Gay Tax

June 12, 2014 3:50 PM

I hit the holy grail and have a new position with full benefits, including full coverage for domestic partners. I have a partner who lives with me, but we are still fairly newish and are not ready to get married. I have to enroll us in the benefits very soon, like now. The problem is, the queer tax (I guess now the Not-Legally-Married tax) on my partner's benefits.

I understand that according to federal tax code, the money my organization spends on my not legally married to me partner is counted as income for me, and so they deduct tax from my check, to pay for her benefits. This will come out to more than $500/month being taken from my pay.

Alternately, she could decline my benefits and enroll in Obamacare. This would cost her less (I think like 300, don't have exact number in front of me) but also provide not as good coverage with higher copays etc. Think Bronze instead of Gold level.)

We are trying to figure out what to do.


I'm wondering: have you dealt with this problem? What did you end up doing? I have heard that if I were to cover her, then she could reimburse me for the tax expense I incur, and then she herself could write off that reimbursement. Have you done that?

Are there other questions I should think about, or information I should gather, before I talk to a tax specialist or sign any paperwork at work?

*****
I know there are tax professionals in this world. Not to mention lawyers and financial advisors. I will likely utilize the services of one or all of these professionals. However, at this moment, I am not going to. I want to hear from anyone here who has direct experience with this issue, and can help me understand, in broad strokes, what the benefits and downsides of various scenarios are now.

So please don't steer me to a tax pro at this point unless you can recommend someone specific in the SF Bay Area who has dealt with this specific issue and is cheap. Thanks!

posted by latkes to Work & Money (14 answers total)

I pay the Domestic Partner Tax for my not-married-long-term-partner to be on my insurance. It's annoying as hell, but he has chronic medical issues and takes a lot of expensive medications, and we decided that long-term it was probably worth it to keep him on my plan with better copays, more flexible choice of doctors, being able to be on the same insurance so we're not fussing with two sets of enrollments each year (which can be hard for him to handle cognitively so it's easier if it's just taken care of through me), etc.

We're happy with that decision, but I don't know that we would have made the same decision if he were healthy and did not expect to be a heavy user of healthcare. I think if money is the only concern, it probably makes more sense to go the Obamacare route - the intangible stuff was a significant additional value to us but might not be to you.
posted by Stacey at 3:57 PM on June 12, 2014

I have gotten insurance for a domestic partner before, and the way it worked was they added the amount the company paid for the extra insurance onto my paycheck as income, calculated my total taxes for the paycheck, and then deducted the amount they put in back out, which made figuring out the cost extra confusing. That being said I think it ended up being much closer to $250 in extra taxes. Your situation is surely different, but $500 of tax for insurance seems really high to me. I just paid the extra $250 in taxes.
posted by OrangeGloves at 4:00 PM on June 12, 2014

Hey latkes - first, have you talked to your company about "grossing up" your pay? Companies sometimes do this when they offer a benefit to employees that counts toward taxable income. "Grossing up" means they increase your pay to an amount that would allow you to have the same take-home pay after the taxes are figured. It's not a guarantee that your employer would offer this, and they are typically under no obligation to, but it may be worth it to ask.

Also, I am not sure that you are thinking of the tax part of this correctly. I am going to pick out some non-realistic numbers for illustration ... let's say the total cost of your partner's monthly health insurance premium is $500, and your employer covers the premiums 50/50. The "taxable income" to you is $250. Assuming a 10% income tax rate (I warned you my numbers are unrealistic), the tax on that $250 would be $25. Meaning that the total amount deducted from your paycheck would be $275. Even if they covered the $500 premium completely and you were in the 28% bracket, the amount deducted for taxes would be $140, not $500. They are not going to give your partner benefits and take out $500 from your paycheck, unless they suck and don't actually cover any of the premium. And if it is the case, it's not taxable to you then.

Your partner could maybe write off the expense if she were self-employed, as there is a health insurance premium deduction available for self-employed persons. Otherwise the only way to deduct is if she itemizes her tax deductions (like with home mortgage interest, etc) and that's only if the amount reaches a pretty high threshold.
posted by stowaway at 4:18 PM on June 12, 2014 [1 favorite]

Stowaway: That's not how it works. Latkes has to pay tax on the entire benefit of the plan. So if it's a 500 dollar plan, and her company pays the entire amount, she owes tax on the 500 dollars of imputed benefit income.

Those numbers aren't too far off. I covered my partner for a while after he graduated law school. The imputed benefit of was 379 a paycheck. So not only did I pay tax on the 170 dollars a month to cover what would be tax exempt to anyone else, but I'm also paying payroll (6.2%), federal (28%) and state taxes (9%) on that full amount.

If I was married, I would be paying zero dollars in tax.
If I didn't buy the insurance, I would be paying 73 dollars tax.
By providing my domestic partner with insurance, I'm paying 400 dollars in tax.

