The federal and most state governments treat dependent benefits for domestic partners as taxable earned income and require gay and lesbian people to pay additional taxes from which straight married relationships are exempt. The law, however, is not uniform. In some states, including those that recognize same-sex marriages, couples aren’t subject to the unfair tax on the state level, but still have to pay federal taxes on any benefits their partners receive.
As 61 same-sex couples at Yale discovered earlier this year, this two-tier system sometimes leads to bureaucratic errors that result in significant economic hardships:
An accounting error by Yale is forcing same-sex couples who work for the University to pay double in tax withholdings this year.
Same-sex married couples are recognized by the state of Connecticut, but not by the federal government — meaning their tax returns are treated differently on each level. These couples are taxed by the federal government, but not by the state government, on the amount of their partner’s health coverage, and Yale affected approximately 60 employees University-wide by failing to withhold income equal to their domestic partner’s health coverage in 2010. Now, the University is making those employees pay back the appropriate amounts by deducting the funds from their 2011 income. […]
The University notified employees of the error in a letter sent on Dec. 22, apologizing for the mistake and informing workers that Yale would deduct the needed amounts from January, February and March paychecks.
The letter explained that the payroll system accidentally computed 2010 benefits as non-taxable on both the state and federal levels.
The New York Times explains that “same-sex couples are all too familiar with the extra financial costs and complications that can arise because their marriages are not recognized by the federal government.” As a result of this particular computer error, “paying the tax back over a three-month period would reduce take-home pay by 33 percent — and that doesn’t even include the taxes owed for this year”:
If the employee paid the tax back over the course of the year, take-home pay would shrink by 8.3 percent (or double that, at nearly 17 percent, when factoring in this year’s taxes). The employee said some workers owed $2,000 a year in taxes (which means they would need to pay a total of $4,000 this year), while others owed close to $4,000 (translating into $8,000 total), though those numbers were likely to vary based on the value of the benefits and the tax bracket of the employee.
A growing number of companies — like Google — begin begun covering the cost of the extra tax that heterosexual married couples do not pay, but for now, Yale is not one of them. According to a study conducted by the Center for American Progress and the Williams Institute, gay people pay $1,069 per year more in taxes than would a married employee with the same coverage. Collectively, “unmarried couples lose $178 million per year to additional taxes” and U.S. employers “pay a total of $57 million per year in additional payroll taxes because of this unequal tax treatment.”
According to a recent study published in Health Affairs, the extra tax burden results in lower levels of insurance for partnered gay and lesbians as compared to their heterosexual counterparts. “Partnered gay men are less than half as likely (42 percent) as married heterosexual men to get employer-sponsored dependent coverage, and partnered lesbians have an even slimmer chance (28 percent) of getting dependent coverage compared to married heterosexual women.”
Ultimately, Congress has to extend the employer-coverage tax exclusion to domestic partnership benefits. The House version of the health care bill included this provision, but it was ultimately kept out of the final law.