First, the bad news. Effective October 1, 2011, DC residents with taxable income above $350,000 in a tax year will be subject to a new 8.95% tax rate on that income. This is up from a top rate of 8.5% on income over $40,000. This rate will be effective for 4 years only, then expire.

Now, the good news. The higher rate was implemented as an offset to pay for delaying the taxation of out-of-state municipal bond income. Municipal bond income from any jurisdiction outside of DC was scheduled to be taxed in DC starting January 1, 2011. That income will now be taxed starting January 1, 2012, providing a one-year delay to the inevitable taxation of this income, and eliminating the need to adjust estimated taxes for 2011.

Mayor Vincent Gray will sign the emergency budget amendment as soon as it hits his desk.

UPDATE: 9/22/2011:  The new law changes the taxation of non-DC municipal bond income in one additional way.  Previously, the tax, when it took effect, applied to all non-DC municipal bond income.  With this new law change, the tax applies only to non-DC municipal bonds purchased after the effective date of January 1, 2012.  This "grandfathers" in existing bonds but creates additional complexity in determining which bonds are subejct to the new tax.