The Tax Loophole that Can Provide Big Savings for Illinois Same-Sex Couples

I got a really interesting case last week that has shed some light on a little known rule for same-sex couples who get married in Illinois.  Even more intriguing is that the rule just applies to Illinois couples, but could influence future laws in other states that enact same-sex marriage legislation.

Filing Taxes Post-Windsor

My clients got married on June 1st, right when marriage became legal in Illinois. However, they had been a part of a civil union since 2011. One of the men is a real estate mogul and the other is an actor. They could benefit from filing jointly, but obviously couldn’t until they were legal married in a state that recognized same-sex marriage.

As you may remember, because of the Windsor decision, from tax year 2013 going forward, married same-sex couples must file either married filing separately (MFS) or married filing jointly (MFJ). Some couples could also benefit from filing a joint return in the years since they married (which could have been as early as 2005). Those couples have the option, not obligation, to amend their prior year returns.  However, a statute of limitations only allows credits or refunds for three prior filing years.

Converting a Civil Union to a Marriage

The key to amending prior year returns is that you had to be considered married. Civil unions didn’t, and still don’t, give you the ability to file jointly on your federal return.

However, some states automatically converted civil unions to marriage

  • Connecticut, effective 1 October 2010;
  • Delaware, effective 1 July 2014;
  • New Hampshire, effective 1 January 2011;
  • Rhode Island effective on Aug. 1, 2013; 
  • Vermont effective September 1, 2009. 

In other words, once marriage became legal in one of those states, the same-sex couple’s civil union automatically became a marriage.

Illinois’ provision is unique in that it’s the only state in which individuals, within in the first year of the marriage law (ending May 31st, 2015), can choose to convert their civil unions to marriage. In doing so, the marriage date is retroactive to the original civil union date. Choose is the operative term, since the couple has to make the election to have the civil union converted.

According to the Cook County Clerk’s website – the couple has to apply for a marriage license and request to use the date of their civil union as the date of their marriage.

Make the Conversion!

Luckily my couple made the choice, and we can now file amended tax returns all the way back to 2011.  

I’m curious what would have happened had they not chosen then conversion and just used June 1st as their marriage date. My guess is since they still fall within the May 31st conversion time frame, they could have fixed the problem.  But I don’t know for sure.

The important thing is for those couples that qualify for this exception to elect to have their marriage date retroactively converted to the date of their civil union. It could result in a significant tax savings.