CA Bill Makes Adult Children’s Health Costs Tax Exempt

March 8, 2011 ( – The California state Assembly has unanimously approved a bill keeping the amount paid for health care insurance for an employee’s adult children from being considered taxable income.

The Associated Press reported that AB36, would align state tax code with federal law and would mean the state would collect $40 million less a year in tax revenue if the measure passes the state Senate and is eventually signed into law. The federal health care reform law allows parents to keep children up to age 26 on the parents’ policies.

Assemblyman Henry Perea of Fresno, who authored the bill, said the health care changes confused employers, who were not sure how to calculate the amount of tax to withhold from their employees’ income (see How Is State Tax Applied to Coverage for Adult Children under the PPACA?), according to the Associated Press.

Without this tax credit, parents may not insure their adult children because of the financial burden the state tax imposes on already cash strapped families, said Perea in a Web site statement.

According to a Business Insurance report, California law currently sets a five-part test, all of which must be satisfied for the coverage to be excluded from employees’ taxable income. Among other things, the child must be younger than 19, or 24 if a full-time student. As a result, if an employee added an adult child who did not satisfy the test, the portion of the health insurance premium attributed to the child would be considered taxable wages and subject to California taxes.

More about the issue of taxing adult children’s health care costs is here.