7/15/2015: In response to this blog, we received comment from one of our readers that the IRS allowed, in his year of marriage, a refund for income taxes paid on imputed income for the period prior to his marriage. This is in direct contrast to the position IRS representatives have communicated to us, as well as our interpretation of the law. While the IRS is not bound to follow its determinations from one taxpayer to the other, its mission is to apply the law consistently and fairly to all taxpayers. It seems our answer isn’t so definitive after all. In determining how you will report imputed income on your individual income tax return, you should consider all relevant facts and circumstances and understand the risks associated with your filing position. Please continue to share your experiences with us and we will keep you updated on this issue!
Over the past few months many of our friends and clients in same-sex relationships have married or have it under consideration. After the June 26, 2015 Supreme Court ruling supporting marriage equality, we expect many more invitations to arrive! We’ve also received tax and financial planning questions related to these nuptials (shocking, we know). Many couples want to quantify the economic impact of their marriage, especially as it relates to their tax liabilities.
One of the most significant factors affecting the change in a couple’s tax liability after marriage is the treatment of imputed income on employer-provided health benefits. And while there are over 74,000 pages in our tax code, none of them clearly indicate how imputed income should be treated in the year of marriage. Specifically, is the cost of coverage included in income up until the date of marriage or is the couple considered married for the entire year so that none of the coverage is taxable in the year of marriage? We have the answer for you, but you may not like it.
Law & Analysis
Internal Revenue Code Section 105(b) provides that in general, an employee can exclude from income the cost of employer-provided coverage under an accident or health plan for the employee, his spouse and his dependents. However, for coverage provided to someone other than the employee’s spouse or dependents, the difference between the value of the coverage and the employee’s payments made for the coverage must be included in the employee's gross income. Therefore, benefits provided to an unmarried employee’s partner are taxable since that partner is not the employee’s spouse. But when a couple gets married imputed income is no longer required since the employee’s partner is now their legal spouse.
From Section 105 it is unclear whether imputed income ceases on the date of marriage, or for the whole year in which the employee is married. At first glance, Section 7703(a)(1) seems to present an answer. This section provides that the determination of whether an individual is married shall be made as of the close of the taxable year. This seems to suggest a couple would be considered married for the entire year and none of the benefits would be taxable. However, upon closer reading, Section 7703(a) is only applicable to a few specific code sections relating to deductions for personal exemptions, NOT Section 105. So we are left with our initial uncertainty from Section 105(b).
With regulations, revenue rulings and other published IRS guidance silent on the growing issue, we decided to contact the IRS Chief Council’s Office. After getting in touch with the officials handling the “post-DOMA issues,” they indicated that imputed income should cease as of the date of marriage. The cost of employer-provided coverage to an employee’s partner prior to marriage is still taxable during the year. In support of that position, they cited the long-standing tax adage that deductions are a matter of legislative grace, which should only be interpreted in narrow context. You can thank your Congressmen for the unfavorable ambiguity.
While this is not the answer The Tax Warriors® had hoped for, it at least clarifies how couples should treat imputed income in the year they are married. Our previously blog, LGBT Marriage & Taxes - Imputed Income for Partner Health Benefits, discusses imputed income in more detail and describes refund opportunities available to previously married couples and specific tax strategies for unmarried couples to deduct the cost of imputed income. Note that this issue is not specific to same-sex couples as it also applies to unmarried opposite-sex couples that have both been on one of their employer’s health plans.
If you are considering marriage, we strongly recommend you consult with a reputable LGBT family law attorney and tax advisor to evaluate the legal and financial impact of marriage on your family. You can use our LGBT Tax Consulting & Financial Planning webpage as a resource to help you make important decisions regarding your family’s finances. If you would like to discuss your specific situation, call on us and someone from our dedicated LGBT services team will contact you.