Same Sex Marriage amended returns -- a new wrinkle

[appelman]

This was a question asked of San Francisco Chronicle financial columnist Kathleen Pender:

Q: Mark P., a retired doctor, asks, "For years, I have been getting a W-2 from (my former employer) for the value of my husband's medical insurance, about $12,000 to $13,000 a year. It's the only W-2 income I have. All the rest is unearned. Based on that W-2, I have been contributing about $5,000 a year to an IRA. If I file amended returns for several years, what do you suppose the IRS will do about all those IRA contributions I made which I probably shouldn't have been able to make?

[buzzardbreath]

W-2 to Wrong Party

I gather from your post there is no "wife" in this scenario.

Husband #1 is getting a W-2 for the value of Husband #2's insurance coverage which covers Husband #1. Did I read this correctly?

My first response is: "Why isn't this $13,000 being tacked onto Husband #2's W-2 if Husband #1 is not working? This should be true regardless of the legality of the relationship, so long as the dependent met the definition of the policy coverage. IOW, if the insurance company allows the employee to cover his parakeet for $1000/yr, then the $1000 gets tacked onto that employee's W-2. The parakeet doesn't get a W-2.

What am I missing??

[appelman]

First, nomenclature

I prefer either to use gender-neutral nomenclature, "Spouse 1" and "Spouse 2," or accept the nomenclature used by the writer. Since he refers to his husband, he presumably considers himself the "wife." I only know what's in the question, but I would assume that the "wife's" former employer is continuing to provide (for whatever reason) family medical coverage to its former employee. Under the pre-2013 rules, this would be federally taxable income and would show up in Box 1 of the former employee's W-2. The "husband" is not really involved at all, except as a beneficiary of the family coverage. However, there is an implication that the "husband' also does not have significant wages. Otherwise, there would most likely be enough income to support IRA's for both spouses.

There are really two issues here: (1) Was this income a legitimate basis for an IRA in the first place? (Since it shows up in Box 1, I would think it would be.) and (2) Even if it was legitimate, it looks like it would most likely be financially advantageous to amend, claim the tax deduction on the health benefits, and give up the IRA. In that case, the question is how one would go about it.

I gather from your post there is no "wife" in this scenario.

Husband #1 is getting a W-2 for the value of Husband #2's insurance coverage which covers Husband #1. Did I read this correctly?

My first response is: "Why isn't this $13,000 being tacked onto Husband #2's W-2 if Husband #1 is not working? This should be true regardless of the legality of the relationship, so long as the dependent met the definition of the policy coverage. IOW, if the insurance company allows the employee to cover his parakeet for $1000/yr, then the $1000 gets tacked onto that employee's W-2. The parakeet doesn't get a W-2.

What am I missing??

[Gary2]

First, the nomenclature.

My husband calls me his husband. This, in spite of the fact that I do 95% of the cooking. Perhaps it's because I also do 95% of the lazing around in front of the TV. And when it comes to not finishing weekend projects, I have no peer. Oh, well. Since neither of us care much for the NFL, at least we can go out to movies or dinner together Sunday evenings and bemoan our lives together as football widowers.

Language evolves, but in this case, it's really staying the same. A male spouse is a husband, and a female spouse is a wife, regardless of the gender of the individual whose spouse the person is.

As for the tax issue, I think the starting question is whether you can get the employer to correct the incorrectly issued W-2s. Without that, the IRS is surely going to be confused into a black hole. And in planning things out, don't forget to factor in the penalties for contributing too much to an IRA, and leaving the amount there for years.

Finally, remember that your obligation is to point out the implications to the client. You're under no obligation to insist that the client amend prior years. Though the excess contributions would nag at me for a long time.

[appelman]

It's not my bloomin' client!

It was posted in the newsypaper! And the W-2 wasn't incorrect when it was issued. The problem is that amending to MFJ and claiming the deduction for family medical coverage will cause the taxable income to disappear, retroactively making the IRA unsustainable. The question is how to unwind it at that point. I could imagine something like filing Form 8606 with each amended return, rolling back the IRA deduction and paying tax on any earnings, then treating the IRA as totally nondeductible and closing it out. The 1099 will come marked "taxable amount unknown," and fully non-taxable status would be supported by the 8606's. I'm not entirely sure that this would be workable.

On nomenclature, I yield to force majeure.

First, the nomenclature.

My husband calls me his husband. This, in spite of the fact that I do 95% of the cooking. Perhaps it's because I also do 95% of the lazing around in front of the TV. And when it comes to not finishing weekend projects, I have no peer. Oh, well. Since neither of us care much for the NFL, at least we can go out to movies or dinner together Sunday evenings and bemoan our lives together as football widowers.

Language evolves, but in this case, it's really staying the same. A male spouse is a husband, and a female spouse is a wife, regardless of the gender of the individual whose spouse the person is.

As for the tax issue, I think the starting question is whether you can get the employer to correct the incorrectly issued W-2s. Without that, the IRS is surely going to be confused into a black hole. And in planning things out, don't forget to factor in the penalties for contributing too much to an IRA, and leaving the amount there for years.

Finally, remember that your obligation is to point out the implications to the client. You're under no obligation to insist that the client amend prior years. Though the excess contributions would nag at me for a long time.