Unless Congress acts before the end of the year to renew the law the federal estate tax will disappear for one year in 2010 before returning with a much higher tax rate in 2011. Congress is currently rushing to modify the donut-hole in the current law, by passing a temporary extension of the current law.

But, unless additional changes are made to it, the law will continue to place a much higher burden on the surviving spouse of a gay or lesbian couple, a new report from Williams Institute finds.

“As Congress turns to legislation in December to address the estate tax before it disappears in 2010, it should address these inequalities for same-sex couples and their families,” said Michael D. Steinberger, the author of the study. He is quoted in a statement from Williams Institute.

A same-sex survivor is assessed an average of $3.3 million more in taxes upon the death of a spouse than similarly-situated different-sexed married couples, according to the report.

“Regardless of your views about this tax, it is a costly implication of legal discrimination against gay and lesbian couples,” said Michael D. Steinberger, the author of the study.

The estate tax sometimes referred to derisively as a “death tax”—especially by Republican politicians who campaign for its outright repeal.

Even in death, same-sex couples face extra tax burden, study finds [contd.]

The tax is accessed to heirs after a wealthy American dies, but the law generally allows married heterosexuals to transfer unlimited assets to their spouses at death, as long as the spouse is a US citizen. Because the federal government refuses to recognize same-sex marriages, however, married lesbians and gay men find it far more difficult to pass on their wealth to their partners and children after their death.

Only a small fraction of estates are large enough to be subject to the tax. The current law exempts the first $3.5 million of an individual's estate, and then taxes the value above that at a maximum rate of 45 percent, Reuters reports.

Unless Congress acts by year-end to renew the law, the tax disappears entirely for 2010 before reverting to an exemption for only the first $1 million of the estate with a top rate of 55 percent above that level, Reuters reports.

The estate tax penalty will cost same-sex couples $237 million in 2009 and nearly $620 million in 2011, if the exclusion limit falls back to $1 million, according to the Williams study.

But Steinberger notes, “Even in 2010, when the estate tax is currently slated to be repealed, federal law allows different-sex married couples to shelter an additional $3 million in capital gains when a partner dies.”

A change in the way capital gains taxes are assessed on bequeathed assets could have a significant effect on same-sex couples in 2010, Steinberger concludes in his report.

The estate tax law also includes exemptions designed to help the owner of a family business or family farm pass the business along to his or her children or spouse’s children, even if the deceased owner was not a legal guardian of the spouse’s children. A child of a lesbian or gay man, however, can take the same deduction only if from a legal parent.

“These penalties are huge for the individual families who must bear their burden and represent yet another economic disadvantage for same-sex couples with small businesses,” said Steinberger.

If the tax is not renewed before year’s end, the the US Treasury stands to lose billions of dollars in taxes it receives annually from the existing tax, according to Reuters. But Williams Institute notes that the loss to federal tax revenue of equalizing the treatment of same-sex couples would be less than one twentieth of one percent (.05%) of total federal government revenue.

Williams Institute is a national think tank at UCLA Law, the Williams Institute produces independent research and scholarship meant to advance sexual orientation law and public policy.

Source: Estate tax debate imminent in Congress | Politics | Reuters
Report: Estate Tax Burden Falls Disproportionately on Same-Sex Couples | Williams Institute press release