Tax Changes for 2016

Tax Brackets

For 2016, the 10%, 15%, 25%, 28%, 33% and 35% brackets for ordinary income reflect an inflation adjustment.

The top bracket of 39.6% applies if taxable income exceeds:

  • $415,050 for single taxpayers
  • $441,000 for heads of households
  • $466,950 for married taxpayers filing jointly and qualifying widows and widowers
  • $233,475 for married taxpayers filing separate returns.

Capital Gains and Qualified Dividends

Depending on your filing status, taxable income, and how much of your taxable income consists of qualified dividends and eligible long-term gains, qualified dividends and long-term capital gains may entirely escape tax under the 0% rate, or be subject to capital gain rates of 15% or 20%.

The 20% capital gain rate has the same taxable income thresholds as the 39.6% ordinary income rate:

  • $415,050 for single taxpayers
  • $441,000 for heads of households
  • $466,950 for married taxpayers filing jointly and qualifying widows and widowers
  • $233,475 for married taxpayers filing separate returns.

The 0%, 15%, and 20% rates do not apply to long-term gains on the following: Collectibles (taxed at 28%), the taxed portion of small business stock (taxed at 28%), unrecaptured real estate depreciation (taxed at 25%).

Individual Health Care Mandate

You are required to have minimum essential health coverage through:

  • an employer plan
  • a government program, or
  • other plan

Penalty:

If you do not have minimum essential health coverage, you will pay a penalty, unless you are exempt.

The penalty amount for 2016 is the higher of:

  1. 2.5% of household income above your filing threshold, or
  2. $695 per person in your household ($347.50 per dependent child under age 18),

up to a maximum of $2,085 (the maximum penalty in 2015 was $975).

Premium Tax Credit

There is a premium tax credit available to help people with modest means pay premiums for coverage obtained from a government exchange (Marketplace). Eligibility for this advanceable, refundable tax credit depends on your household income and other factors.

Form 8962, Premium Tax Credit (PTC):

If you claimed the premium in advance when you obtained coverage, you have to reconcile what you already applied toward your premiums with what you are actually entitled to. You report the difference on Form 1040, Line 46 as an additional tax. Complete Form 8962 if you received the premium in advance and attach it to your return. See the instructions for Form 8962.

If you did not receive the credit in advance, but are eligible for a credit, you can claim it on your return. Complete Form 8962.

If you do not claim the premium tax credit and qualify for Trade Adjustment Assistance (TAA), you may qualify for the health coverage tax credit of 72.5% of the premiums.

First-year expensing (Section 179) and Bonus Depreciation

For qualifying property placed in service in 2016, first-year expensing is allowed up to a limit of $500,000. The limit begins to phase out if the total cost of qualifying property exceeds $2,010,000.

Section 179 Deduction Phase-out:

If the cost of qualifying property placed in service in 2016 is more than $2,010,000, you reduce the $500,000 expensing limit dollar-for-dollar for each dollar the cost of qualifying property exceeds $2,010,000 (but not below zero).

For example, if you place machinery in service during 2016 costing $2,100,000, the $500,000 deduction limit is reduced by $90,000 to $410,000.

If the cost of the property was $2,510,000 or more, you could not take the Section 179 deduction because the $500,000 deduction limit would be completely phased out.

Bonus Depreciation:

The bonus depreciation rate for 2016 is 50%. Bonus depreciation is also called a Section 168(k) allowance and a special depreciation allowance.

Standard Deduction

Your standard deduction depends on your filing status.

  • Married Filing Joint Return: $12,600
  • Qualifying Widow or Widower: $12,600
  • Head of Household: $9,300
  • Single: $6,300
  • Married Filing Separately: $6,300
  • Dependents - minimum deduction: $1,050

Additional Standard Deduction:

Individuals at least 65 or blind may claim the additional standard deduction. This is an amount that is added to the regular standard deduction to provide a larger deduction.

If you turned 65 on January 1, you are considered to be 65 as of December 31 of the previous tax year. For example, if you turned 65 on January 1, 2017, you are considered to be 65 as of December 31, 2016 and would be eligible to claim the additional standard deduction that applies to age.

Complete Blindness:

To be eligible for the additional standard deduction for blindness, you must be completely blind as of December 31. The January 1 exception discussed above for age does not apply to blindness.

Partial Blindness:

To claim the additional standard deduction if you are partially blind as of December 31, you will need to get a letter from your eye doctor certifying that you cannot see better than 20/200 in your better eye with lenses or that your filed of vision is 20 degrees or less. If your eye doctor believes your vision will never improve beyond these limits, this fact should be stated in the letter.

Additional Standard Deduction:

  • Married: amount allowed for each spouse - filing jointly or separately:
    • $1,250 for each spouse age 65 or older
    • $1,250 for each spouse who is blind

Example:

If both spouses are 65 and both are also blind, the additional standard deduction would be $5,000 computed as follows:

  • $1,250 x 2 = $2,500 for age, PLUS
  • $1,250 x 2 = $2,500 for blindness, EQUALS
  • $5,000
  • Qualifying Widow/Widower:
    • $1,250 ($2,500 for age and blindness)
  • Single or Head of Household:
    • $1,550 ($3,100 for age and blindness)

Personal Exemptions

For 2016, each allowable exemption is $4,050, which is subject to a phaseout.

Phaseout of Exemptions for 2015:

If your 2016 filing status is - Phaseout applies if AGI exceeds - Exemptions Phased Out Completely if AGI exceeds -
Married filing jointly or Qualifying Widow/widower $311,300 $433,800
Head of household 285,350 407,850
Single 259,400 381,900
Married filing separately 155,650 216,900

The above Adjusted Gross Income phaseout thresholds for exemptions also apply to the phaseout of itemized deductions claimed on Schedule A (Form 1040), but there is no phaseout of deductions for the following:

  • Medical expenses
  • Investment interest
  • Casualty and theft losses
  • Gambling losses.

