Earlier this year, we discussed the status of Illinois civil union partners under DOMA, tax law, benefit laws and other laws. While the tax status of such partners is still an interpretational issue for employers, the IRS recently wrote an informal letter and the Illinois Department of Revenue changed a prior announcement on the topic. The IRS letter, sent to H&R Block on August 30, 2011, applies the common-law marriage rule from Revenue Ruling 58-66 to the new Illinois Civil Union Act, which became effective June 1, 2011. The IRS letter concludes that opposite-sex civil union partners in Illinois are husband and wife for federal income tax purposes. The federal tax status of same-sex civil union partners is not addressed due to the restrictions of DOMA. The Illinois Department of Revenue announcement treats all civil unions the same as marriage for state tax purposes. The impact of the informal letter and the announcement is to be seen, but it could assist employers in interpreting tax and benefits laws.
The IRS letter is informal, not binding, and cannot be relied upon by any tax payer. That being said, the IRS letter adds another element in the analysis of the tax status for opposite-sex civil union partners in Illinois. The Illinois Civil Union Act could be interpreted to put opposite-sex civil union partners on par with a common-law marriage for the purposes of federal and Illinois state taxes. Such an interpretation, while not clear, would not be inconsistent with DOMA. DOMA provides that marriage “means only a legal union between one man and one woman as husband and wife…” The Illinois law provides that the terms husband and wife include opposite-sex civil union partners. One possible conclusion then is that husband and wife, for federal tax purposes, includes Illinois opposite-sex civil union partners.
Since our July 2011 post, the Illinois Department of Revenue has changed the Illinois tax treatment of civil union partners for both opposite-sex and same-sex civil unions. In July, the Illinois Department of Revenue was committed to following the federal tax rules, resulting in same-sex civil union partners treated as single. Recently, the Illinois Department of Revenue announced that all civil union partners are treated as married for Illinois state tax purposes, and opposite-sex civil union partners may be treated as married for federal tax purposes. The change to the Illinois tax filing practice is consistent with the informal interpretation by the IRS.
Although the IRS letter and the Illinois announcement are specific to individual tax filing status, the interpretations may impact employer administration of benefit plans. For example, employers may determine that medical coverage for Illinois civil union partners no longer results in imputed income for state tax because the coverage is available tax-free for a spouse, and for federal tax as well for opposite-sex civil union partners. The Illinois announcement includes instructions for the individual to adjust for civil union partner health coverage imputed income. Employers may want to modify their payroll and withholding practice for both federal (opposite-sex only) and Illinois state (both same-sex and opposite-sex) tax purposes.
Further, employers will need to consider whether opposite-sex civil union partners will be entitled to spousal benefits in tax-qualified retirement plans, such as survivor benefits, spousal consent and hardship withdrawal rights. Employers may want to modify their procedure for capturing spousal information to include opposite-sex civil union partners. Again though, none of the benefits implications are clear. The IRS letter is merely an informal letter to one tax preparer about one separate, but related, narrow issue; the Illinois announcement is about the same narrow issue – tax filing status of individuals.
Four other states allow or will allow civil unions: Delaware, Hawaii, New Jersey and Rhode Island, but only Hawaii will recognize civil unions for opposite-sex couples (the Hawaii civil union law is effective January 1, 2012). The implication of the IRS letter for Hawaii and other states with opposite-sex domestic partnerships (such as Nevada, California and Washington) is unknown.
Today’s post was contributed by Megan Hladilek.
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