Bigger Tax Bite for Most Households Under Senate Plan

The legislation, which still must overcome resistance exhibited on Tuesday by House Republicans, would grant most Americans an instant reversal of the income tax increases that took effect with the arrival of the new year. Only about 0.7 percent of households would be subject to an income tax increase this year, according to the Tax Policy Center, a nonpartisan research group in Washington. The increases would apply almost exclusively to households making at least half a million dollars, the center estimated in an analysis published Tuesday.

But the Senate’s decision not to reverse a scheduled increase in the payroll tax that finances Social Security, while widely expected, still means that about 77 percent of households would pay a larger share of income to the federal government this year, according to the center’s analysis.

The tax this year would increase by two percentage points, to 6.2 percent from 4.2 percent, on all earned income up to $113,700.

Indeed, for most lower- and middle-income households, the payroll tax increase would most likely equal or exceed the value of the income tax savings. A household earning $50,000 in 2013, roughly the national median, would avoid paying about $1,000 more in income taxes — but pay about $1,000 more in payroll taxes.

The timing and outcome of a House vote was unclear on Tuesday evening.

Sabrina Garcia, a 35-year-old accounting assistant from Quincy, Mass., who together with her husband made about $102,000 last year, said the payroll tax increase equated to “about $200 a month for my family.”

“That’s a lot of money for us,” Ms. Garcia said. “It means we will have to cut back.” She said in an e-mail exchange that she would most likely postpone buying a new computer. “And forget about being able to save money,” she added.

The deal would impose larger tax increases on those who make the most. It would raise taxes in two ways: by restoring limits on the amount of income affluent Americans can shelter from federal taxation, and by returning to a top marginal tax rate of 39.6 percent. The current rate is 35 percent.

For married couples filing jointly, the deduction limits apply to income above $300,000, while the top tax rate kicks in above $450,000. But both numbers are somewhat misleading, because “income” in this context is a technical term, referring only to the portion of income subject to taxation after exemptions and deductions.

Few households with actual incomes of less than half a million dollars would face a tax increase. The Tax Policy Center calculated that less than 5 percent of families earning $200,000 to $500,000 would actually pay more.

The size of those increases would be much smaller than President Obama originally proposed. The net effect, according to the center’s estimates, is that the top 1 percent of households would see an average income tax increase this year of $62,000 rather than $94,000. “The high-income people really are doing very well in this compared to what the president wanted to do,” said Roberton Williams, a senior fellow at the Tax Policy Center.

The Senate deal would impose fewer limits on deductions than the White House plan. It would also tax income from dividends at a flat rate of 20 percent, rather than the same marginal rate as earned income. And there is another important point, often misunderstood: Affluent households would pay the new 39.6 percent rate only on income above $450,000. They and everyone else would still pay lower rates on income below that threshold.

Households making $500,000 to $1 million would pay an additional $6,700 in taxes on average. Those making more than $1 million would pay an additional $123,000 on average.

Article source: http://www.nytimes.com/2013/01/02/business/economy/a-bigger-tax-bite-for-most-households-under-senate-plan.html?partner=rss&emc=rss