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2012 Tax Changes in Washington DC - Important Updates and Amendments

Learn about the significant 2012 tax changes in Washington DC, including combined reporting, double-weighted sales factor, minimum franchise tax increase, individual rate increase, and more.

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2012 Tax Changes in Washington DC - Important Updates and Amendments

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  1. District of ColumbiaOffice of the Chief Financial OfficerOffice of Tax and RevenueWashington DC Economic Partnership Stephen M. Cordi Deputy Chief Financial Officer January 11, 2012

  2. 2012 Tax Changes • During the last year, the Mayor and Council made a number of major changes in DC taxes as an important part of balancing the 2012 budget • These generally appear in the 2011 Budget Support Act for FY 2012

  3. Combined Reporting • By far the most important DC tax change has been the enactment of combined reporting beginning with the current tax year • DC has been an easy target for intangible holding companies, transfer pricing schemes and the like • Legislation is effective for tax year 2011

  4. Combined Reporting -2 • The legislation is largely based on the MTC model statute as modified by West Virginia • The legislation was the subject of some last-minute taxpayer–friendly amendments • We are currently in the process of publishing guidance to implement combined reporting and revising our franchise tax returns

  5. Double-Weighted Sales Factor • For business franchise taxes, apportionment is changed to property, payroll and double-weighted sales • Previous law provided for equal-weighted 3-factor formula • Effective for tax year 2011

  6. Minimum Franchise Tax Increase • Effective for tax year 2011, the minimum franchise tax has been increased from $100 to $250 • For taxpayers with DC adjusted gross income of $1,000,000, the minimum tax has increased to $1,000 • Applies to both corporate in unincorporated business franchise taxes

  7. Individual Rate Increase • Beginning with tax year 2012, an additional income tax bracket of 8.95% for taxpayers with DC taxable income over $350,000 has been added • Applies to estates and trusts as well

  8. Out of State Bonds • DC has repealed its exemption for the interest on out of state tax exempt bonds • Effective for bonds acquired after December 31, 2011, including bonds held indirectly through mutual funds • By its terms , it does not include bonds issued by the Washington Metropolitan Airport Authority • OTR has a notice out on this one - 2011-6

  9. Limitation on Itemized Deductions • New limitation applies to itemized deductions for DC taxable income of $200,000 • Itemized deductions are to be reduced by 5% of the amount over $200,000 • Doesn’t include medical, investment interest or casualty losses • Effective for tax year 2011

  10. Withholding on Retirement Account Distributions • Legislation will require withholding of DC income taxes at the highest marginal rate from distributions from retirement accounts to DC residents if there is an IRS withholding requirement • Effective beginning January 1, 2012 • Clarifying legislation not enacted until December 22nd • Notice 2011-9 issued – telling providers to use their best efforts

  11. Increased Withholding • Effective January 1, 2012, employers are to remove the standard deduction from the withholding calculation • DC standard deduction is $4,000, so the additional w/h for each job ranges up to $340 for a taxpayer with DC income up to $40,000 • Intended to produce one-time windfall of $41 million and ongoing collection benefits

  12. Sales Tax on Cigarettes at Wholesale • DC has exempted sales of cigarettes at retail effective October 1, 2011 • At the same time, we’ve increased the stamp tax by 36 cents • This new “sales tax” portion of the cigarette stamp tax is adjustable annually on the basis of changes in the retail price of cigarettes • The object is to reduce tax leakage at the retail level & the amount of tax handled by small merchants

  13. Sales Tax on Security Services • The sales tax has been extended to armored car, private detective and security services • Modeled on Maryland law in effect since 1992 • Effective October 1, 2011 • Notice 2011-3

  14. Sales Tax Rate Increases • Sales tax on sales of alcohol for off-premise use increased from 9% to 10%, effective July 1, 2011 • Sales tax on charges for parking and storage of vehicles increased from 12% to 18%, effective October 1, 2011 • Existing general 6% rate, set to revert to 5.75% effective October 1, 2012, has been made permanent

  15. Contact Information • Tax Practitioner Hotline (202) 727-1435 • Main Call Center (202) 727-4TAX (4829) • Problem Resolution (202) 442-6348 • Collections Division (202) 724-5045

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