Davina Kotulski

How same-sex couples can save on their taxes

Filed By Davina Kotulski | March 08, 2010 2:00 PM | comments

Filed in: Living, Marriage Equality
Tags: domestic partner benefits, gay couples, lesbian couples, same-sex couples, save on taxes, tax, tax time

Every year the IRS insults me.

First, I have to check single on my tax form. People, I've been with the same wonderful woman for 14 years, I am not single! buy-a-house-save-on-taxes.jpgSecond, even though we are now legally married, my tax person has to complete extra tax forms, we are married and can file jointly the state, but we have to file single for the feds and so Tax Lady Nancy has two run our numbers twice. Thirdly, because I am self-employed and receive health insurance through Molly, my health benefits are taxed as extra income by the IRS.

Makes you want to scream marriage equality now, doesn't it?

But recently, Molly was at a panel where Patricia Cain, an Inez Mabie Distinguished Professor of Law of Santa Clara University's School of Law, announced a way around complaint #3.

Here's what she says:

Do you pay federal income taxes on employer-provided domestic partner health benefits? If so, you might want to discuss with a tax professional whether or not you are entitled to receive those benefits tax-free.

There is a common misunderstanding that domestic partner benefits are always taxable. But that is not true if the domestic partner is a "dependent" of the taxpayer/employee. A partner can qualify as a dependent for these purposes even if the partner is not a tax dependent for deduction purposes. That is because there are two different definitions of dependent in the Internal Revenue Code.

To be a dependent for deduction purposes the partner must have income below $3650. But to qualify as a dependent for purposes of excluding the value of the health benefits, there is no gross income limitation.

To qualify under this alternative definition, the taxpayer and partner must share the same household for the entire year and the taxpayer must provide over 50% of the partner's support. The IRS clarified this rule in Notice 2004-79, available on line.

But for some reason, many employers seem to be unaware of the rule. Instead, whenever an employee asks whether the employer can exclude the value of the benefits on the W-2, many employers require proof that the employee is claiming a dependency deduction for the partner.

If you qualify for the exclusion because you and your partner share a household and you provide over 50% of the support, you should ask your employer for an amended W-2. If the employer asks for proof of a dependency deduction or evidence that your partner's gross income is below $3650, show your employer Notice 2004-79. If you can't get an amended W-2, you should nonetheless exclude the amount that was wrongly included on your W-2 and explain in an addendum to your tax return why you are excluding it.

Professor Cain noted that several employers were reluctant to take our tax requests seriously and has committed herself to getting the word out about this option.

As mentioned above, please consult your gay-friendly tax person, so they can become informed about this option and share it with their clients.

And remember, this is yet another reason why we need to lift DOMA and have access to marriage equality, unless you enjoy paying the government more to be treated as a second-class citizen.

With liberty and justice for all!

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Thank you for this post. It is well written and helpful.

That's some good practical advice.

What other tricks do you have up your sleeve? Can you tell me how to make a chocolate cake from scratch? :)

Next up: Davina's advice column on how to take care of small household chores. *grins*

Russell Bennett | March 9, 2010 11:52 AM

My partner has covered me for the past several years and we've been taxed on it. After reading this I asked him to check into it further. (The sad part is that he works for a public accounting firm and they never told him that he didn't need to be paying taxes on my benefits this entire time...). He asked a fellow accountant and she that there are 2 scenarios:

1. If your partner works and is eligible to receive healthcare through his employer (even if he turns them down), and he is covered by DT domestic partner benefits the amount of benefit he receives is taxable to you. This is because the IRS views it as a fringe benefit similar to you getting a bonus.
2. If your partner does not work or is not eligible for health coverage through his employer the DT domestic partner benefits are NOT taxable to you.

So, the good news is that I shouldn't be taxed for my benefits!!! Thanks for this great article, it will help us A LOT!