DC budget enacted with significant income tax changes

The DC Council recently adopted its annual budget, which contains numerous current and future tax changes. While most local coverage has focused on the so-called “yoga tax,” businesses and their owners need to be aware of other significant income tax changes in the budget, including reductions in the unincorporated and incorporated business franchise tax rate.

The changes in the budget will phase in over the next five years and some are contingent on revenue being available to offset the cuts. The budget heads to the mayor for approval and then is subject to congressional review.

The following changes will become effective Jan. 1, 2015:

  • The unincorporated and incorporated business franchise tax is reduced to 9.4 percent from 9.975 percent.
  • The legislation implements a “single sales factor” for apportioning income. This is designed to increase taxable income in the District as many companies have a large DC sales factor but relatively small property or payroll factors. As a result, companies operating in multiple jurisdictions can expect to see their DC income tax increase.
  • A lower individual income tax rate of 7 percent is established for those earning $40,000 to $60,000, down from 8.5 percent.
  • The standard deduction increases to $5,200 for singles, $6,650 for heads of household, and $8,350 for married couples.
  • The local earned income tax credit extends to single workers.
  • The 5.75 percent general sales tax extends to certain services, including health clubs, tanning salons, storage units, and car washes.
  • Passive investment vehicles, such as mutual funds, are exempt from the unincorporated business franchise tax.

The following changes will become effective in sequence once additional revenue becomes available to cover the cost:

  • The unincorporated and incorporated business franchise tax will fall to 8.5 percent from 9.4 percent. This reduction would take effect incrementally, sliding to 9.2 percent from 9.4 percent, then to 9 percent, 8.75 percent, and, eventually, 8.5 percent.
  • The threshold for the application of the estate tax will first rise to $2 million from $1 million and then to $5.25 million to conform to the federal level.
  • The rate on the new individual income tax bracket for those earning $40,000 to $60,000 will drop to 6.75 percent from 7 percent and, subsequently, to 6.5 percent.
  • An 8.75 percent individual income tax bracket will be created for those earning $350,000 to $1 million. The 8.95 percent bracket would remain in place for those earning more than $1 million.
  • The standard deduction and personal exemption will increase in increments over time to conform to the federal levels.

For more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.