CITYWIDE — On Dec. 31 as people across the country rang in the new year, tax professionals had one eye on the festivities and a nervous eye on Washington D.C. where lawmakers were scrambling to finalize changes to the federal tax code.

If they failed to come to some kind of deal, the United States would go over the much-trumpeted “fiscal cliff,” a vicious mix of tax hikes and spending cuts that many economists feared would push the country back into recession.

Ed Mofrad wasn’t worried.

“They always manage to reach a deal at the last minute,” said Mofrad, owner and CPA of Mofrad Financial Solutions and member of the Santa Monica Chamber of Commerce. “It’s like a soap opera, at the last minute, there’s a save. It’s part of American politics, and it happens every time.”

At the end of the day, the vast majority of tax cuts brought in under the George W. Bush administration were made permanent, protecting middle class families from severe hikes in their federal income taxes.

In fact, unless you’re one of the upper crust, almost nothing will change in terms of your federal income taxes, Mofrad said.

“Most people who make under $400,000 if it’s a single filing or married filing joint making under $450,000 won’t be affected,” Mofrad said. “Income tax rates go up for people in those thresholds.”

That doesn’t just hold for income tax thresholds, which will go up from 35 percent to 39.6 percent for some of the most wealthy.

They will also be hit by an increase in the capital gains tax, a tax which came under much scrutiny during the 2012 presidential election when it was revealed that multi-millionaire Mitt Romney paid under 15 percent a year, largely because his income accrued from investments.

Those rates will go up from 15 percent to 20 percent for those same high-earners, Mofrad said.

People earning between $300,000 and $350,000 will see some changes in personal exemptions, what Mofrad describes as the amount deducted for “bread and butter” expenses like cost of living.

Families with children looking toward college can look forward to a break on their taxes, which would have gone up had certain aspects of the 2009 American Recovery and Reinvestment Act, commonly called the stimulus bill, expired.

There’s a five-year extension on certain tax breaks on college tuition costs and the child tax credit, which impacts Santa Monica families a lot, Mofrad said.

How much some of the changes on the very wealthy will filter through the community is less clear.

It’s hard to know just how many Santa Monicans make $400,000, the cut off where many of the most expensive tax hikes take place.

According to census data, of the 47,181 households in Santa Monica, 11.5 percent make over $200,000 per year, but it doesn’t get more specific.

Those charts show that a large concentration of Santa Monica households, 42.8 percent, fall within a range between $50,000 and $149,999, whereas 38.7 percent bring in below $50,000 per year.

What will hit home for many of those households is a 2 percent increase in Social Security taxes taken directly out of paychecks.

That will bump up from 4.2 percent to 6.2 percent, and will take a noticeable bite out of people’s earnings, said Jim Medlock, director of education and training at the American Payroll Association.

“Everyone will see a decrease in their net pay because of the increase in Social Security,” Medlock said.

To show the impact, Medlock shared examples he used in a recent training seminar.

A single person making $39,000 a year would see a $15 per week increase in the amount of social security taxes they pay, whereas a person in the same situation making $101,400 a year would see a net increase of $39 in taxes per week.

According to the Tax Policy Center, a nonpartisan thinktank, that equates to $442 per year from a person making between $30,000 and $40,000 per year and $813 per year for those between $50,000 and $75,000.

Employers will not see any change — while employees got the 2 percent break in 2011, their bosses continued to pay the full 6.2 percent.

Yvette George, who was visiting the Third Street Promenade from her native Texas, just got the news today from her company’s human resources department. It will impact her, even though legislators had maintained that the tax hikes wouldn’t hit the average American, she said.

“It’s frustrating,” George said. “I don’t think Congress thought this through.”

She’s not the only one put out.

Many of these changes in tax policy are coming into play very quickly, faster, in fact, than many businesses can handle.

As of last week, Mofrad didn’t have the forms he needed to get cracking on his clients’ taxes just as the big tax season push begins.

“It’s mind boggling,” Mofrad said. “Laws were passed into the new year and in fact things happened so swiftly that our software company has not been able to keep up.”

The changes in payroll taxes and federal tax withholding needed to be in place in time for January paychecks, even as the Internal Revenue Service, or IRS, was busy cranking out new numbers for businesses to use.

In some cases, businesses used old tables because newer, more accurate ones had not yet been released, Medlock said.

“I’m aware of some organizations that downloaded the first set of withholding tables, implemented them into withholding and processed payroll on Wednesday and discovered Thursday morning that the IRS put out a second set of tables with considerably lower federal tax withholding,” Medlock said.

Santa Monica taxpayers will see another bite into their checkbooks from Proposition 30, a measure passed in Nov. 2012 to raise money for education in California.

That includes a one-quarter percent increase in the sales tax, but also hits the wealthiest Californians — in this case making over $250,000 and above — with an additional tax increase for seven years, Mofrad said.


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