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The Boston Globe

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Expiring payroll tax cut to hit everyone’s paycheck

Workers at every income level will see a small cut in their paychecks as a result of the tax package passed by Congress — about $822 a year for taxpayers earning between $50,000 and $75,000 a year.

The change, affecting the largest number of taxpayers, follows the expiration of a temporary 2 percent reduction in the Social Security payroll tax. President Obama had requested that the lower 4.2 percent rate be extended, but lawmakers declined.

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“That tax is going to hit everybody’s paycheck this week. That’s going to have an immediate impact on disposable income,’’ said James P. Angelini, associate professor of taxation and accounting at Suffolk University in Boston.

Despite its widespread impact, there was little appetite in Congress to extend the payroll tax holiday, in part, analysts said, because Social Security needs all the money it can get. Now workers will go back to paying 6.6 percent of their income — up to a new wage ceiling of $113,700 in 2013.

For the upper 1 percent of taxpayers, other changes will kick in, including the top tax rate increasing to 39.6 percent from 35 percent for married couples earning more than $450,000, and individuals earning above $400,000.

And those same top earners will pay higher rates on capital gains and dividends — a subject that gained attention during the election because that is how Mitt Romney and other wealthy investors earn much of their income. Their rate will now be 20 percent, while other taxpayers will continue to pay 15 percent.

Separately, Congress did not repeal another tax on higher-income people that Republicans had targeted: a 3.8 percent levy on investment income to help pay for the new health care law. That means taxpayers who earn at least $200,000, or $250,000 if married and filing jointly, will have to pony up yet more.

Massachusetts is one of the wealthiest states in the country, with high earners in the large finance and technology sectors, in particular. According to the IRS, there were 124,142 households and individuals reporting income between $200,000 and $500,000 in 2010. That group was spared the largest tax increases under the new rules; their tax bill will increase by $2,711, on average, according to the Tax Policy Center,, a nonpartisan research group.

But taxpayers earning over $1 million — more than 10,000 in Massachusetts — will see their taxes rise dramatically, by $170,341 on average, according to the Tax Policy Center. They will be most affected by new limits on exemptions and deductions that kick in for joint filers making more than $300,000. Estate and gift taxes are rising to 40 percent, from 35 percent ,but the first $5.12 million in inheritance will still be exempt, instead of a lower cutoff of $1 million.

Congress also made a permanent fix to the alternative minimum tax, a tool that has been imposed for many years to cap deductions for wealthy taxpayers, so that they do not escape taxes entirely. As part of the measure, lawmakers will have the alternative minimum tax thresholds rise with inflation.

“The alternative minimum tax generally hits around the $200,000 to $500,000 income level,’’ said Joseph Rosenberg, a specialist in federal tax policy at the Tax Policy Center. The main factors that set off the alternative minimum tax are state and local tax deductions, medical expenses, and personal exemptions, such as dependents, he said. About 4 million people will be subject to the alternative minimum tax at its new levels, compared with 31 million if Congress had not changed the rates.

There are other stimulus features that will help the middle class, including continuing a $1,000 child tax credit that was scheduled to be reduced by half, and preserving a $3,000 credit for child and dependent care. And parents can still get a tax credit of up to $2,500 annually toward college expenses for children.

Lawmakers did not touch the mortgage interest deduction that millions of Americans enjoy. However, economists believe the generous tax break, worth $100 billion a year, is likely to be in contention when Congress takes up the next round of debates on spending and revenues.

“The mortgage interest deduction as is presently written is not going to be affordable,’’ said Mark Muro, policy director of the Metropolitan Policy Program at the Washington-based Brookings Institution. “They are going to have to look for revenue somewhere, and this is somewhere they are going to look.”

Beth Healy can be reached at bhealy@globe.com. Jenifer
McKim and Todd Wallack of the Globe staff contributed to this report.

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