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The Patient Protection and Affordable Care Act and Impact on California Tax

On January 24, we sent a Tax News Alert with the following information:

The Patient Protection and Affordable Care Act signed by the President in March of 2010, requires benefit plans that provide coverage for family members to cover adult children of the employee, to age 26 whether or not they qualify as dependents for tax purposes, effective for plan renewals beginning on or after September 23, 2010. The Health Care and Education Reconciliation Act of 2010 extends the general exclusion for reimbursements for medical care expenses under an employer-provided accident or health plan to any child of an employee who has not attained age 27 as of the end of the taxable year. This law also amended federal income tax laws to exclude the value of an eligible adult child’s medical coverage from the taxable income of the parent-employee. Federal law also allows self-employed individuals a deduction for health insurance premiums for an adult child under age 27 who is not a dependent.

California law has not been amended to conform to the 2010 federal income tax rules which exclude the value of the medical coverage provided to nondependent adult children from California gross income and allow a deduction to self-employed individuals for health insurance premiums for nondependent adult children under age 27. For California income tax purposes, the fair market value of employer-provided medical coverage for some adult children in excess of the amount paid by the employee for such coverage may result in taxable income to the employee. Any amount paid by an employee for such additional coverage is excluded from federal, but not California taxable wages.

  • The additional income is reportable and taxable to the employee, not to the adult child.
  • The amount of income included in taxable wage is equal to the amount by which fair market value of the taxable benefit received by an employee exceeds the amount the employee pays for the benefit.

In addition, self-employed individuals may not deduct the health insurance premium paid for an adult child under age 27 who is not a dependent.

For more information, go to www.edd.ca.gov/Payroll_Taxes/

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