Health coverage for a domestic partner, same-sex spouse, and any children of the partner or spouse, is typically a taxable benefit.
Enrolling a domestic partner, a same-sex spouse, and/or the children of a domestic partner or same-sex spouse in Health Service System benefits can increase your taxable gross income. This information offers a brief overview about the tax treatment of health benefits offered by your employer to domestic partners, same-sex spouses and their children, based on information available as of October, 2010. HSS strongly recommends that you consult with a professional tax advisor about imputed income from dependent health benefits and your federal and state taxes.
Health coverage for your domestic partner, same-sex spouse, and any children of that partner or spouse through a Health Service System (HSS) plan is typically a taxable benefit. Because the federal government does not recognize domestic partnership or same-sex marriage for tax purposes, employer contributions to health premiums for an employee or retiree’s domestic partner, same-sex spouse, and children of a domestic partner or same-sex spouse, are treated as taxable (imputed) income. Moreover, employee premium contributions are taken post-tax. By comparison, if an employee or retiree is married to a member of the opposite sex, no taxable imputed income results from an employer’s contributions to an opposite sex spouse’s health premium costs. Also, employee premium contributions for an opposite sex spouse are paid pre-tax.
The Internal Revenue Service (IRS) offers a tax break for health-related expenses incurred by a “qualifying relative.” Under IRS code section 152, a domestic partner (of either gender), a same-sex spouse, and children of a domestic partner or same-sex spouse qualify for favorable tax treatment if they meet all of the following conditions:
If an employee or retiree’s domestic partner, same-sex spouse, or child of a domestic partner or same-sex spouse is enrolled in an HSS health plan and meets the requirements listed above, the employee or retiree may submit an annual declaration to HSS stating that the enrolled dependent meets the federal standard for pre-tax treatment of health coverage costs. If this declaration is filed annually with HSS, there will be no imputed income for the employer contribution to health premium costs for the qualifying family member of the employee/retiree. Also, for an employee’s family member, premium contributions will be paid pre-tax. (By law, all retiree contributions must still be paid post-tax.) This could result in significant savings.
To take advantage of this favorable tax treatment, you must file the declaration annually with HSS by required HSS deadlines. The HSS declaration form is valid for one tax year. You must submit an individual declaration for each qualifying dependent each year.
HSS Declaration Form for Pre-Tax Premium Deduction:
If the dependent of an employee or retiree does not qualify for favorable tax treatment under the IRS requirements described above, employer contributions will accrue as imputed income and be taxed by the federal government. Also, employee and retiree premium contributions are paid post-tax.
However, if you file a California state income tax return, the health benefits of your same-sex domestic partner, same-sex spouse, and the children of your same-sex domestic partner or same-sex spouse are entitled to equitable tax treatment under California state law. (Note: this California law only applies to same-sex domestic partners and same-sex spouses – not opposite sex domestic partners.)
To obtain such equitable tax treatment under California state law, you are required to have either a valid California marriage license or a Declaration of Domestic Partnership issued by the Secretary of the State of California. HSS accepts all valid municipal domestic partner and marriage certificates when enrolling a same-sex domestic partner or same-sex spouse. However, to be entitled to equitable treatment under state law, California requires either a California marriage license or the California State Declaration of Domestic Partnership.
If your dependent does not meet the IRS code 152 requirements for favorable tax treatment under federal law, you may still take advantage of equitable California state tax treatment if your dependent qualifies under California state law. In that case, you will need to deduct the value of the employer paid health insurance premiums for your same-sex domestic partner or same-sex spouse, and his or her children, when filing your California state income tax return.
California State Domestic Partner Registry:
Franchise Tax Board Domestic Partner FAQ:
This information may not include everything you need to know about this topic and is not a substitute for a professional assessment of your individual situation. Please consult with a professional tax advisor before taking any action. Be aware you remain subject to all state and federal tax law and will be responsible for any consequences that result from the forms, documents or declarations you submit to the Health Service System.