined to let it go.)

[Gary2]

My first inclination would be to see if there's some way to justify the support argument, possibly looking at whether the home has been kept out of the community. You may come up empty, but it can't hurt to look.

Otherwise, I think you have to include the imputed income, but be prepared to amend (or file a protective claim amendment) in case the current New England cases play out favorably. It's unclear how Obama's recent decision concerning these cases will affect their timetables or results.

For what it's worth, I got on my husband's employer's bookkeeper's bad side by first making her do the corrected W-2C, and then arguing over the valuation because she insisted on using the Family Plan increment (since that's their only option), while I believe that an Employee-Plus-One increment (or even Employee-Only at full value) would be fairer. But I give her credit for at least putting the effort into learning about the valuation.

[joanmcq]

Does the imputed income change the dependency question for federal benefits rules? Many of my clients are in this situation- like the first RDP return I'm doing and that was an issue they particularly wanted me to research. I'm good at research, but have no idea where to begin with this one since under no circumstances in any earlier time would you have a dependent with income imputed to them by virtue of a relationship the federal government doesn't recognize.

Gary, have you done the research and if so, could you point me to a cite or two?

[Gary2]

Does the imputed income change the dependency question for federal benefits rules? Many of my clients are in this situation- like the first RDP return I'm doing and that was an issue they particularly wanted me to research. I'm good at research, but have no idea where to begin with this one since under no circumstances in any earlier time would you have a dependent with income imputed to them by virtue of a relationship the federal government doesn't recognize.

Gary, have you done the research and if so, could you point me to a cite or two?

I'm not in a community property state, so the question doesn't arise for me. It's seems like a fascinating question, since for CA purposes, there is no imputed income. So the question then is whether CA treats federal imputed income as community income or separate income. Possibly a CA tax attorney could answer this.

I'd be more inclined to look for ways to establish separate income or resources using established methods, possibly by explicitly excluding income from the community. I don't know if CA allows spousal agreements to do that. That's why I started with the home, which seems like the easiest example of property that may be separate.

[joanmcq]

I've already determined that it is now better for the disabled spouse to pay the mortgage, medical and any other deductible expenses from her account, rather than the other way around since her SS is not community. In CA, where one SSMC/RDP provides medical benefits for the spouse through her job, the value of the medical benefits are added to the W-2 for federal but not for state. Of course, the work around was when one spouse qualifies as a dependent on the federal level; dependent benefits are not added to federal wages. I guess its this way everywhere that recognizes SSMC/civil unions/RDPs.

I'm going to contact Lambda Legal, but this is whole new waters. And a major cluster!@#$.