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The Affordable Care Act and Impact on California Tax - Supersedes PSB 11.06

Purpose of bulletin

To inform staff that California income tax law has changed to conform to the federal income tax rules which exclude the value of the medical coverage provided to adult children from gross income.

Background

AB 36 conforms California personal income tax law with federal income tax law by adopting a specified provision of the Affordable Care Act signed into law by the President in March 2010. (The Affordable Care Act refers to Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010). AB 36 is effective immediately, and applies the same taxable periods as federal law.

  • The Patient Protection and Affordable Care Act 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.
  • 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 at the end of the tax year.

CA Law

California personal income tax law, as amended by AB 36, conforms 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 allows a deduction to self-employed individuals for health insurance premiums for nondependent adult children under the age 27.

Tax impact

How to file

Form 540 – On an original tax return

If the employer issued Form W-2 including the amount of medical coverage for your nondependent adult children in your California wages, contact your employer to have them issue you Form W-2C excluding the amount from your California wages. Use form FTB 3525 as a substitute for federal Form W-2C if your employer does not issue you a Form W-2C.

Self-employed individuals may deduct the health insurance premium paid for nondependent adult children under age 27. No California adjustment is needed.

Form 540X – On a previously filed tax return

If you have already filed Form 540 with Form W-2 that included the amount of medical coverage for your nondependent adult children in your California wages, contact your employer to have them issue you Form W-2C excluding the amount from your California wages. Use form FTB 3525 as a substitute for federal Form W-2C if your employer does not issue you a Form W-2C. File Form 540X to report the reduction in your California wages.

For self-employed individuals who reported a California adjustment excluding the health insurance premium paid for nondependent adult children, file Form 540X to report the allowed deduction for California.

Additional information

For information on how to compute taxable wages, go to edd.ca.gov, and search for payroll taxes, or call 888.745.3886, Weekdays, 8 a.m. to 5 p.m., except state holidays.