Published by Debra Taylor, | June 6, 2016
I am sure that when Benjamin Franklin famously said “In this world nothing can be said to be certain, except death and taxes” even he never envisioned the current complexity of this age old process. Each year we brace for the tax code changes and do our best to monitor the continual adjustments. Some of the things to watch out for include updates to personal tax brackets, exemptions from the alternative minimum tax (AMT), raises in estate and gift tax exemptions, and Obamacare requirements that will affect both individuals and businesses this year. This week, let’s discuss some of the personal effects, which we break down below (or you can click here to see the changes summarized on a fact sheet).
Retirement Plans: Contributions to retirement plans remain the same for 2016 (see chart below) but income ceilings on Roth IRA’s now phase out at Adjusted Gross Incomes of $184,000 to $194,000 for couples and $117,000 to $132,000 for individuals. Remember, you can always convert from a traditional IRA to a Roth IRA regardless of your income.
Estate and Gift Taxes: Exemptions for estate and gift taxes increase to $5,450,000 this year with the tax rate for gifts and estates in excess of this amount remaining at 40%. Those looking to make a gift this year will get the same annual exclusion as last year, $14,000 to each individual.
Anyone serving as an Executor should be aware of a new reporting rule, beginning June 30, 2016, that requires that the IRS and heirs be notified within 30 days of the filing of a Form 706, of the basis of inherited assets.
Income Brackets – Good News! Low inflation in 2014/2015 led to only slightly wider income tax brackets (see chart below) and personal tax rates will be remaining the same in 2016.
Deductions: Standard deductions for heads of households were raised slightly to $9,300 with an additional $1,550 for those 65 and older; for married tax filers it is $12,600 with an additional $1,250 for each spouse. The standard deduction for single filers is $6,300 or $7,850 after attaining age 65.
Pease Limitation: Itemized deductions phase out at higher levels in 2016 with write-offs cut by 3% of the excess of AGI over $259,400 for individuals, $285,350 for heads of household filers and $311,300 for married filers (and your total deduction cannot exceed 80% of itemizations).
Personal exemptions rise to $4,050 for taxpayers and their dependents, but is cut by 2% for each $2,500 of adjusted gross income over the same thresholds for the itemized deduction phase out.
Healthcare Savings Accounts: The cap on annual deductible contributions for account owners with family coverage, rose to $6,750 for 2016 for Healthcare Savings Accounts (HSA). The top for an individual remains at $3,350 and individuals born before 1962 can contribute an additional $1,000. Out of pocket cost limits (i.e. deductibles, copayments etc.) are $13,100 for family coverage and $6,550 for individual coverage.
Obamacare Fines: You could pay dearly for not having health insurance in 2016 with the basic fines more than doubling from 2015. Many without coverage will see basic fines rise from $325 per adult with a family ceiling of $975 to $695 per adult ($347.50 per child) with a family ceiling of $2,085. The income based fine increases from 2% to 2.5% and that kicks in at certain tax return thresholds. The uninsured should bear in mind that, typically, the greater of the two amounts is what can be levied.
Social Security: The tax rate of 6.2% for FICA Social Security on up to $118,500 of income remains the same for 2016. Earning caps also remain the same, for those receiving benefits in 2016, at $15,720 for individuals age 62 through 65. Those turning 66 this year can earn $41,880 before their 2016 birthday.
Medicare: Premiums for Medicare Part B will remain $104.90 per month for most. Higher income seniors will see an increase to Parts B and D coverage based on their modified adjusted gross income if it exceeds $170,000 for joint filers or $85,000 for individual filers. These high income seniors will pay the higher $121.80 monthly premium and owe a surcharge. They will also owe a surcharge on their Part D premiums for prescriptions. Surcharges for those in the upper income brackets could be as large as $340.90 a month.
We know tax code changes can be overwhelming at best. Please call our office if you have any questions. However, as always, we recommend that you consult with your tax professional.