Tax Changes For 2016

Harold Goedde

Standard Deduction

The amount for single and marred filing separate is $6,300 ($7,850 if 65 and over or blind), surviving spouse and married filing joint $12,600 plus $1,500 for each spouse 65 and over, or blind, heads of household $9,300 plus $1,250 if 65 and over or blind. For taxpayers claimed as a dependent on another return, it is the greater of (a) $1,050 or (b) $350 plus earned income. The amount can’t exceed the basic standard deduction.

Personal Exemptions

These will be $4,050 (no change from 2015) for each taxpayer and dependent. For taxpayers claimed as a dependent on another return, a personal exemption is not allowed. The amount phases out if AGI exceeds $311,390 for married filing joint and surviving spouse, $285,350 for heads of household, $259,400 single, and $155,650 for married filing separate, The phase out is 2% of the exemptions for every $2,500 ($1,250 for married filing separate) of AGI over the threshold amounts.

Itemized Deductions Phase-out

The AGI thresholds are the same as those for personal exemptions but the reduction is 3% of AGI over the threshold amounts but not more than 80% of the deductions. The reduction does not apply to medical expenses, investment interest, casualties/thefts, and gambling losses.

AMT Exemptions

These increase to $83,800 for surviving spouse and married filing joint, $53,900 for heads of household and single, and $41,900 for married filing separate. The 28% rate starts at alternative minimum taxable income over $186,300.

Flexible Spending Accounts

The maximum elective deferral is $2,550 (same as 2015).

Health Savings Accounts

The annual cap is $6,750 per person for family coverage and $3,550 for self-only coverage. If you were born before 1962, an additional $1,000 can be contributed. Minimum policy deductibles remain at $2,600 for families and 1,300 for singles. Out-of- pocket maximums (e.g., co-payments and deductibles) increase to $13,100 for those with family coverage and to $6,550 for individual coverage.

Top Rate on Dividends and Long-term Capital Gains

The top rate of 20% starts at taxable income of $415,050 for singles, $441,000 for heads of household, married filing joint and surviving spouse. The regular maximum rate applies to taxpayers with taxable income below these amounts but filers in the zero to 15% tax brackets do not pay a tax on long-term capital gains.

Additional Medicare Tax

The 3.8% rate increases the total rate to 23.8%.

Long-term Care Insurance Premiums

For taxpayers 71 and older, the maximum deduction as a medical expense is $4,870 per person. For those 61-70 it is $3,900, for those 51-60 it is $1,460, for those 41-50 it is $730 and for those under 40 it is $390.

The foreign income exclusion is $101,300.

Monthly Exclusions for Certain Employer Provided Fringe Benefits

The amounts for free parking, mass transit passes, and commuter vans increase to $255.

Costs eligible for the Adoption Credit

The maximum amount is $13,460. If the credit exceeds the tax liability, it is not refundable. The full credit is available for adopting a special needs child even if the adoption costs are less. The credit phases out for MAGI between $201,920 and becomes zero for the tax liability over $241,920. The exclusion for company paid adoptions increases to $13,460.

Lifetime Learning Education Credit

The rate and dollar amount of eligible expenses are the same as 2015. The MAGI phase-out range of $55,000 to $65,000 is the same as 2015 for unmarried taxpayers, but increases to $111,000 to $131,000 for married filing joint.

Income Ceiling on Roth IRA

The contribution amount ($5,500 plus $1,000 if age 50 and over) phases out at AGI levels of $184,000 for married filing joint and $117,000 to $132,000 for singles.

Phase-out for Retirement Plan contributions (savers) credit

For married filing joint, it is for AGI over $61,500, heads of households $46,125, and $30,750 for singles.

Long-term Care Payments Exclusion

The per-diem amounts from a qualified policy can be excluded from income up to $340 per day.

Foreign Earned Income Exclusion

The maximum amount for taxpayers meeting the foreign residence or physical presence
test is $101,300, up from $100,800 in 2015. The dollar limit is reduced on a daily basis for those who qualify for only a partial year.

Attorney Fee Awards

Attorney fees up to $200 per hour are excludable if taxpayers win their case against the IRS and the IRS position was unreasonable.

Estate and Gift Tax Exemptions and Exclusions

For persons dying in 2016, the exemption is $5.45 million (up from $5.43 million in 2015). This amount also applies to lifetime gifts. To the extent it is used for gifts, it reduces the exemption available at death. The annual exclusion for gifts is $14,000 (same s 2015). The exclusion for gifts to non U.S. citizens is $148,000 (up from $147,000 in 2015).

Savings Bond Interest Exclusion

For redeemed Series EE or I bonds used to pay higher education expenses, the exclusion phase-out range is for MAGI of $116,300 to $146,300 for married filing joint and $77,550 to $92,550 for unmarried taxpayers.

Student Loan Interest Deduction

This is a deduction FOR AGI and is limited to $2,500 (same as 2015 because it is fixed by law). The phase-out range is for MAGI of $65,000 to $80,000 for single taxpayers and $130,000 to $160,000 for married filing joint.

PTIN Fees Reduced

For the 2016 filing season, the fee is $50 for new and renewal applications (down from $64.25 for new and $63.00 for renewals in 2015).

Dr. Goedde is a former college professor who taught income tax, auditing, personal finance, and financial accounting and has 25 years of experience preparing income tax returns and consulting. He published many accounting and tax articles in professional journals. He is presently retired and does tax return preparation and consulting. He also writes articles on various aspects of taxation. During tax season he works as a volunteer income tax return preparer for seniors and low income persons in the IRS’s VITA program.

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