Suppose your boss told the IRS that you made three thousand dollars more than you actually did this year? Or added a few hundred dollars in pretend income each pay period, withheld taxes on it, but then didn't actually put it in your paycheck? And what if the federal government forced your employer to pay taxes on this imaginary chunk of cash?
It may sound crazy, but that's the reality for many gay Americans -- and the companies who employ them.
It turns out that even a gay couple that is legally married or registered as domestic partners cannot accept standard employer benefits like health care for a spouse or partner without paying a special and cumbersome tax. That is because, according to federal tax law, employer-provided health care insurance for an opposite-sex spouse is considered a benefit, but for a same-sex couple, it is considered income. The difference? Income is taxed; benefits are not.
Unbeknownst to many, federal tax law singles out health insurance for a domestic partner and treats it as "imputed income" -- penalizing both the employer who offers it and the employees who utilize it by levying extra taxes. Further, this loophole creates a huge administrative mess -- forcing businesses to keep a separate set of books for their gay employees in order to calculate these added payroll and income taxes.
The result is an unnecessary nuisance that costs more for everyone: the employer pays hundreds more in payroll taxes, while the employee pays thousands more to the IRS, all to do what more and more businesses and Americans feel is fair.
The fact is that as America makes enormous strides in its acceptance and recognition of same-sex couples, the tax code is stuck in the past. And because much of American enterprise is ahead of government, businesses and couples all over the country are trying to work around this cumbersome exclusion. Some employers have decided to "gross up" or pay their employees who have domestic partners an extra amount each year to cover the cost of the added tax burden. It's an expensive and ill-fitting work-around, but some businesses have found that if they don't gross up, no one will opt to use the domestic partner protections they offer. The added tax penalty and arduous calculations mandated by the federal government just aren't worth it.
But there's an easy fix that would cut through this maze. It's called the Tax Equity for Health Plan Beneficiaries Act, and its mouthful of a name is almost as long as its gracefully simple substance. The bill would merely close the loophole and ensure that all workers can receive their employer-provided health coverage on equal footing. No business would be forced to provide domestic partner protections under the legislation, but those who chose to do so would no longer be penalized. The result would be to streamline the process for small businesses and Fortune 500 companies alike, more of whom are offering protections to same-sex couples nearly every day.
Between 2000 and 2010, the number of gay and lesbian couples who were married or registered under civil union or domestic partnership laws in their states has increased from zero to at least 135,000. As this number grows, let's let businesses who want to respect the relationships of their employees with domestic partners do so without punishment. And let's eliminate the complicated and confusing hoops that currently make so many employers add imaginary income to a few of their workers' pay stubs. Few policy solutions in Washington make more sense.
To learn more, check out our idea brief, Eliminating the Tax Penalty on Health Insurance for Domestic Partners, or our infographic illustrating The Tax Penalties and Bureaucratic Burden of Domestic Partner Health Insurance.
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