Following are examples of how the deficit-reduction package now under consideration in Congress would affect taxpayers in six income categories. The examples are hypothetical and describe the impact of the tax provisions agreed to by congressional leaders and the White House on Wednesday. The package could still be modified before enactment:
1.An elementary school teacher who is studying part-time for a masterUs degree and makes $25,000 a year. He is single and rents an apartment in the District. Federal income tax impact: None.
2. A married couple, both young aides on Capitol Hill, with a combined income of $45,000 where one person earns $25,000 and the other earns $20,000. They have just bought their own home. Federal income tax impact: None.
3. A married couple with a combined income of $90,000. The wife is a lawyer at a big K Street firm who earns $70,000 a year and the husband is a part-time tennis pro who stays home much of the day with their two children and makes $20,000. They own their own home. Federal income tax impact: The woman would fall under the new, higher threshold for income subject to the 1.45 percent payroll tax devoted Medicare. Under existing law, she would have only paid the tax on income up to $54,300 next year. The budget agreement would extend this tax to income up to $125,000 a year. As a result, the woman will pay the 1.45 percent payroll tax on her entire income, costing the couple an additional $228 a year.
4. A married couple with a combined income of $500,000. The husband, a highly paid lobbyist, earns $325,000 a year and his wife, a computer programmer, earns $75,000 a year. They have $100,000 a year in capital gains. They have two children. Between personal exemptions, high local taxes, and the mortgage on a townhouse in Georgetown, they have $125,000 a year in deductions.Federal income tax impact: Both the husband and wife will pay more because of the higher cap on the 1.45 percent payroll tax for Medicare. Between them, an additional $91,400 of income is subject to the tax at an annual cost of $1,325 to the couple.Under the Pease plan to trim deductions, they would lose $12,000 in deductions and their total taxable income would rise from $375,000 to $387,000.There would be no change in the tax due on their $100,000 in capital gains.The tax due on the remaining $287,000 of income would be subject to the new 31 percent tax rate starting at $81,550. The new federal income tax bill would be $110,136.50, an increase of $5,136.50 over last year.The total increase in federal taxes would be: $6,461.50.
5. A radiologist who earns $100,000 a year in salary. She has $20,000 in deductions for interest and state and local taxes. She is unmarried and has no children.Federal income tax impact: Under the proposed tax package, she would receive one tax cut and one tax increase. She has a taxable income of $77,850Qher salary minus deductions and the $2,150 projected personal exemption. On $28,900 of that income, she receives a tax cut because the 33 percent marginal rate on upper income earners would be cut to 31 percent. She would save $578 as a result.But a greater portion of her income would be subject to the 1.45 percent payroll tax dedicated to Medicare. As a result she would pay an additional $663 for this tax.Her salary falls below the level at which the Pease plan would begin to trim deductions, so her deductions remain unchanged. Overall, her federal tax bill would increase by $85.
6. An investment banker who is married with two children and a house and earns $260,000 a year. He has $40,000 in deductions for state and local taxes and his mortgage. His spouse is not employed and they file a joint return.Federal income tax impact: This couple falls under the new RbubbleS in which their personal exemptions are phased out once their income rises above $150,000. Instead of having $8,600 in personal exemptions for themselves and the children, they have only $1,032 in personal exemptions.They also lose a portion of their deductions under the Pease plan. They would lose 3 percent of the income in excess of $100,000, or $4,800. As a result their deductions would be cut to $35,200. Their total taxable income would be $223,768, an increase of $3,768. They receive a tax cut on a certain part of his income to 31 percent from 33 percent. They receive a tax increase on another part of his income from 28 percent to 31 percent. The net effect would be an income tax increase of $935.In addition, the financier would have an increased portion of his income subject to the 1.45 percent payroll tax for Medicare and would thus pay an additional $1,025.Overall, their tax bill would increase by $1,960.