IRS Clarifies Income Tax Refund Procedure for Same-Sex Married Employees

Author: Rena Pirsos, XpertHR Legal Editor

August 20, 2014

In Information Letter 2014-0012, the Internal Revenue Service (IRS) has outlined two procedures that a same-sex married employee may use to claim an income tax refund if an employer included the value of his or her spouse's health insurance on the 2013 Form W-2, Wage and Tax Statement. This special tax refund procedure became necessary after the US Supreme Court's 2013 ruling in Windsor v. United States that § 3 of the Defense of Marriage Act (DOMA) was unconstitutional.

Background

Before the Windsor ruling, the IRS had always considered employer-provided benefits provided to an employee's same-sex spouse, including health benefits, to be taxable to the employee. Since the ruling, however, the federal government recognizes same-sex marriages for all federal purposes, including employer-provided health benefits.

Consequently, the IRS issued Revenue Ruling 2013-17, and Notice 2014-1. Revenue Ruling 2013-17 provides that a same-sex spouse will be treated as a spouse for all federal tax purposes provided the couple is lawfully married under state law. Notice 2014-1 specifies that group health benefits provided to an employee's same-sex spouse are tax-free to the employee. Further, if health benefits are provided through a cafeteria plan under Internal Revenue Code § 125, the employee may pay for his or her spouse's insurance on a pretax salary reduction basis.

Option 1: The Employer Provides Form W-2c

According to the IRS, the employee should first contact his or her employer and request that the employer issue the employee a Form W-2c, Corrected Wage and Tax Statement, that does not include the value of spousal health insurance in taxable wages. The employee must then file Form 1040, U.S. Individual Income Tax Return. If the employee has already filed his or her 2013 Form 1040, he or she must file Form 1040X, Amended U.S. Individual Income Tax Return, with the amount of the spousal health insurance subtracted from the employee's income.

Option 2: Employee Attaches Form 4852 to Form 1040

The IRS also says that an employer does not have to provide Form W-2c to the employee. If the employer does not, the employee must file Form 1040, with a completed Form 4852, Substitute for Form W-2, Wage and Tax Statement, attached. The employee must use the amounts shown on Form 4852, instead of the Form W-2, when completing Form 1040.

An employee who uses this option must take the following steps to complete Form 4852:

  • The employee must check the box indicating that he or she received an incorrect Form W-2 for 2013;
  • On line 7(a), the employee must subtract the value of spousal health insurance from the taxable wages that the employer reported in Box 1 of Form W-2;
  • On line 7(c), the employee must subtract the value of spousal health insurance from Medicare wages that the employer reported in Box 5 of Form W-2;
  • On line 7(b), the employee must show $113,700 (i.e., the 2013 Social Security taxable wage limit), or the line 7(c) amount, whichever is less. If the employee's wages were not subject to Social Security tax, the amount of Social Security wages from Box 3 of Form W-2 should be indicated on line 7(b);
  • On lines 7(d) through 7(j), the employee must copy the amounts reported on Form W-2 onto the appropriate places;
  • On line 9, the employee must explain that the amounts reported on Form W-2 included the value of excludable spousal health insurance, and that these amounts are excluded on Form 4852 as allowed by Rev. Rul. 2013-17 and Notice 2014-1. The employee must also explain how the value of his or her spouse's health insurance was determined (e.g., by referring to the amount reported as taxable health insurance on his or her pay statements); and
  • On line 10, the employee must explain all the steps taken to request a Form W-2c from his or her employer.

Refunds of Social Security and Medicare Taxes

The employee may also be due a refund of Social Security and Medicare taxes that were withheld on the value of the spousal health insurance. If so, the employee should first contact the employer to inquire whether the employer will be seeking a refund on the employee's behalf, the IRS advises.

If the employer will not seek a refund, the employee may claim a refund by filing Form 843, Claim for Refund and Request for Abatement. The employee must include all necessary attachments that are listed in the instructions for Form 843.