A lot of Washingtonians may need to start looking for an accountant.
Local residents will be paying Uncle Sam more in 2013, between the 2 percentage-point increase in the payroll tax and two lesser-known provisions buried in the "fiscal cliff" deal
that reduce exemptions and deductions for the area's wealthier residents.
Single taxpayers making at least $250,000 and couples making at least $300,000 will be hit by both the personal exemption phaseout, or PEP, and the Pease provision. The former will gradually reduce the amount of money taxpayers can deduct for themselves and their dependents, while the latter will decrease some taxpayers' itemized deductions.
|Tax hits after fiscal cliff provisions|
|Couple making $301,000||Couple making $350,000||Couple making $400,000||Couple making $450,000|
|Personal exemption phaseout, no children||$51.48||$1,029.60||$2,184.00||$3,088.80|
|Personal exemption phaseout, one child||$77.22||$1,544.40||$3,276.00||$4,633.20|
|Personal exemption phaseout, two children||$102.96||$2,059.20||$4,368.00||$6,177.60|
|Personal exemption phaseout, three children||$128.70||$2,574.00||$5,460.00||$7,722.00|
|Pease provision (deductions)||$9.90||$495.00||$1,050.00||$1,782.00|
"Sometimes the politicians will say we haven't raised the tax rates at all; technically that's true, but their taxes will go up because they'll be losing some of these deductions," said Fairfax County tax expert Robert Baldassari. "It's almost an underhanded way of increasing taxes without saying you're increasing taxes."
In the Washington area, 198,907 households -- about 14.7 percent -- bring in more than $200,000 a year, according to census data.
In Maryland, which has the highest household median income in the nation at $72,419, a married couple who make a combined $350,000 and have two children will be forking out $8,102.20 more in taxes this year.
That's because they are paying 2 percent more in payroll taxes that go to Social Security, can exempt $6,240 less for themselves and their children, can write off $1,500 less in itemized deductions and are paying a higher tax rate in Maryland.
Their Maryland tax rate is now 5.75 percent, compared with 5 percent when they paid their 2011 taxes. The increase on single filers earning more than $100,000 and couples earning more than $150,000 will affect about 22 percent of Montgomery County filers and 10 percent of Prince George's County filers.
Calculating the PEP relies on personal exemptions, expected to be $3,900 each in 2013, so a family of four could ordinarily deduct $15,600. The PEP decreases the exemption by 2 percent for every $2,500 above the $250,000/$300,000 threshold.
A family of four making between $300,000 and $302,500, then, would lose $312 in deductions. That money would become taxable income, resulting in a tax increase of $102.96. A family of four making between $362,500 and $365,000 would see a $2,574 tax increase, and that same family making more than $422,500 -- when 100 percent of exemptions disappear -- would see a $6,177.60 increase.
"If you have a lot of kids, it's adding a lot to your taxable income," said Roberton Williams, a senior fellow at the Urban Institute. "High-income, big families will get hit harder by this."
The Pease provision, named for its creator, the late Rep. Donald Pease, D-Ohio, reduces itemized deductions by 3 percent of the difference between a taxpayer's income and the $250,000/$300,000 baseline. A single taxpayer making $275,000 would see the amount of itemized deductions he could write off drop by 3 percent of $25,000, or $750. That money would then become taxable income, making for a $247.50 tax increase.
Both provisions use adjusted gross income, or total income without specific payments like moving expenses and student loan interest, for their baseline. AGI does not factor in itemized deductions such as mortgage interest and money given to charity. They were in the tax code until 2001, when they were phased out between then and 2010 as part of the Bush tax cuts.
Meanwhile, the more well-known payroll tax increase, which funds Social Security, hits all workers. At the beginning of the year, the payroll tax rate reverted to 6.2 percent on the first $113,700 in individual wages. It had been 4.2 percent for the past two years as part of the federal stimulus package.