2016 Tax Law Updates
Tax Season Kicks off January 23, 2016
The IRS announced that the country's 2017 tax season opens on January 23th, with more than 153 million individual tax returns expected to be filed this year. It's important to note that the IRS has implemented a few key changes in the filing process.
- A new law requires the IRS to hold refunds for filers claiming the Earned Income Tax Credit (EITC) and the Additional Child Tax Credit (ACTC) until February 15, 2017.
- In order to eFile with a new software system, your prior year Adjusted Gross Income will be needed. The Electronic Filing PIN number is no longer an option.
- Taxpayers with Individual Tax Identification Numbers (ITIN) that have not been used in the prior 3 years, can expect those numbers to expire on January 1, 2017. A renewal application should be submitted in order to file and avoid a delay in processing your refund.
This season will feature standard inflation adjustments, tax extenders and some extenders that have now become permanent.
I. Inflation Adjustments
- Personal Exemptions. The personal exemption amount is $4,050 for 2016, up from $4,000 in 2015. Phase-outs for personal exemption amounts (sometimes called “PEP”) begins with adjusted gross incomes (AGI) of $259,400 for individuals and $311,300 for married couples filing jointly.
- Standard Deductions. The standard deduction remains at $6,300 for single taxpayers and married taxpayers filing separately. The standard deduction remains $12,600 for married couples filing jointly and increases to $9,300 for heads of household.
- Itemized Deductions. For tax year 2016, there may be a limitation on itemized deductions for single taxpayers with incomes of $259,400 or more and for married couples filing jointly with income of $311,300 or more. This limitation, known as the Pease Limitations, will occur when a taxpayer in these income brackets has personal deductions that exceed the Standard Deduction amount.
- 39.6 percent tax bracket. This rate affects singles whose income exceeds $415,050 ($466,950 for married taxpayers filing a joint return).
- Standard mileage allowance. The business standard mileage allowance for 2016 decreased from 57.5 cents per mile in 2015 to 54 cents in 2016. The rate for medical or moving expenses are down from 23 cents in 2015 to 19 cents per mile in 2016. For miles driven in service of charitable organizations, it remains at 14 cents.
- Alternative Minimum Tax exemption. The AMT exemption is $53,900 for single and head of household filers, or $83,800 for married filing joint filers.
- Earned Income Credit. The maximum EIC amount is $6,269 for taxpayers filing jointly with three or more qualifying children. .
- Flexible Spending Accounts. The annual dollar limit on employee contributions to employer-sponsored healthcare flexible spending accounts (FSA) increases from $2,550 for 2015 to $2,600 for 2016. Some plans may allow participants to carry over up to $500 of unused amounts.
- Federal Estate Tax Exemption. The exclusion amount for estates of decedents who die in 2016 is $5,450,000 before the estate is subject to federal estate tax.
Not every amount in the IRS code changed this year. The amount taxpayers can give as a gift to any one person without filing a gift tax return is still $14,000. In addition, the amount taxpayers can contribute to an IRA remains at no more than $5,500 (or $6,500 if age 50 or older) in a traditional or Roth IRA.
II. Tax Extenders
At the end of last year, it was determined that the tax benefit of these prior year laws would be extended either through December 31, 2017 or permanently:
- Higher education tuition deduction. Taxpayers may still be able to deduct between $2,000 and $4,000 of qualified tuition expense.
- Educator expense deduction. Teachers can claim up to $250 of unreimbursed classroom expenses. As of 2016, this deduction has been made permanent.
- Commuting tax breaks. This extension gives taxpayers who commute by train or bus a $5 increase for a $255 monthly tax break for employer-provided subsidies as those who receive employer assistance for parking costs. The current mass transit deduction remains at $130 per month.
- Deduction for state and local income tax. This deduction has been made permanent and makes a huge difference to residents of states with a state income tax.
IRA charitable donations. IRA owners at least age 70 ½ can still make tax-free donations of up to $100,000 from IRAs to certain qualified charities.
Mortgage forgiveness exclusion. Homeowners, who are underwater on their mortgages and have part of their loan forgiven by a bank, may exclude up to $1 million of the forgiven debt (or $2 million for married couples) from treatment as income. This is extended through 2016.
Research and development tax credit. This has been extended for two years.
Deduction for small business equipment purchases of up to $2 million. This is extended and now includes computer software.
Work Opportunity Tax Credit. Taxpayers who own businessess can claim a credit equal to a certain percentage of wages paid to new hires of one of nine targeted groups. These groups include members of families receiving benefits under the Temporary Assistance to Needy Families (TANF) program, qualified veterans and ex-felons, designated community residents, vocational rehabilitation referrals, qualified summer youth employees, qualified food and nutrition recipients, qualified SSI recipients and long-term family assistance recipients..
Energy efficiency tax breaks. This includes credits for home improvements that improve energy efficiency, such as heating and cooling systems, insulation and windows. This allows for a 10 percent credit for energy efficiency improvements to existing homes, and deductions for construction of energy efficient homes and commercial buildings.