Only the most affluent American households will face higher
income tax rates this year under the deal passed by Congress on
Tuesday, but about 77 percent of households will pay a larger share
of income because the deal does not extend a 2-year-old break on
The legislation grants 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 are subject to an income tax increase this year, according to the Tax Policy Center, a nonpartisan research group in Washington. The increases apply almost exclusively to households making at least half a million dollars, the center estimated.
But the Senate's decision not to reverse a scheduled increase in the payroll tax that finances Social Security, while widely expected, means that tax will increase by 2 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 most likely equals or exceeds the value of the income tax savings. A household earning $50,000 in 2013, roughly the national median, will avoid paying about $1,000 more in income taxes - but still pay about $1,000 more in payroll taxes.
The deal imposes larger tax increases on those who make the most. In fact, more than 90 percent of the tax increases will fall on households with income of $1 million or more, economist Roberton Williams of the Tax Policy Center told The Wall Street Journal.
The measure raises taxes two ways: by restoring limits on the amounts of income affluent Americans can shelter from federal taxation and by restoring a top marginal tax rate of 39.6 percent, up from 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 will face a tax increase. The Tax Policy Center calculated that fewer than 5 percent of families earning $200,000 to $500,000 will actually pay more.
The size of those increases are much smaller than President Barack Obama originally proposed. The net effect, according to the center's estimates, is that the top 1 percent of households will 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 Williams, a senior fellow at the Tax Policy Center.
The measure that was passed imposes fewer limits on deductions than the White House had proposed. But the measure revived the "Pease" provision, a complex limitation on itemized deductions. Under the bill, it would eliminate as much as 80 percent of deductions for couples above the $300,000 threshold, and singles above $250,000, The Wall Street Journal reported. The provision, named after former Rep. Donald Pease of Ohio, affects all deductions, including charitable donations and mortgage interest.
It also taxes income from dividends at a flat rate of 20 percent, rather than the same marginal rate as earned income. And there's another important point, often misunderstood: Affluent households will pay the new 39.6 percent rate only on income above $450,000. They and everyone else will still pay lower rates on income below that threshold.
Households making $500,000 to $1 million will pay an additional $14,812 in taxes on average. Those making more than $1 million will pay an additional $170,341 on average.
Changes in the estate tax also will benefit affluent families. The tax will not apply to the first $5 million of an inheritance, extending the current exclusion rather than lowering it to the $3.5 million threshold that Obama initially favored. However, wealth above that amount will be taxed at a rate of 40 percent rather than the previous rate of 35 percent.
The Obama administration won a five-year extension of tax breaks for lower-income families, including the child tax credit and earned- income tax credit. Those credits eliminate income tax liability for many lower-income families. In many cases, the government makes a direct payment to the family to help offset the burden of payroll taxation - up to $1,000 a child under the child credit and up to $5,900 total under the earned-income credit.
The measure also restores unemployment benefits for about 2 million Americans. People who can't find work, and already have received government checks for the standard period of 26 weeks, have been able to stay on the rolls for up to an additional 47 weeks. But financing for that program, which is aimed at the states with the highest unemployment rates, expired Saturday. Under the terms of the deal, people who are eligible will receive any missed benefits retroactively.
The deal also includes new rules for the alternative minimum tax, which this year threatened to impose higher taxes on roughly 30 million households. The tax was created in the 1960s to set a lower limit on the taxes paid by the most affluent households, but the eligibility threshold was not indexed to inflation, so it theoretically encompasses a larger share of households with each passing year. Congress has repeatedly passed short-term increases in the threshold; the new measure makes those increases automatic.
This story was compiled from reports by The New York Times and McClatchy-Tribune News Service.
Payroll tax increase
The payroll tax that finances Social Security will increase to 6.2 percent from 4.2 percent on all earned income up to $113,700. Households earning about $50,000 - about the national median - will pay an additional $1,000 in payroll taxes this year.
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