Oops! Yale Payroll Error Costs Gay Employees

Yale University says it made a payroll error that resulted in under-withholding for 61 employees with same-sex partners.  Yale failed to withhold federal taxes on the value of domestic partner health insurance during 2010. 

Same-sex marriage is legal in Connecticut, where Yale is located, but the federal government does not recognize same-sex marriage.  The issue here is taxability of health insurance provided to a same-sex spouse.  Connecticut does not tax the value of such health insurance, but the federal government does.  A programming error in Yale's payroll system treated the health insurance as not taxable for both state and federal purposes, instead of just for state purposes, so federal taxes were not withheld on the value of the insurance.

The affected employees will see smaller paychecks in 2011, because they'll not only have "regular" withholding for 2011, but they'll also have the 2010 under-withholding withheld from their paychecks in 2011.

Read all about it in this New York Times blog.

Federal Tax Provisions and the State of Iowa

One of the considerations of tax planning is the impact of state taxes.  Many states follow along with most federal provisions for calculating income, but almost every state varies from federal law on at least a few items.  This is often referred to as "de-coupling" from federal law. 

For example, Iowa in 2009 "de-coupled" from federal law on Section 179 expensing and bonus depreciation.  Section 179 expensing was limited to $133,000 (as opposed to $250,000 on federal returns), and bonus depreciation was not allowed at all on Iowa returns.  (Read more about this tax issue in this article.)

Iowa often "de-couples" from other "extender" items such as the front-side deduction for college expenses and the front-side deduction allowed to K-12 teachers for out-of-pocket classroom expenses.  These were a part of the federal tax bill signed into law last week.  The Iowa legislature will decide next month on whether to de-couple from these items and not allow them to be deductible on Iowa tax returns.  It is a safe bet that the legislature will vote to de-couple on these items, and also on the increase in Section 179 and bonus depreciation.

One federal provision that Iowa is coupling with is the provision in the "health care bill" passed earlier this year that allows people to keep children on their health insurance through age 26.  The value of this insurance coverage will be tax-free for federal purposes, and Iowa has announced that it will go along with federal law in this case.  Read more in this informational post from the Iowa Department of Revenue.

Self-Employed Can Deduct Health Insurance for Self-Employment Taxes

People who are self-employed and provide their own health insurance will be able to deduct the insurance premiums from business income, thus reducing their self-employment taxes.  Normally, the self-employed can only deduct health insurance premiums when calculating income tax, but not for calculating the self-employment tax. 

The same rules and restrictions that normally apply to self-employed people who deduct insurance premiums will still apply (e.g. must not be eligible for coverage under a spouse's insurance plan).

This change is effective for 2010 only and was part of the "Small Business Jobs Act" that was signed into law in September.

Barclays to Reimburse Same-Sex Couples for Health Insurance Costs

British-based Barclays has announced that it will "gross up" pay of U.S. employees to help off-set the extra taxes paid by employees whose health insurance covers a same-sex partner.  Under federal law, the value of insurance coverage for people other than spouses or dependents is included in income.  (Remember, federal law does not recognize same-sex marriage, so a same-sex spouse is not considered a "spouse" for federal purposes.)

According to the New York Times, Cisco, Google, The Kimpton Hotels, and The Gates Foundation also provide similar reimbursement programs for employees in same-sex relationships.

Read more at the Times and at Bloomberg.