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Effect of DOMA on the Estate Tax

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Of the 50 states, 31 have constitutional amendments banning gay marriage. It is legal in nine states and Washington, D.C.

The remaining states’ policies vary, with some recognizing marriage from other states, some providing some of the legal benefits of marriage and others denying marriage by state laws, but not constitutional amendments.

The Obama administration said in 2011 that it viewed DOMA as a violation of the U.S. Constitution and said it would no longer defend it in court. A group appointed by the Republican majority in the U.S. House of Representatives has asked the justices to uphold DOMA.

When Spyer died, the general estate tax exemption was $3.5 million. So Windsor inherited that amount from Spyer tax-free, including gifts received during Spyer’s lifetime.

But because they were a lesbian couple, under the DOMA law Windsor could not take advantage of the spousal exemption, which says that a spouse may inherit any amount tax-free from a deceased spouse.

So Windsor was charged $363,000 in estate tax by the federal tax-collecting Internal Revenue Service. She paid her IRS bill but then sued, seeking a refund. She won in district court and in a federal appeals courts, but her case gradually took on increased prominence and eventually made its way to the Supreme Court.

The Williams Institute, a University of California-Los Angeles think tank that studies sexual orientation, estimates that if DOMA is overturned, only about 50 same-sex couples would qualify for the spousal exemption each year.

The institute based its estimate on figures from the U.S. Census and the nonpartisan Tax Policy Center, a think tank.

Marriage Penalty

But if Windsor wins her case, there would also be changes ahead in income tax filing and other benefits for some 130,000 same-sex married couples, as estimated by the Census Bureau.

A post-DOMA landscape would expose married gays to some of the same problems faced by married opposite-sex couples.

For instance, tax bracket and tax credit variations for singles versus married couples might mean wealthier couples and the working poor could face a “marriage penalty,” while middle-income couples with one breadwinner could get a tax break.

“Equality is not always a net fiscal positive” for couples, said Brian Moulton, legal director of the Human Rights Campaign, which advocates for gay rights.

The maximum amount free of tax, whether for a spouse or not, has risen since Spyer died in 2009, and is now $5.25 million. As a result, most estates are passed on tax-free.

If you have any questions about same-sex marriages, domestic partnerships or DOMA, contact Anh Tran, an Orange County estate planning attorney at Modern Wealth Law to discuss your questions.

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