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Taxation of Partner Benefits: Determining and Tracking Dependent Status

The information in this document does not constitute legal advice. For assistance with legal questions specific to your situation, please consult an attorney.

This page explains the determination of dependent status with respect to the taxation of domestic partner benefits. See Taxation of Domestic Partner Benefits for more information.

In general, to qualify as a dependent for purposes of receiving tax-free employer-paid coverage, an individual must reside with the employee for the tax year at issue and receive more than half of his or her financial support from the employee.

  • Gross income test does not apply. Notably, a rule that applies in other instances and that limits a dependent's earned income to no more than a specified amount in a given year — commonly referred to as the "gross income test" — does not apply in this instance.[1]
  • Employee does not need to claim partner as a dependent. An employee is not required to claim the individual as a dependent on his or her Form 1040 for such individual to qualify as a dependent for purposes of tax-free employer-paid health coverage.

If the employee's domestic partner is a qualifying dependent under IRS definitions, the value of the health insurance coverage can be excluded for federal tax purposes. Employers should allow their employees to certify that their partner does indeed qualify and treat contributions for that coverage in the same manner as spousal coverage. The employer may wish to utilize a form to track the dependent status of covered partners.

State Recognition

States that recognize same-sex relationships as equivalent to different-sex spouses generally treat these relationships the same for state tax purposes. Because the federal definition of spouse is limited by the Defense of Marriage Act of 1996, most state or local tax provisions for lesbian, gay, bisexual and transgender families do not apply for the purpose of federal taxes. Both employers and employees may have to calculate multiple iterations of payroll and income taxes for employees in these states.

Sample Employer Forms

Simple Declaration of Tax Status Form

The fair market value[2] of the contributions made by [Employer] toward the cost of coverage for your Partner under any [Employer] sponsored health, dental or vision plan is treated as taxable income to you unless your Partner qualifies as your dependent for purposes of tax-free employer-provided health coverage. If your Partner qualifies as such, then [Employer] may provide coverage to your Partner without imputing additional income to you equal to the fair market value of the coverage so provided. Please note, it is our understanding that under current law all coverage provided under the Plan to your partner's children must be treated as taxable income to you and, as such, will show up on your Form W-2 as taxable wages.

Definition of Dependency

In order for your Partner to qualify as your dependent for purposes of tax-free employer-provided health coverage, all three of the following tests must be satisfied:

  1. You provide over one half of the support of your Partner for the year. In calculating support you must compare the amounts you contribute to your Partner with the amounts your Partner receives from ALL other sources including earnings and interest;
  2. Your Partner is a member of your household for the year; and
  3. Your home is the principal place of residence of your Partner for the year.

Certification

________________________________________________________
Employee Printed Name / SSN

________________________________________________________
Partner Printed Name / SSN


I certify that I have read the information outlined above and that my Partner satisfies all three tests outlined above. I understand that falsely certifying dependency status could result in various tax penalties [and in [Employer] undertaking disciplinary action against me. I further agree to notify [Employer] immediately of any change in this tax status.]

_____________________________________________________________
Employee Signature            Date

 


[1] See Internal Revenue Code sections Section 105(b) and 106, and Proposed Treasury Regulation § 1.106-1, which carve-out the gross income test found in subsection (d)(1)(B) of Code Section 152 for purposes of determining who qualifies as an employee's dependent and can thus receive tax-free employer-paid coverage. See also IRS Notice 2004-79 (which provides a good background on the history of Code section 152 and the statutory changes that resulted in the carve-out of the gross income test for purposes of Code sections 105 and 106).

[2] See "How and when do employers calculate imputed income?"