TAXPAYERS IN THE District of Columbia are in for a rude surprise if they have been counting on a completely tax-free return on All- Savers certificates and new IRAs. Unlike the federal government and the states of Maryland and Virginia, the District intends to tax interest on these investments at the full rate. This could result in a city tax liability of as much as $220 a couple for Washingtonians who have bought All-Savers certificates.
The situation is much more complicated with regard to IRAs. These new accounts, designed to encourage retirement savings, were originally available only to individuals not covered by private pension plans at work. Beginning this year, accounts can be set up by any working person. Each individual can deposit $2,000 a year and deduct that amount from federal income tax. The account draws interest that is not taxed by the IRS until funds are withdrawn after retirement. Maryland and Virginia grant the same tax breaks as the federal government. If you live in the District of Columbia, however, you will have to pay city income tax each year on both the IRA contribution and on the interest as it accrues. This is so even though money cannot be withdrawn from the account to pay the taxes without incurring a substantial penalty.
A resident of this city who sets up an IRA and remains in the District until he dies has some complicated bookkeeping to do. He pays city taxes on contributions and interest each year, but no city taxes as he withdraws the funds after retirement. Conversely, he pays no tax to the federal government on either contributions or interest while he is working, but must pay federal income taxes on the amounts he withdraws after retirement.
But it could be worse. Consider the far more difficult situations of the District resident who moves into Maryland or Virginia after he retires. Having paid District taxes on all this money during his working years, he now finds he must pay state taxes on the same money as it is withdrawn after retirement. If you are confused by the complication and inequity of this scenerio, you are not alone.
What is the remedy? The District should make its tax forms compatible with those of the federal government. There are now more than a dozen line items on the tax return--ranging from charitable contributions to certain pensions--that are taxed one way by the federal government and another way by the District. Using the same standards, as Maryland, Virginia and a majority of the states do, would greatly simplify the task of the District taxpayer. Conformity need not result in revenue losses if tax rates are adjusted to compensate for new deductions. While the mayor has withdrawn his initial support of the concept of conformity, Councilman John Wilson says his Committee on Finance and Revenue will consider it. District residents and financial institutions in this city should make their views known. The taxpayers are entitled to simplicity and equity.