15 Income Tax changes to plan for in 2016

January 31, 2016

  1. Tax Day is April 18. – The Washington, D.C., holiday of Emancipation Day is on Friday, April 15, 2016. Under federal law, the tax deadline gets extended when it falls on a holiday or weekend, and so the tax deadline for most taxpayers will be the following Monday, April 18.
  2. Tax penalties related to Obamacare are going up again. – Affordable Care Act penalties: For 2016, there is an increased penalty for not having health insurance. The penalty is currently $285 per adult, or 2 percent of income above the filing limit for 2015. In 2016, those penalties get much steeper, costing taxpayers $695 or 2.5 percent of income above the filing limit. The maximum family penalty for 2016 is $2,085, up from $975 in 2015.
  3. Tax brackets are rising slightly. – Most of the tax brackets that govern different classes of taxpayers are adjusted for inflation. For 2016, these bracket amounts are rising by roughly 0.4%.
  4. Standard deductions are going up for head-of-household filers. – Standard deductions remain the same, except for head of household filers, who will see an increase of $500 to $9,300.
  5. Personal exemptions are rising. – The personal exemption that taxpayers are entitled to take on their tax returns will go up by $50 in 2016. That will give everyone an exemption amount of $4,050.
  6. Contribution limits on health savings accounts are going up. –  Health savings accounts let 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.
  7. The Earned Income Credit is rising. – The maximum allowable Earned Income Credit will go up modestly in 2016. For those with three or more qualifying children, the maximum credit will rise to $6,269, up $27. Those with two children will get a maximum $5,572, which is up $24 from 2015, while one-child families can get up to $3,373, $14 more than last year. Those without children get just a $3 bump and can claim up to $506 for 2016.
  8. The exemption from AMT is higher. –   The alternative minimum tax has struck a growing number of taxpayers, making the exemption amount more important than ever. Single taxpayers will see their AMT exemptions go up $300 in 2016 to $53,900, while joint filers will see a $500 boost to $83,800.
  9. The estate tax exemption is heading upward. –  The lifetime exemption amount for the gift and estate tax is tied to inflation, and it is slated to rise next year as well. The exemption amount will rise to $5.45 million, up $20,000 from 2015. The limit applies to estates of those who pass away in 2016.
  10. Spouse without 401k plan. –  For those not covered by a workplace retirement plan but married to someone that is covered, the deduction phase-out for an IRA contribution will increase by $1,000 in 2016 to between $184,000 and $194,000.
  11. Roth IRA contributions – For Roth IRA contributions the AGI (adjusted gross income) phase-out range has also increased by $1,000. Up to $184,000 and $194,000 for those filing jointly and to $117,000 and $132,000 for those filing single or head of household.
  12. Estate taxes Exemption rise slightly –Estates of decedents will have an exemption of $5,450,000 in 2016, up from $5,430,000 for those who passed in 2015.
  13. Research and Development tax credit is now permanent – The Research and Development tax credit is now permanent and beginning with this year, small businesses will also be entitled to use this credit to offset their alternative minimum tax liability.
  14. Section 179 Depreciation becomes permanent. – The deduction for the cost of depreciable assets of up to $500,000 on purchases up to 5 million dollars made by small businesses (businesses with under 50 million dollars in gross revenue) is allowed in the year of purchase. This is now a permanent provision under IRC Section 179 and the amounts will be indexed for inflation in future years.
  15. Other tax provisions could change if not renewed. -Nearly every year, lawmakers wait until the last minute to renew popular tax breaks, such as charitable distribution from IRAs, state sales tax deductions, teachers’ write-offs for classroom supplies, and deductions for private mortgage insurance. As of early December, these provisions hadn’t yet been renewed for 2015, but typically, lawmakers renew them retroactive to the beginning of the year. The same is likely in 2016 unless an extension provides for two years of relief rather than just one.