Recently, many people in same-sex relationships have married or have it under consideration. The June 26, 2015, SCOTUS ruling supporting marriage equality made the decision easier. To that end, many couples want to quantify the economic impact of their marriage, especially as it relates to their tax liabilities.
Among the most significant factors considered is the treatment of imputed income on employer-provided health benefits. Nowhere in the tax code does it 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? I have the answer for you, kind of.
Law & Analysis
Internal Revenue Code Section 105(b) provides that an employee can exclude from income the cost of employer-provided coverage under an accident or health plan for the employee, her spouse and her 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. 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. Many people are aware that the IRS has a code section that 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 in the year of marriage. However, upon closer reading of the code itself, that section is only applicable to filing status and deductions for personal exemptions, NOT Section 105. So we are left with our initial uncertainty from Section 105(b).
Practical Matters
We are aware of certain taxpayers who have contested this issue with the IRS and successfully received refunds relating to imputed income for the first entire year of their marriage. 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.
Conclusion
With regulations, revenue rulings and other published IRS guidance silent on the important issue, we contact the IRS Chief Council’s Office. The officials handling the “post-DOMA issues” 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.
Obviously this conclusion provided by the IRS varies from the practical experience that certain taxpayers have reported. 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.
While the answer isn’t as clear cut as many hoped for, it does provide more color (pun intended) to how same-sex married couples should treat imputed income in the year they are married. Consider consulting with a family law attorney and tax advisor to evaluate the legal and financial impact of marriage on your family.
Rosalind W. Sutch, CPA, MT, is a shareholder at Drucker & Scaccetti (D&S), a Philadelphia-based tax advisory firm. Roz leads D&S’s LGBT Tax Consulting & Financial Planning Practice Group and can be reached at rsutch@taxwarriors.com.
