Tax Changes for 2016
As 2015 draws to a close, most individual and corporate taxpayers are looking for strategies to reduce their overall tax liability. While this is an important step in the planning process, it’s also important to keep an eye on the future. There are often opportunities to bunch expenses into the current year or accelerate income into the next. Recently, the IRS issued its annual update to tax brackets for the coming year and provided information on changes to various tax incentives and benefits. The annual updates are important because it allows the IRS to review inflationary and cost of living increases over the prior year to assess whether rate changes need to be made. To make clients, prospects and others aware of these changes, JLK Rosenberger has provided a brief summary of the key points below.
Tax Rate Changes
For the 2016 tax year, the following changes apply
- The standard deduction for heads of household will rise to $9,300, up from $9,250
- The other standard deduction amounts will remain the same: $6,300 for singles and those who are married but filing separate returns and $12,600 for married couples filing jointly.
- The personal exemption amount rises slightly to $4,050, up from $4,000, but is subject to a phase-out with an adjusted gross income (AGI) of $259,400 to $381,900 (or $311,300 to $433,800 for married couples filing jointly).
- The Alternative Minimum Tax (AMT) exemption will be $53,900 (up from $53,600) with a phase out beginning at $119,700 (or $83,400, up from $83,400, for married couples filing jointly with a phase out at $159,700).
- The threshold for the “kiddie tax” (the amount of unearned income a child under 19 or college student under 24 can take home without paying income tax) is $1,050. All unearned income in excess of $2,100 is taxed at the parent’s tax rate.
- The biggest story is that tax rate tables have changed at all levels for all filing groups to account for cost-of-living increases, meaning that you can earn a little more in each bracket and stay at the same tax rate:
| Tax rate | Single filers – 2015 | Single filers – 2016 | Married filing jointly/
qualifying widow/ widower – 2015 |
Married filing jointly/ qualifying widow/ widower – 2016 |
| 10% | Up to $9,225 | Up to $9,275 | Up to $18,450 | Up to $18,550 |
| 15% | $9,226 to $37,450 | $9,276 to $37,650 | $18,451 to $74,900 | $18,551 to $75,300 |
| 25% | $37,451 to $90,750 | $37,651 to $91,150 | $74,901 to $151,200 | $75,301 to $151,900 |
| 28% | $90,751 to $189,300 | $91,151 to $190,150 | $151,201 to $230,450 | $151,901 to $231,450 |
| 33% | $189,301 to $411,500 | $190,151 to $413,350 | $230,451 to $411,500 | $231,451 to $413,350 |
| 35% | $411,501 to $413,200 | $413,351 to $415,050 | $411,501 to $464,850 | $413,351 to $466,950 |
| 39.6% | $413,201 or more | $415,051 or more | $464,851 or more | $466,951 or more |
| Tax rate | Married filing separately – 2015 | Married filing separately – 2016 | Head of household – 2015 | Head of household – 2016 |
| 10% | Up to $9,225 | Up to $9,275 | Up to $13,150 | Up to $13,250 |
| 15% | $9,226 to $37,450 | $9,276 to $37,650 | $13,151 to $50,200 | $13,251 to $50,400 |
| 25% | $37,451 to $75,600 | $37,651 to $75,950 | $50,201 to $129,600 | $50,401 to $130,150 |
| 28% | $75,601 to $115,225 | $75,951 to $115,725 | $129,601 to $209,850 | $130,151 to $210,800 |
| 33% | $115,226 to $205,750 | $115,726 to $206,675 | $209,851 to $411,500 | $210,801 to $413,350 |
| 35% | $205,751 to $232,425 | $206,676 to $233,475 | $411,501 to $439,000 | $413,351 to $441,000 |
| 39.6% | $232,426 or more | $233,476 or more | $439,001 or more | $441,001 or more |
Deductions and Credits
Beyond the tax rate changes listed above, there are also some deductions and credits that were impacted in the recent IRS announcement. These include:
- Child Development & Care Credit – The expense value used to determine the amount of refundable credit will be $3,000 (although the credit amount will not change).
- Adoption Credit – For 2016, the credit for a child with special needs is $13,460, and the maximum credit allowed for other adoptions is the amount of qualified adoption expenses up to $13,460 with a phase out for AGIs of $201,920 to $241,920.
- Hope Scholarship Credit – The credit will remain at 100% of qualified tuition and related expenses not in excess of $2,000.
- Student Loan Interest Deduction – The maximum deduction amount you can take remains at $2,500, but phase-outs apply for taxpayers with AGIs from $65,000 to $80,000 or $130,000 to $160,000 for joint returns.
- Foreign Earned Income Exclusion – The exclusion increases from $101,300, up from $100,800.
- Medical Savings Account – Participants with family coverage, the maximum out-of-pocket limit will still be $8,150 and the floor for the annual deductible remains at $4,450, but the deductible cannot be more than $6,700 (up $50).
Contact Us
While these changes may not seem significant, it’s important for individual and business taxpayers to be aware of them as it may impact tax planning strategies for next year. To learn more about the expected changes or for assistance with individual or corporate tax planning, JLK Rosenberger wants to help! For additional information, call us at 818-334-8623, or click here to contact us.
