Domestic Partner Benefits ... Ask TaxMama ... June 6, 2004

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Published by Eva Rosenberg, MBA, EA
Volume 6, Issue 261 June 6, 2004


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Domestic Partner Benefits

» From: Manchester, CT

Dear TaxMama:

My employer has just decided to offer domestic partner healcare benefits to same gender couples. Since it is their first experience with this, I naturally expected them to have litttle understanding of the tax law behind it.

When I suggested to them that a portion of the cost of my insurance is considered imputed income by the IRS, they laughed at me. They said that this was my problem and I would have to hire my own tax expert to figure it out.

I am concerned that they are not going add the proper calculations to my w-2 form and I may end up with back taxes, interest and possible fines to pay. Would you tell me if I am correct?

I expect my imputed income to be $4399.89

If I fall in a 28% tax bracket, I should expect to pay $1231.97 on this benefit because my employer must report it as imputed income.

I want you to tell me that I am wrong, but I suspect I am not. Please help me.

Thanks

Rick

Hi Rick,

You're very right to be concerned.

But the situation amuses me. I needed a chuckle this early in the morning.

Do you want to know why I am amused?

According to a little provision of IRC Sec 3402, which I happen to keep pasted on my file cabinet where I can always see it, your employer is responsible for reporting your income properly and submitting the proper taxes to IRS.

What will happen should your employer ever get audited is this - IRS will determine that they under-reported employees' income. IRS will increase the taxable payroll and make the employer pay the additional Social Security/Medicare taxes.

Under 3402, IRS should make them pay your additional taxes on that money, too.

If they don't, if IRS passes through assessments to you, all you have to is copy out Section 3402 of the code and send it off to IRS with their assessment letter and ask them to please collect the additional tax from your employer.

Honest, he's really the one held responsible.

Please, feel free to share the code section with your employer.

Meanwhile, increase your withholding by 200 per month for the rest of the year, to cover any additional taxes you potentially have to pay.

Just file a new W-4 keeping the same exemptions you now have. But on line 6, add an amount that will result in $200 more being deducted per month.

i.e. If you get paid 2 x per month, that would be $100; If you get paid every 2 weeks, that would be $46 for 26 weeks (starting July 1).

For next year, you'll want to file a new W-4 again, to spread that additional tax over all 12 months.

Do the same thing with your state taxes.

Incidentally, you are welcome to pay the additional taxes with your tax return. Just put $200 per month into savings. You wouldn't want to miss out the whopping 1% you could earn on that money. By the end of the year, it might be enough to cover a Happy Meal at McDonalds.

Oh, as to your calculations, I don't do those things. But you can run the numbers through the estimators at TaxBrain Income Tax Liability Estimator and other Tools

or

TurboTax Income Tax Liability Estimator and other Tools

But hey! Don't be too harsh with your employer. Even if you are picking up some of the additional costs, they are being remarkably generous, essentially giving you nearly a $5,000 raise. So, tread delicately. Don't make them sorry they're doing this.

And remember, the tax laws aren't totally clear on this issue yet. I suspect it still remains to be defined. Having IRS tax this is clearly discriminatory --- except that same-sex marriages are not yet Federal law...and most likely won't be under a Bush administration.

But it wouldn't hurt to get involved and lobby.

To help explain this issue to your boss, print this article out to add support to your case. Domestic Partner Benefits

Highlight the parts relating to your explanation.

Good luck!

Best wishes,

Eva Rosenberg
Your TaxMama

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