Since this is a holiday week, I’m taking the easy way out and re-posting some of my most popular blog posts.
Here’s one from January of this year about a topic that doesn’t get a lot of attention, but that can be critical for people in same-sex relationships: how to claim someone as a medical dependent without claiming that person as a dependent on your tax return.
Originally published January 23, 2012
People in same-sex relationships know that if a same-sex partner is not a dependent, then the value of health benefits provided to that partner are taxable income. Some of my clients in same-sex relationships have upwards of $10,000 of “income” added to their W-2s because they have a partner on their health insurance.
But most people, employers and accountants are mistaken in thinking that this is the way it always has to be.
Definition of “Dependent” Depends
Health insurance provided to a spouse or dependent is not taxable. People in same-sex relationships can never be considered married (and thus the term “spouse” cannot apply) for federal purposes because of the Defense of Marriage Act. But what about saying a same-sex partner is a dependent?
This is where it gets confusing. A person can be your dependent for medical purposes without you claiming that person as a dependent on your tax return. If a person qualifies as a medical dependent, then you should not be taxed on the value of health benefits provided to that person.
Here are the rules for someone to qualify as your medical dependent:
- The person must live with you all year.
- You must provide over 1/2 of their support.
Note what is missing: there is no gross income limitation. The gross income limitation only applies for trying to claim a dependency exemption for a person on your tax return. It doesn’t apply for purposes of someone being a medical dependent.
Before rushing to say that your spouse or partner is a medical dependent, PLEASE PROCEED WITH CAUTION. IT’S NOT AS EASY AS IT SOUNDS TO SAY SOMEONE IS YOUR MEDICAL DEPENDENT!
For example, the mere fact that you make more money than your spouse/partner doesn’t necessarily mean that your spouse/partner qualifies as your medical dependent. It is possible to make more money than someone without providing more than 1/2 of that person’s support. It is vital for you to do the following two things:
- Complete the support worksheet in Publication 501 to document that you really are providing more than 1/2 of your spouse/partner’s support.
- You must continue to provide more than 1/2 of your spouse/partner’s support going forward in order for them to keep qualifying as your medical dependent.
I will say this one more time for emphasis: it’s not as easy as it sounds. You may want to discuss with a professional who specializes in LGBT tax issues, such as myself.
More to Come
Next week I’ll provide more details about the topic of taxation of health benefits, including code sections and other resources.