California has adopted a new law excluding from gross income, for state personal income tax purposes, any amount received by an employee from an employer to compensate for additional federal income taxes incurred by the employee from employer-provided health benefits because of the federal government’s failure to recognize same-sex spouses or domestic partners as the employee’s spouse for federal income tax purposes. This exclusion also includes any “grossed-up” amounts the employer provided to offset any taxes incurred by the employee on such reimbursement. The new law covers same-sex couples who are married or registered domestic partners whose employers reimburse them for federal taxes the couples pay on health care benefits for their partner and dependents. The exclusion applies to tax years 2013 to 2018.
Following the U.S. Supreme Court’s June 26, 2013, opinion in United States v. Windsor, which invalidated the provision of the federal law that confined marriage to a legal union between one man and one woman as husband and wife, the Internal Revenue Service ruled that same-sex couples who are legally married in jurisdictions that recognize their marriages will be treated as married for all federal tax purposes, regardless of whether the couple currently lives in a jurisdiction that recognizes same-sex marriage or not. (For details on Windsor, please see U.S. Supreme Court Rulings on DOMA and California’s Proposition 8 Affect Employee Benefit Plans and Plan Sponsors. For details on the IRS ruling, please see IRS Rules All Legal Same-Sex Marriages Will Be Recognized for Federal Tax Purposes.) The IRS ruling does not apply to registered domestic partners.
For more information on this or other workplace developments, please contact Mark S. Askanas, at (415) 394-9400 or [email protected], or the Jackson Lewis attorney with whom you regularly work.
IRS Circular 230 disclosure: Any tax advice contained in this communication (including any attachments or enclosures) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication. (The foregoing disclaimer has been affixed pursuant to U.S. Treasury regulations governing tax practitioners.)