CONSTRUCTION Accounting Article -
Are "Non-Traditional" Dependents Creating Tax Liabilities for Your Employees?

Target Audience: Construction Industry Professionals, Contractors, Construction Business Owners, Construction Accountant Interest, Construction Management, Tax Law Changes and Updates, Taxable Income Interest, Federal Tax and State Tax Law Updates

As the concept of the "traditional family" continues to evolve under various state laws, certain definitional departures from federal tax law arise creating some potentially troublesome issues. This is certainly the case involving health care coverage for children and domestic partners of same-sex marriages who do not meet the definition of a dependent or spouse under federal tax law. In cases where a taxpayer's employer pays for health care coverage of a same-sex spouse or child who is no longer a dependent, such costs result in taxable income to the taxpayer/employee.

Specifically, employer-paid premiums on a policy of accident or health insurance coverage are excludable from the employee's taxable income if such coverage is for the employee, his spouse, or his dependents. The federal definition of a spouse or dependent may not be the same as what may be covered under a group plan under state law. In the case of a spouse, a federal statute (the "Defense of Marriage Act", PL 104-199) defines the term "spouse" as limited to a person of the opposite sex who is a husband or wife. As a result, health insurance premiums paid by an employer for coverage of a same-sex spouse would be includible in the employee's taxable income as such coverage is not for the employee's spouse, notwithstanding recognition as a spouse under state law.

In the case of a child, the federal exclusion of a same-sex spouse could result in that spouse's child being disqualified as the taxpayer's dependent with the resulting inclusion of employer-paid premiums being taxable to the taxpayer-employee. This certainly has implications in determining and reporting an employee's taxable wages.

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