2016 Tax Provisions for Individuals: A Review
Many of the tax changes affecting individuals and businesses for 2016, arose from the Protecting Americans from Tax Hikes Act of 2015 (PATH) which modified or made permanent numerous tax breaks (the so-called “tax extenders”). To complicate matters, some provisions were extended only through 2016, and are set to expire at the end of this year, while others were extended through 2019. With that in mind, here are some basic tax provisions for 2016, that individuals and families need to know.
Personal Exemptions
The personal and dependent exemption for tax year 2016, is $4,050.
Standard Deductions
The standard deduction for married couples filing a joint return in 2016, is $12,600. For singles and married individuals filing separately, it is $6,300, and for heads of household the deduction is $9,300.
The additional standard deduction for blind people and senior citizens in 2016, is $1,250 for married individuals and $1,550 for singles and heads of household.
Income Tax Rates
In 2016 the top tax rate of 39.6 percent affects individuals whose income exceeds $415,050 ($466,950 for married taxpayers filing a joint return). Marginal tax rates for 2016–10, 15, 25, 28, 33 and 35 percent–remain the same as in prior years.
Due to inflation, tax-bracket thresholds increased for every filing status. For example, the taxable-income threshold separating the 15 percent bracket from the 25 percent bracket is $75,300 for a married couple filing a joint return.
Alternative Minimum Tax (AMT)
For 2016, AMT exemption amounts are $53,900 for single and head of household filers, $83,800 for married people filing jointly and for qualifying widows or widowers, and $41,900 for married people filing separately.
Pease and PEP (Personal Exemption Phaseout)
Pease (limitations on itemized deductions) and PEP (personal exemption phase-out) limitations are indexed for inflation and affect taxpayers with income at or above $259,400 for single filers and $311,300 for married filing jointly in tax year 2016.
Flexible Spending Accounts (FSA)
A limitation of $2,550 applies to salary reduction contributions under a health Flexible Spending Account (FSA) for plan years that begin in 2016. The plan year refers to the period for which salary reduction elections are made and is often not a calendar year.
In the case of a plan providing a grace period (which may be up to two months and 15 days), unused salary reduction contributions to the health FSA that are carried over into the grace period for that plan year will not count against the $2,550 limit for the subsequent plan year.
Further, employers may allow people to carry over into the next calendar year up to $500 in their accounts, but aren’t required to do so.
Long-Term Capital Gains
In 2016, taxpayers in the lower tax brackets (10 and 15 percent) pay zero percent on long-term capital gains and qualified dividends. For taxpayers in the middle four tax brackets the rate is 15 percent and for taxpayers whose income is above $415,050 ($466,950 married filing jointly), the rate on both long-term capital gains and qualified dividends is capped at 20 percent.
Tax Credits
Adoption Credit
In 2016 a nonrefundable (i.e. only those with a lax liability will benefit) credit of up to $13,460 is available for qualified adoption expenses for each eligible child.
Child and Dependent Care Credit
If you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or someone incapable of self-care) in order to work or look for work, you may qualify for a credit of up to $1,050 (or 35 percent of $3,000) of eligible expenses.
For two or more qualifying dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible expenses. For higher income earners the credit percentage is reduced, but not below 20 percent, regardless of the amount of adjusted gross income.
Child Tax Credit
For tax year 2016, the child tax credit is $1,000. A portion of the credit may be refundable, which means that you can claim the amount you are owed, even if you have no tax liability for the year. The credit is phased out for those with higher incomes.
Earned Income Tax Credit (EITC)
For tax year 2016, the maximum earned income tax credit (EITC) for low and moderate income workers and working families increased to $6,269 (up from $6,242 in 2015). The maximum income limit for the EITC increased to $53,505 (up from $53,267 in 2015) for married filing jointly. The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children.
Education Expenses
Coverdell Education Savings Account
You can contribute up to $2,000 a year to Coverdell education savings accounts in 2016. These accounts can be used to offset the cost of elementary and secondary education as well as post-secondary education.
American Opportunity Tax Credit
For 2016, the maximum American Opportunity Tax Credit that can be used to offset certain higher education expenses is $2,500 per student, although it is phased out beginning at $160,000 adjusted gross income for joint filers and $80,000 for other filers.
Employer-Provided Educational Assistance
In 2016, as an employee, you can exclude up to $5,250 of qualifying post-secondary and graduate education expenses that are reimbursed by your employer.
Lifetime Learning Credit
A credit of up to $2,000 is available for an unlimited number of years for certain costs of post-secondary or graduate courses or courses to acquire or improve your job skills. For 2016, the modified adjusted gross income threshold at which the lifetime learning credit begins to phase out is $111,000 for joint filers and $55,000 for singles and heads of household.
Student Loan Interest
In 2016, you can deduct up to the maximum of $2,500 in student-loan interest as long as your modified adjusted gross income is less than $65,000 (single) or $130,000 (married filing jointly). The deduction begins to phase above those income levels. This deduction is claimed as an adjustment to income, so you do not need to itemize your deductions to benefit from it.
Retirement
Contribution Limits
For 2016, the elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is $18,000 (same as 2015). For persons age 50 or older in 2016, the limit is $24,000 (including a $6,000 catch-up contribution). Contribution limits for SIMPLE plans remain at $12,500 (same as 2015) for persons under age 50 and $15,500 for anyone age 50 or older in 2016. The maximum compensation used to determine contributions increased to $265,000.
Saver’s Credit
In 2016, the adjusted gross income limit for the saver’s credit (also known as the retirement savings contributions credit) for low-and-moderate-income workers is $61,500 for married couples filing jointly, $46,125 for heads of household, and $30,750 for singles and married individuals filing separately.
Estate and Gift Taxes
In 2016, there is an exemption of $5.45 million per individual for estate, gift and generation-skipping transfer taxes, with a top tax rate of 40 percent. The annual exclusion for gifts of present interests is $14,000.
Please call us, if you need help understanding which deductions and tax credits can save you money on your taxes.