Analysis: Death, taxes and Supreme Court's gay marriage case
WASHINGTON (Reuters) - Edith Windsor and Thea Spyer, the lesbian couple at the center of a major gay rights case set to go before the Supreme Court this month, were in many ways a typical New York power couple.
Spyer was a psychologist; Windsor, a consultant at IBM. They met in a Greenwich Village restaurant in the 1960s and lived together for decades, summering at a Long Island beach house.
They waited until they were in their mid-70s to marry in Canada in 2007. When Spyer died in 2009, Windsor inherited her spouse's estate, worth about $4.1 million, according to lawyers.
But because she is gay, Windsor missed out on one of the most lucrative tax breaks enjoyed by affluent Americans - the exemption from federal estate tax on wealth passed from one spouse to another.
"The biggest benefit of marriage, financially, is when you die," said Fred Slater, a New York tax accountant.
The spousal exemption to the estate tax is denied to same-sex couples because of the Defense of Marriage Act (DOMA), a law passed by Congress and signed by the president in 1996 that defines marriage as between a man and a woman.
Windsor is challenging DOMA in a case the nine-member high court will hear on March 27. At its core, Windsor's fight is with the Internal Revenue Service over how much federal tax she owes on Spyer's estate.
She seeks the return of hundreds of thousands of dollars in taxes she would not have had to pay if she and Spyer had been of opposite sexes. Her challenge asks whether married gays should be able to claim the same exemption as married heterosexuals do.
The Supreme Court ruling is likely to affect estate taxes paid by only the most affluent of gays. But at stake is a bigger question: Are married gay couples entitled to the same federal tax and other benefits as married heterosexuals?
A ruling is expected by the end of June.
More broadly, however, if the court strikes down DOMA, married gay couples would likely be able to file their income tax returns jointly in states that allow gay marriage - a prospect with ramifications as complex as the tax code itself.
ESTATE TAX IMPACT
In bringing her case to the Supreme Court, Windsor argues that DOMA violates the U.S. Constitution's guarantee of equal protection. DOMA backers say the law is valid.
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.
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.
Only 3,600 estates were subject to estate tax in 2012, according to government figures, while the richest 10 percent of Americans paid almost all of the estate tax collected, said the Tax Policy Center.