As is always the case with the IRS, there is good news and bad news with changes to the tax code for 2016. But unlike the rollercoaster of a stock market ushered in with the new year, the tax code changes are mostly minor, a reflection of mild inflation.
To be Biblical, the IRS giveth, but the IRS also taketh away. I said the same thing about this time last year, and (at the risk of sounding like a smart aleck) I’ll go out on a limb and predict the same thing for next year.
Here are a few of the changes:
- Affordable Care Act Penalties: This is an exception to the modest change theme. These penalties have grown more severe each year for those choosing not to buy qualifying health insurance. The penalties started at $95 per adult, or 1% of income above the filing threshold in 2014, but they rose to $285 per adult, or 2% of income above the filing limit in 2015. For 2016, penalties will rise again, hitting $695 per adult and $347.50 per child, or 2.5% of income. A family maximum will apply to the per-person amount, but the $2,085 amount is substantially higher than the $975 in 2015, and the $285 in 2014. Future penalty increases for 2017 and beyond are not set in stone as they will be tied to the Consumer Price Index. For a complete review of who will be penalized and how much, go here.
- Alternative Minimum Tax: The AMT was created in 1969 to ensure that very wealthy taxpayers paid their fair share in taxes. As incomes and inflation rose sharply during the years following its implementation, the AMT now ensnares millions of upper middle-class Americans. For 2016, the income threshold for individuals starts at $53,900 (up $300). For married couples filing jointly, the threshold begins at $83,800 (a $400 increase). For some strategies to deal with the AMT, see this Kiplinger article.
- Business Use of Automobile: This deduction went down after Jan. 1. The IRS bases this on a formula tied to the cost of operation of a business vehicle. For 2016, the rates are 54 cents per mile for business use (down from 57.5 cents for 2015), 19 cents per mile driven for medical or moving purposes (down from 23 cents) and 14 cents per mile driven in service of charitable organizations (no change).
- Tax Brackets: They are rising about 0.4 percent, adjusting for inflation. The cutoff for the highest bracket (39.6 percent) is $415,050 for single taxpayers (up from $413,200) and to $466,950 for married filing jointly (up from $464,850). You can see the complete brackets here.
- Exemptions: The personal exemption will increase from $4,000 to $4,050. The exemption begins to phase out at $259,400 for individuals and $311,300 for married couples filing jointly. The phase out ends at $381,900 and $433,800 for married couples filing jointly. Anyone who falls under the income limit is eligible to take advantage of the personal exemption.
- Estate Tax Exemption is Up: The lifetime exemption amount for the gift and estate tax is tied to inflation, and it has risen to $5.45 million this year, up $20,000 from 2015. The limit applies to estates of those who pass away in 2016.
- Personal Exemption: It increase by $50 this year to $4,050.
- Standard Deductions: The low inflation rate kept standard deductions for most taxpayers level in 2016, including the single, married filing jointly, and married filing separately statuses. For those who qualify as heads of household, the standard deduction will rise $50 to $9,300 in 2016.
- Health Savings Account Contributions: They are going up. This feature lets people with high-deductible health plans set money aside on a pretax basis to cover the costs of their health care. For 2016, the contribution limit for individual policies will remain at $3,350, but the maximum contribution for family policies will rise by $100 to $6,750. A catch-up contribution of $1,000 for those 55 or older will continue to apply.
- Social Security and Medicare: Because of low inflation, nothing changes with Social Security payroll taxes or benefits. However, Medicare Part B premiums went up for new enrollees in 2016 and for users not yet taking Social Security. The monthly cost is up at least $16.90, and more for large earners. Existing Social Security benefit recipients avoid the Medicare premium increase because of a law prohibiting Medicare increases when Social Security benefits are stagnant. The Centers for Medicare and Medicaid Services estimate about 30 percent of Part B users will pay the increased premium in 2016. More complete information can be found here.
- Retirement Contributions: Allowable contribution limits and deductions are unchanged for 2016.
For those with the procrastination gene, at least tax day will be later than normal this year – April 18. Washington, DC, celebrates Emancipation Day and it falls on Friday, April 15, so the deadline will fall on the next business day, Monday the 18th.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.