[FoRK] Why is married filing separately even a thing? (in the US)

Stephen Williams sdw at lig.net
Sun Feb 9 23:48:38 PST 2014


Should have included this link:

http://www.irs.gov/uac/Answers-to-Frequently-Asked-Questions-for-Registered-Domestic-Partners-and-Individuals-in-Civil-Unions

There are some bizarre decisions in there:
>
> *Q15. How should registered domestic partners report community income from a business on Schedule C, Profit or Loss From 
> Business?*
>
> A15. Half of the income, deductions, and net earnings of a business operated by a registered domestic partner must be reported 
> by each registered domestic partner on a Schedule C (or Schedule C-EZ). In addition, each registered domestic partner owes 
> self-employment tax on half of the net earnings of the business. The self-employment tax rule under section 1402(a)(5) that 
> overrides community income treatment and attributes the income, deductions, and net earnings to the spouse who carries on the 
> trade or business does not apply to registered domestic partners.
>

Q22 reminds me to check to see whether I've deducted the interest on student loans for my children...

This seems relevant:
>
> *Q25. If a registered domestic partner is self-employed and pays health insurance premiums for both partners out of community 
> property funds, are both partners allowed a deduction under section 162(l) (deduction for self-employed health insurance)?*
>
> A25. If one of the registered domestic partners is a self-employed individual treated as an employee within the meaning of 
> section 401(c)(1)(the employee partner) and the other partner is not (the non-employee partner), the employee partner may be 
> allowed a deduction under section 162(l) for the cost of the employee partner’s health insurance paid out of community 
> funds. If the non-employee partner is also covered by the health insurance, the portion of the cost attributable to the 
> non-employee partner’s coverage is not deductible by either the employee partner or the non-employee partner under 
> section 162(l).
>

If you're self-employed, why not employ the domestic partner in some fashion and include health insurance as a fringe benefit? 
Especially in light of Q15.

What a mess.

sdw

On 2/9/14 11:28 PM, Stephen Williams wrote:
> On 2/9/14 9:09 PM, J. Andrew Rogers wrote:
>> On Feb 9, 2014, at 6:20 PM, Stephen Williams <sdw at lig.net> wrote:
>>> While consulting a couple years ago, after exhausting COBRA (which I was very lucky to sign up for 3 days before the end of 
>>> a 75% rebated/discounted rate during the recession), I took advantage of this through my SO's company.  I was hit with a 
>>> substantial (thousands) tax bill as the health insurance in that case is considered imputed income to the non-employee.
>>
>> I’ve never heard of this consequence before but that may reflect selective enforcement.
>
> http://www.sfgate.com/business/networth/article/Who-pays-tax-on-domestic-partner-benefits-3259655.php
> http://www.myhss.org/member_services/imputedincome.html
>
> It's possible the IRS is turning a blind eye, but in our case it didn't matter much for us: Her company realized that it 
> should have been taxable and just essentially garnished her wages to collect for it.  Incorrect withholding liability is 
> nothing to mess with as the penalties and interest compound (I found out the hard way with my old C-corp in 1992 or so).  You 
> could still argue it, but you'd have to insist that the W2 was wrong, etc.  Messy.
>
>>
>> This health benefit, at the state level, is organized under the “domestic partnership” concept created largely to support gay 
>> couples. The Federal government does not recognize these as marriages so there would seem to be some kind of equal protection 
>> problem here if gay couples are not similarly targeted for imputed income based on the absence of Federally recognized marriage.
>>
>> And it gets even uglier in the case of marriages that are nominally recognized in some Federal contexts but not technically 
>> legally recognized in others. It is messy.
>>
>>
>>> It was still probably better than any alternative that I had at the time since it was impossible for me to buy an individual 
>>> policy before Obamacare. Now, it probably is better to buy such a policy rather than be on her policy.
>>
>> If you saved money, you are a rare outlier.
>
> I have an employer plan currently but probably not forever.  At the end of the COBRA period, a few years ago now, I checked 
> every possibility for getting an individual plan: I was rejected by every company.  I failed to find a way to even get a quote 
> from the state high-risk plan system which I believe had a long waiting list anyway.  I'm very healthy, so that was fairly 
> bizarre to me, and showed the system was clearly broken.
>
>>
>> I think it should be simple to buy appropriately priced health insurance; I don’t believe employment should be involved at 
>> all. However, Obamacare increased healthcare costs for my company 25-30% directly this year alone and another couple percent 
>> on payroll costs due to related tax changes that don’t actually help anyone. For zero improvement in benefits. I am unclear 
>> how this helps small business.
>
> Even if there was no direct change in benefits, which maybe is rare as many old plans would now be considered substandard, 
> there's still the bar against pre-existing condition denial, covering children to age 25, free preventative care and family 
> planning, and similar changes.  But different states are managing their markets much differently.  Insurance and regulation 
> are intertwined so much that there is a cloud of unintended consequences.  Many rates were much lower than expected in 
> California.
>
>>
>> Everyone I know has been hit with this cost increase. For some it comes out of their paycheck if their company doesn’t eat 
>> it, and for others it comes as reduced hours or reduced benefits. Consequently, the above practice of being able to use 
>> domestic partnership policies to piggyback on companies willing to eat both the partner cost *and* the Obamacare cost 
>> increase is a seriously valuable perk. I have that perk but I also know what it costs.
>>
>>
>>> Interestingly, there are some loopholes around marriage and divorce that might support getting married and divorced multiple 
>>> times in certain circumstances.  One big one: divorce settlements and alimony are generally not taxable income.  The best 
>>> way to transfer money to someone tax free is to marry and perhaps divorce them or their parents.  Might explain a few 
>>> well-known examples.
>>
>> I had not thought of this before. On its face, it seems like a tricky gambit due to the possibility of jurisdictional and 
>> common law issues. It would require good faith on both parties.
>>
>
> Prenup?
>
> sdw
>
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