Income Tax Changes for 2016
At The Handy Tax Guy we like to provide our clients with helpful tax tips throughout the year to keep you informed with an ever changing tax code. This includes significant changes which takes effect in 2016 which will impact your 2017 tax return. Be sure to review our blog to stay informed and up to date on the latest news and tax tips.
Health Insurance Penalty
Part of the Affordable Care Act mandates that all Americans have health insurance. If you and your dependents are not covered for example through your employer or the healthcare marketplace (Obama care) then you will face a tax penalty as a result. In 2015, the penalties was 2% of your household income or $325 per adult and $162.50 per child under 18, whichever is greater. In 2016, the penalties will increase significantly to 2.5% of total household income, or $695 per adult and $347.50 per child under 18, whichever is greater. This can really add up for a middle class family of four. If you were not covered and paid a penalty on your 2015 tax return, make sure you get health insurance to avoid penalties in your upcoming tax return. Feel free to contact us for any questions or review the healthcare.gov website for more details.
Federal Income Tax Filing Deadline
The filing deadline for individuals in the 2016 tax year is Tuesday April 18, 2017. Don’t wait till the last minute. Contact us to file today. If you’d like more information regarding other critical tax deadlines, click here.
2016 Income Tax Rates
In 2016, taxable incomes above the amounts below will fall into the 39.6% tax bracket. (Click for more details)
|Married Filing Separately||$233,475|
|Head of Household||$441,000|
|Married Filing Jointly||$466,950|
Capital Gains Tax
A capital gains tax or (CGT) is a tax on capital gains. The profit realized on the sale of a non-inventory asset that was purchased at a cost amount that was lower than the amount realized on the sale. The most common capital gains are realized from the sale of stocks, bonds, precious metals and property. In 2016, the qualified dividends which income received will be taxed at the same rate as long-term capital gains. Learn More
|10% – 15%||An individuals in this tax brackets will pay 0% on eligible dividends on most capital gains.|
|25% – 35%||An individuals in this tax brackets will pay 15% on capital gains.|
|Above 35%||An individuals in the 39.6% bracket will pay 20%.|
Social Security and Medicare
In 2016, wages paid in excess of $200,000 for an Unmarried taxpayer and in excess of $250,000 for Married taxpayers will be subject to an extra 0.9% tax. The wage limit, or Social Security maximum remains at $118,500 and Social Security tax continues to remain at 6.20%. The Cost of Living Adjustment (COLA) was 1.7% in 2015, decreasing the Supplemental Security Income (SSI) limit to $2,639 per month.
Gift and Estate Tax
In 2016, the IRS increases the estate but not the gift exclusion limits. The annual gift exclusion amount stays at $14,000. The federal estate tax exemption which the amount an individual can leave to heirs without having to pay federal estate tax will be $5.45 million in 2016, up from $5.43 million for 2015. Learn More
For 2016, the IRS increases the standard deduction amounts for all individual taxpayers. To learn more about your standard deduction, click on the link below.
|Married Filing Separately||$6,300||$0|
|Married Filing Jointly||$12,600||$0|
|Head of Household||$9,300||$50|
Mileage Deduction Rates 2016
The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile, including depreciation, insurance, repairs, tires, maintenance, gas and oil. The rate for medical and moving purposes is based on the variable costs, such as gas and oil. The charitable rate is set by law.
You always have the option of claiming deductions based on the actual costs of using a vehicle rather than the standard mileage rates.
Beginning on Jan. 1, 2016, the standard mileage rates for the use of a car, van, pickup or panel truck will be:
|Business Miles||54.0 cents per mile|
|Charitable Miles||14.0 cents per mile|
|Medical Travel||19.0 cents per mile|
Earned Income Credit
The Earned Income Tax Credit (EITC or EIC) applies to working taxpayers with low to moderate income. The qualification threshold depends on the number of people in your family. The tax credits maximum increased from 2015 to 2016 is indicated in the table below. Learn More
|Single or Head of Household Income Max||Married Filing Jointly Income Max||Number of Children||Credit Amount|
|$47,955||$53,495||3 or more||$6,268|
Lifetime Learning and Hope Scholarship Credits
The maximum Hope Scholarship Credit, available for the first two years of post-secondary education, remains at $2,500 in 2016. This includes 100% of qualifying tuition and related expenses not in excess of $2,000, plus 25% of those expenses that do not exceed $4,000.
The maximum Lifetime Learning Credit (LLC) is $2,000 in 2016. The credit applies to 20% of the first $10,000 of a taxpayer’s out-of-pocket expenses for students attending an institution of higher education or a maximum of $2,000 per taxpayer. A taxpayer cannot claim the Hope Credit and the Lifetime Learning Credit in the same tax year for the same student. The LLC is not refundable.
In 2016, the taxpayer’s modified adjusted gross income (AIG) is used to determine the reduction in the amount of the Hope Scholarship and Lifetime Learning Credits. Reductions start for taxpayers with an AGI in excess of $80,000, or $160,000 for those filing joint returns for the Hope Credit. The income threshold for the Lifetime Learning Credit increases to $55,000 or $110,000 for those filing joint returns in 2016. As the AIG increases the amount of credit received reduces. Once your AIG reaches the LLC limit, you cannot claim the credit. Learn more at the Tax Benefits for Education: Information Center.
Retirement Accounts Contributions
The contribution limits for 401(k) as well as 403(b) plans remains at $18,000 in 2016. Catch up contributions also remains at $6,000. The contribution limit for SIMPLE retirement remains at $12,500, while the catch up contribution limit remains at $3,000.
In 2016, the contribution limits for Traditional IRAs and Roth IRAs is $5,500, with a catch-up contribution of $1,000 for anyone age 50 or older by the end of the calendar year. The income phase out threshold for Roth IRAs now starts at $184,000 for those filing jointly, which is an increase of $1,000 from 2015. The phase out threshold for taxpayers filing as Head of Household or Single is now $117,000, which is a $1,000 increase from 2015.
The income phase out limits that apply to Traditional IRAs increased for those individuals covered by a retirement plan at work. The 2016 income phase out limits remains at $98,000 for joint filers. For those with a filing status of Single or Head of Household the limit remains at $61,000. For more information regarding Retirement Accounts Contribution limits, click here.