IRS Announces 2016 Tax Rates, Standard Deductions, Exemption Amounts And More
The Internal Revenue Service (IRS) has announced the annual inflation adjustments for a number of provisions for the year 2016, including tax rate schedules, tax tables and cost-of-living adjustments for certain tax items.
These are the applicable numbers for the tax year 2016 – in other words, effective January 1, 2016. They are NOT the numbers and tax rates that you’ll use to prepare your 2015 tax returns in 2016 (you’ll find them here). These numbers and tax rates are those you’ll use to prepare your 2016 tax returns in 2017.
If you aren’t expecting any significant changes, you can use the updated tax tables to estimate your liability for the 2016 tax year. If, however, you are expecting to make more money, get married, buy a house, have a baby or other life change, you’ll want to consider adjusting your withholding or tweaking your estimated tax payments.
Tax Brackets. The big news is, of course, the tax brackets and tax rates for 2016:
The standard deduction amounts for 2016 are as follows:
For 2016, the additional standard deduction amount for the aged or the blind is $1,250. The additional standard deduction amount is increased to $1,550 if the individual is also unmarried and not a surviving spouse.
For those taxpayers who itemize their deductions, the Pease limitations, named after former Rep. Don Pease (D-OH) may cap or phase out certain deductions for high income taxpayers.
The Pease thresholds for 2016 are:
If the Pease limitations apply, the total of all your itemized deductions is reduced by the lesser of:
3% of AGI above the applicable threshold; or
80% of the amount of itemized deductions otherwise allowable for the tax year.
Pease limitations apply to charitable donations, the home mortgage interest deduction, state and local tax deductions and miscellaneous itemized deductions. They do not apply to medical expenses, investment expenses, gambling losses and certain theft and casualty losses.
(You can read more about the Pease limitations and how they affect affluent taxpayers here.)
Keep in mind that the floor for medical expenses remains 10% of adjusted gross income (AGI) for most taxpayers. Taxpayers over the age of 65 may still use the 7.5% through 2016 – but after that, the favored tax rate will disappear and all taxpayers will be subject to the 10% floor.
The personal exemption amount for 2016 is $4,050, up from $4,000 in 2015. However, the exemption is subject to a phase-out that begins with adjusted gross incomes of $259,400 ($311,300 for married couples filing jointly). It phases out completely at $381,900 ($433,800 for married couples filing jointly.)
Phaseouts apply as follows:
In years past, the AMT was subject to a last minute scramble by Congress to “patch” the exemption but as part of the American Taxpayer Relief Act of 2012 (ATRA), the AMT exemption amounts are permanently adjusted for inflation – that’s why you now see it in this list. The AMT exemption amounts are as follows:
The kiddie tax applies to unearned income for children under the age of 19 and college students under the age of 24. For 2016, the threshold for the kiddie tax – meaning the amount of unearned net income that a child can take home without paying any federal income tax – is $1,050. All unearned income in excess of $2,100 is taxed at the parent’s tax rate.
Some tax credits are also adjusted for 2016. Some of the most common tax credits are:
Earned Income Tax Credit (EITC). For 2016, the maximum EITC amount available is $6,269 for taxpayers filing jointly who have 3 or more qualifying children, up from a total of $6,242 for tax year 2015. The revenue procedure has a table providing maximum credit amounts for other categories, income thresholds and phase-outs.
Child & Dependent Care Credit. For 2016, the value used to determine the amount of credit that may be refundable is $3,000 (the credit amount has not changed). Keep in mind that this is the value of the expenses used to determine the credit and not the actual amount of the credit.
Adoption Credit. For 2016, the credit allowed for an adoption of 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. Phaseouts do apply beginning at taxpayers with modified adjusted gross income (MAGI) in excess of $201,920 and completely phased out for taxpayers with MAGI of $241,920 or more.
Hope Scholarship Credit. The Hope Scholarship Credit for 2016 will remain an amount equal to 100% of qualified tuition and related expenses not in excess of $2,000 plus 25% of those expenses in excess of $2,000 but not in excess of $4,000. That means that the maximum Hope Scholarship Credit allowable for 2016 is $2,500. Income restrictions do apply and for 2016, those kick in for taxpayers with modified adjusted gross income (MAGI) in excess of $80,000 ($160,000 for a joint return).
Lifetime Learning Credit. As with the Hope Scholarship Credit, income restrictions apply to the Lifetime Learning Credit. For 2016, the adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit is $111,000, up from $110,000 for tax year 2015.
Changes were also made to certain tax deductions, deferrals & exclusions for 2016. You’ll find some of the most common here:
Student Loan Interest Deduction. For 2016, the maximum amount that you can take as a deduction for interest paid on student loans remains at $2,500. Phaseouts apply for taxpayers with modified adjusted gross income (MAGI) in excess of $65,000 ($130,000 for joint returns), and is completely phased out for taxpayers with modified adjusted gross income (MAGI) of $80,000 or more ($160,000 or more for joint returns).
Foreign Earned Income Exclusion. For tax year 2016, the foreign earned income exclusion is $101,300, up from $100,800 for tax year 2015.
Transportation and Parking Benefits. For 2016, the monthly limitation for the qualified transportation fringe benefit remains at $130 for transportation, but rises to $255 for qualified parking, up from $250 for tax year 2015.
Medical Savings Accounts. For 2016, participants who have self-only coverage in a Medical Savings Account are subject to an annual deductible that is not less than $2,250 (up from $2,200 for tax year 2015) but not more than $3,350 (up from $3,300 for tax year 2015). For self-only coverage the maximum out of pocket expense amount remains at $4,450. For 2016 participants with family coverage, the floor for the annual deductible remains as it was at $4,450 (the same as in 2015); however the deductible cannot be more than $6,700 (up $50 from the limit for tax year 2015). For family coverage, the out of pocket expense limit remains at $8,150 for tax year 2016 as it was for tax year 2015.