IRS Announcement on Tax Filing Status of Same Sex Couples
August 29, 2013 – The IRS today ruled that same-sex couples, legally married in jurisdictions that recognize their marriages, will be treated as married for federal tax purposes – regardless of their current state of residence. Because taxes and ACA are inextricably linked, there is of course a number of health care implications. I summarize a few of these below.
Same-sex couples who currently access domestic partner benefits may gain if they marry or qualify as married under IRS ruling. Under the current tax law, the value of the benefits that employers provide to opposite-sex spouses is largely excluded from income. Prior to today’s announcement, however, the reverse was true from same-sex spouses/partners: they had to pay federal income taxes on the full value of the employer’s contribution for same-sex spouse/partner health insurance, etc. These taxfilers may no longer have to treat the value of the health insurance as imputed income if they get married – meaning that their taxes for this imputed income would disappear (though their overall taxes could increase depending on the couple’s financial situation). The same is true for employers: they may pay lower payroll taxes if the same-sex couple marries, meaning that the employer no longer has to treat the value of the employer’s contribution as imputed income. (For more information about the broader tax implications of today’s ruling, see the post from my colleague Mark Steber at http://www.huffingtonpost.com/mark-steber/gay-marriage-federal-taxe…)
Before rushing to the courthouse, though, same-sex partners should consider a few implications related to the new health care programs under the ACA and the Internal Revenue Code:
- Same-sex partners with similar incomes may lose out. For example, same-sex partners who each have an income of $40,000 may be eligible for the premium assistance tax credits under the ACA – but only if they remain single. If they marry, then they would lose eligibility because their income would be over the threshold for a household of two.
- BUT, same-sex partners with different incomes may gain. For example, two persons in a same-sex relationship who had incomes of $30,000 and $80,000, respectively, would not qualify for the tax credits if they were married (because their combined income is above the limit for a couple). However, the individual making $30,000 would qualify for the tax credits if the couple remains unmarried (because that individual’s income is below the threshold for a household of one). Of course, the couple may end up paying a lower marginal tax rate if they marry and they exercise a new right to file jointly – so part of the decision about whether and when to marry may involve a complicated trade-off between minimizing taxes and accessing insurance.
- Very low income same-sex couples may also gain. Take the example of a same-sex couple residing in one of the 27 states that have not yet expanded Medicaid for all adults, and assume each of the two individuals earned less than about $11,500 per year. Neither individual would not qualify for any assistance under the ACA if the remained “single,” but they would both qualify for substantial tax credits and cost-sharing reductions under the ACA if they got married in a jurisdiction that recognizes same-sex marriage.
- BUT, same-sex couples who marry may lose out if one or more of their employers offers spousal coverage but no subsidy. If the couple marries and one employer offers spouse or dependent coverage, then the same-sex spouse may lose eligibility for the ACA tax credits. The ACA limits the tax credits to spouses and dependents who do not have access to affordable coverage. Even if the employer does not subsidize spouse or dependent health coverage, the fact that the spouse has access may disqualify him or her from the tax credit program. The reason is simple but not intuitive: the final rule about premium tax credit eligibility states that dependents who have access to “affordable” employer-sponsored coverage are ineligible for premium tax credits. However, “affordability” of employer-sponsored insurance is determined only with regard to the employer contribution to the employee-only coverage tier. Consequently, a same-sex partner (and for that matter, any dependent) would be ineligible for tax credits if the employer offers spousal coverage but contributes 0% towards the associated premium. If coverage for a same-sex spouse or other dependent coverage is unavailable, though, a same-sex spouse or other dependent may have some hope of qualifying for a tax credit.
- And remember the filing requirement! If a same sex couple were to get married and claim these new tax credits under the ACA, then the ACA rules require them to file a joint return for the respective tax year (as is the case with opposite-sex married couples). No more married filing separate!
And there is yet another puzzling policy question: Did the IRS just effectively expand the rules for both tax household composition and Medicaid household composition (at least for Medicaid MAGI categories) to include same-sex couples? Here’s the logic, though it’s admittedly technical: Since the Medicaid MAGI categories (children, pregnant/parenting, and childless adults) adopted the tax composition household rules (with a few explicitly-noted differences in the final Medicaid rules), the federal income tax treatment of same-sex couples presumably now applies to the Medicaid MAGI groups. But this potentially means that, in states that don’t recognize same-sex marriage, same-sex spouses who apply for Medicaid would be “married” for the MAGI eligibility groups but not married for the non-MAGI groups (e.g., the old aged, blind, and disabled categories). This will be an enormous challenge for such states to implement if HHS does not adopt a uniform definition of marriage for all Medicaid eligibility groups. Rumors abound that HHS may issue guidance on this question – but not “soon soon.” Stay tuned!
Suffice it to say, it’s complicated – which is why we encourage you to seek tax advice from tax professional who are well versed in the insurance affordability programs under the ACA. Like, for instance, those at Jackson Hewitt!
Senior Vice President
for Health Policy
Jackson Hewitt Tax Service Inc.