So I'm paying 170 dollars to insure my partner. I'm paying the tax man 400 dollars for the opportunity. An excellent health plan could easily cost an extra 1150/month for spousal coverage.

I never found a way around it. If you support her completely, you may be able to consider her a dependent. In that case, the insurance would not be taxable. I find the concept of her paying you back for taxes and filing it as a health expense very sketchy, and would not do that without the seal of approval from a tax person.
posted by politikitty at 5:35 PM on June 12, 2014 [1 favorite]

yikes, strike that. I read your last sentence completely backwards, as if she pays five hundred dollars, she doesn't pay anything, not any taxes.

But the point stands that it's quite easy to get up to 500/mo. If you include the initial benefits, I was paying almost 600/mo. I wasn't surprised that it was a tax issue that eventually brought down DOMA.
posted by politikitty at 6:13 PM on June 12, 2014 [1 favorite]

your best answer to this question is to run the numbers. i just left a domestic partnership where i was getting coverage through my partner's employer. it was a GOOD PLAN. the plan itself was pricey and the taxes we paid on it were several thousand a year.

However, now that i'm stuck with obamacare, i will be paying more than twice the total cost of what i had before (including premiums and taxes) for a MUCH WORSE plan.

you can go to healthcare.gov right now and plug in your dp's stats to get a rough idea of what she'd be paying in premiums and deductibles etc. your employer's benefits admin should be able to tell you costs for your dp if you went that way.

that's how i'd play it. in the end, who cares what entity you're paying the money to? it's all going out of your pocket into someone elses. get the absolute best care you can if the prices are comparable and if one is cheaper than the other, i guess that's your answer.
posted by misanthropicsarah at 7:32 PM on June 12, 2014

I've been in this boat. One additional factor that made it not worthwhile to us is that for reasons, I need and opt for the 'gold' version of my employer's offerings. My partner does not need to do so, but if he were covered as my domestic partner, he would be forced to choose the same level of coverage. In the end, between the bigger premium and the tax on the imputed income, his part was going to cost around $700/mo. So I do not cover him.
posted by Dashy at 7:34 PM on June 12, 2014

Yeah, politkitty and I are saying the same thing, I was just using an example of where the premium cost is shared and with radically simplified numbers. Just wanted to make sure that you understood the underlying math. Work through all the options and see what works best for your family.
posted by stowaway at 7:38 PM on June 12, 2014

Also, remember that open enrollment is (for most places) in November - which is not infinitely far away. You can alter your choice then, if you find the numbers work better the other way. And congrats on the job.
posted by Dashy at 7:40 PM on June 12, 2014

Response by poster: Thanks folks. I guess what I'm getting out of this is just to focus on the straight numbers. Which will be cheaper. And it looks like she can get coverage that's almost as good as mine by just buying it for much less than the 500+ I'd have to pay to cover her.

And for what it's worth - I know the exact amount of my tax penalty (well, very close) because our benefits department gives it to us in our offer packets.

Grossing up pay seems near impossible since I am on a union payscale at an underfunded public institution, but I may as well ask!
posted by latkes at 8:40 PM on June 12, 2014

I have my partner covered under my health insurance, and yes, the tax ramifications are annoying and feel unfair. On the other hand, I recognize that I am choosing this situation since we could make this go away by getting legally married.

My understanding is that my partner, who is self-employed, cannot claim the cost of his health premiums as a business expense. It's my policy with the insurance provider and the premiums are deducted from my paycheck -- him reimbursing me doesn't count as him paying for his health insurance.

Also take note that your extra "income" can bump you into a higher tax bracket, so take advantage of any opportunities your employer offers for you to pay for things out of pre-tax dollars. Transit expenses, retirement contributions, flexible spending account, etc.
posted by desuetude at 8:06 AM on June 13, 2014

Last year, the org I work for actually sponsored and passed AB 362 last year specifically to deal with the penalty for health benefits; it provides a refund on state taxes to cover the amount taken out by federal taxes for the gross-up. It was a total nerd bill, so it didn't get much press, but I know that it covered domestic partnerships as well as marriage (that was how it was amended after the SCOTUS win 6/26).

Unfortunately, the LGBT-friendly CPAs I know are in Glendora, not the Bay, but if you want a referral, I'd be happy to pass 'em along. They write regular guest blog posts about LGBT tax law.
posted by klangklangston at 12:00 PM on June 13, 2014 [2 favorites]

Get a definitive opinion, but prior to 6/26, CA defined domestic partnerships as registered domestic partnerships. My company had a lower requirement to consider my partner a domestic partner. (That we had no plans to split up, and we were financially interdependent)

I don't know if that requirement still stands. If you don't want to talk to a CPA, the FTB is often fairly helpful. (/end threadsit)
posted by politikitty at 12:14 PM on June 13, 2014

Response by poster: We ended up just having her pay for benefits out of pocket - cheaper that way. Oh well. I guess eventually I'll have to solve this by making an honest woman of her - or vise versa.
posted by latkes at 1:36 PM on July 17, 2014