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Provision in deal raises taxes for many in D.C.

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The tax increases approved by Congress last week as part of a "fiscal cliff" compromise were supposed to hit only the wealthiest, but the bill also contained new limits on tax exemptions and deductions that are going to drive up taxes for many Washington-area families.

Lawmakers in both parties who backed the fiscal cliff deal pledged that only the taxes on those earning $400,000 a year and families making more than $450,000 would increase.

But a provision tucked into the bill will phase out the $3,800 personal exemption, known as PEP, and limit itemized deductions, including those for mortgage interest and charitable giving, for anyone making more than $250,000 or families making $300,000. The limits on deductions alone, known as Pease, after the congressman who created them, will cost families earning $300,000 about $500 more in taxes annually.

With federal employees in the Washington area earning an average of $120,000 and lawyers averaging nearly $190,000, according to Commerce Department data crunched by Bloomberg News, many area families will soon see their taxes rise.

"It's a hidden tax increase buried in there," Nick Kasprak, an analyst with the nonpartisan Tax Foundation, told The Washington Examiner.

Capitol Hill insiders say Democrats insisted on reinstating the PEP and Pease provisions, which were in effect between 1990 and 2001, as part of the fiscal cliff deal.

Adding those provisions allowed the White House to say it met President Obama's campaign pledge to raise taxes on anyone making $250,000 a year, a threshold that rose to $400,000 during negotiations with congressional Republicans.

"The limitation on deductions and exemptions was put in place at the $250,000 level for individuals and $300,000 for married at the insistence of the White House so that they could have the trophy of taxing people making over $250,000 as they had campaigned on," said Dean Zerbe, a former top GOP aide on the Senate Finance Committee who is now national managing director of alliantgroup, a tax services firm.

"It's a hidden way of raising our marginal tax rates," Kasprak said.

A couple earning $600,000 would not only see its income tax rate rise 3.6 percent but would pay an additional $3,600 because its deductions were limited.

Robert Baldassari of the accounting firm Matthews, Carter & Boyce, said the phase-out of the personal exemption could also hit couples hard.

It slashes each exemption a person can claim by 2 percent for each $2,500 earned above the $250,000 threshold.

A family earning $400,000, he said, would have to pay more than $1,000 in additional taxes annually. Even couples making an extra dollar above the $300,000 threshold would pay higher taxes, he said.

"They lose $6,000 of their personal exemption just by making $1 more," above the cutoff, Baldassari said.

Dee Hodges, president of the Maryland Taxpayers Association, said the added tax will be a particularly onerous burden on small-business owners.

"It's going to affect future expansion of employment in this country," Hodges said.

sferrechio@washingtonexaminer.com

sferrechio@washingtonexaminer.com

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Susan Ferrechio

Chief Congressional Correspondent
The Washington Examiner