Other itemized deductions are reduced by 3% of adjusted gross income exceeding the applicable threshold, but the total reduction cannot exceed 80% of the deductions.

Adoption Expenses

For 2016, the limit on the adoption credit as well as the exclusion for employer-paid adoption assistance is $13,460. The benefit phaseout range is modified adjusted gross income between $201,920 to $241,920.

Alternative Minimum tax (AMT) Exemption and Tax Brackets

The AMT exemptions, exemption phaseout thresholds, and the dividing line between the 26% and 28% AMT brackets are adjusted for inflation. The 2016 AMT exemptions (prior to any phaseout) are:

  • $83,800 for married couples filing jointly
  • $83, 800 Qualifying widows and widowers
  • $53,900 for single persons
  • $53,900 for heads of households
  • $41,900 for married persons filing separately

Saver's Credit

The adjusted gross income (AGI) brackets for the 10%, 20%, and 50% credits are increased for 2016.

No credit is allowed when AGI reaches:

  • $30,750 for single taxpayers
  • $46,125 for heads of households
  • $61,500 for married persons filing jointly

Annual Gift Tax Exclusion and Gift Tax and Estate Tax Exemption

  • For 2015 and 2016 the annual gift tax exclusion is $14,000 per donee for gifts of cash or present interests.
  • The basic exemption amount for 2016 gift tax and estate tax purposes is $5,450,000.
  • The top tax rate remains at 40%.

Deduction Limits for Long-Term Care Premiums

The maximum amount of age-based long-term care premiums that can be included as deductible medical expenses for 2016 (subject to the 7.5% if 65 or older or 10% AGI floor, if under 65) is:

  • $390 if you are age 40 or younger at the end of 2016
  • $730 for those age 41 through 50
  • $1,460 for those age 51 through 60
  • $3,900 for those age 61 through 70
  • $4,870 for those over age 70

Foreign Earned Income and Housing Exclusions

For 2016, the maximum foreign earned income exclusion is $101,300. The limit on housing expenses that may be taken into account in figuring the housing exclusion is generally $30,390, but the limit is increased by the IRS for high cost localities.

Mortgage Interest Limit for Unmarried Co-owners

An appeals court held that if unmarried individuals co-own a residence, each co-owner can deduct interest on acquisition debt of up to $1 million and home equity debt up to $100,000. This decision disagreed with the Tax Court and IRS view that the $1.1 million debt limit must be divided among the co-owners. The IRS has agreed to follow the appeals court decision.

Basis of Property Reported on Estate Tax Return

Executors filing estate tax returns after July 31, 2015 must report the date-of-death value of property included in the gross estate to the IRS and to the heirs. The heirs will be subject to a penalty if on a later sale of the property, they claim a basis for the property that exceeds the amount that had been reported to the IRS by the executor.

Self-employment Tax and Deduction for Portion of Self-employment tax

  • On Schedule SE for 2016, self-employment tax of 15.3% applies to earnings of up to $118,500 after the earnings are reduced by 7.65%.
  • The 15.3% rate equals 12.4% for Social Security (6.2% employee share and 6.2% employer share) plus 2.9% for Medicare (1.45% employee share and 1.45% employer share).
  • If net earnings exceed $118,500, the 2.9% Medicare rate applies to the entire amount.
  • One half of the self-employments tax may be claimed as an above-the-line deduction on the front page of Form 1040. In other words, you don't have to itemize to claim this deduction.

Social Security Wage Base

  • For 2016, the maximum wage base for Social Security withholdings is $118,500.
  • The employee's share of the Social Security tax rate is 6.2% (50% x 12.4%), therefore, Social Security tax withholdings should not exceed $7,347 (6.2% x $118,500).
  • The employee's share of the Medicare tax rate of 1.45% (50% x 2.9%) is withheld from all wages regardless of amount.
  • The employer also pays 1.45% of each employee's total gross wages.

IRA and Roth IRA Contribution Phaseout; Rollover Limits

For 2016, the contribution limit for traditional IRAs and Roth IRAs is unchanged at $5,500, or $6,500 for those age 50 or older.

You can make only one IRA rollover (60-day rollover) every 12 months. There is no restriction on the number of direct transfers you can make each year.

Traditional IRA Deduction for Contributions:

The deduction limit for 2016 contributions to a traditional IRA is phased out for active plan participants with modified adjusted gross income (MAGI) between:

    • $61,000 and $71,000 for a single person or head of household,
    • or between $98,000 and $118.000 for married persons filing jointly and qualifying widows and widowers.

The phaseout range is $184,000 - $194,000 for a spouse who is not an active plan participant and who files jointly with a spouse who is an active plan participant.

Roth IRA Contributions:

The 2016 Roth IRA contribution limit is phased out for a single person or head of household with MAGI between $117,000 and $132,000 and for married persons filing jointly and qualifying widows and widowers with MAGI between $184,000 and $194,000.

IRS Mileage Allowance

2016 IRS Mileage Rates:

  • Business: 54 cents a mile
  • Medical: 19 cents a mile
  • Moving: 19 cents a mile
  • Charitable: 14 cents a mile

Health Savings Accounts (HSA)

The definition of a high-deductible health plan, which is a prerequisite to funding an HSA, means a policy with a minimum deductible for 2016 of $1,300 for self-only coverage and a maximum out-of-pocket cap on co-payments and other amounts of $6,550.These limits are doubled for family coverage ($2,600/$13,100).

The contribution for 2016 is capped at $3,350 for self-only coverage and $6,750 for family coverage.


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