As tax day approaches, the majority of us will be scrambling to get our 2015 tax returns prepared. However, there are some tax changes coming in 2016 that you should think about now.
1. Tax Day is April 18th
This year you’ll have 3 extra days to procrastinate, er, I mean, file your returns and make your first 2016 estimated tax payment. You can thank Washington D.C. for this – they will celebrate Emancipation Day on April 15th – and since this is a federal holiday, all federal offices will be closed (i.e. IRS).
2. Tax Brackets Will Rise Slightly
Income tax brackets for 2016 are only slightly wider than 2015. This is because the inflation figures used to determine the adjustments were relatively mild. For 2016, these bracket amounts are rising by roughly 0.4%. (These numbers and rates are those you’ll use to prepare your 2016 tax returns in 2017.) Check out the projected rates here.
If you’re expecting significant life changes in 2016, like increased income, getting married, or having a baby, you’ll want to consider adjusting your withholding or tweaking your estimated tax payments. Generally you can submit a new W-4 to your employer at any time to change your withholding allowances.
3. Obamacare Tax Penalties Increase in 2016
For tax year 2015, the Affordable Care Act (ACA) penalty for those not having qualified health care coverage is either 2% of your household’s annual taxable income, or $325 per adult and $162.50 per child, to a maximum of $975, whichever amount is greater. In 2016 the penalty increases to 2.5% of your income, or $695 per adult and $347.50 per child, to a maximum of $2,085.
For tax year 2017 and beyond, the percentage option will remain at 2.5%, but the flat fee will be adjusted for inflation.
4. Contributions on HSA’s Will Increase
HSA’s (health savings accounts) allow people with high-deductible health plans to set aside money on a pretax basis to cover their health care costs (2016 minimum annual deductible: $1,300 for individual coverage and $2,600 for family coverage) .
In 2016, individual contributions limits will remain at the 2015 level of $3,350, but the family policy limit will increase by $100 to $6,750. Those 55 and older will continue to have an additional catch-up contribution of $1,000, putting them at $4,350 for an individual contribution and $7,750 for a family.
5. The AMT Exemption Increases
Singles and heads of households will see their AMT (alternative minimum tax) exemption increase by $300 to $53,900, while joint filers will see a $500 increase to $83,800. Additionally, the phase out zones for the exemptions start at higher income levels as well – above $159,700 for couples and $119,700 for single filers and heads-of-households. For tax year 2016, the 28% tax rate applies to taxpayers with taxable incomes above $186,300 ($93,150 for married individuals filing separately).
6. Personal Exemption to Rise
The personal exemption that taxpayers are entitled to take will rise $50 to $4,050 for the 2016 tax year. The exemption will begin to phase-out with adjusted gross incomes of $259,400 ($311,300 for married couples filing jointly) and phases out completely at $381,900 ($433,800 for married couples filing jointly.)
7. Standard Deductions will Increase for Head-of-Household Filers
Due to low inflation rates, standard deduction for single, married filing jointly and married filing separately will remain the same as the 2015 levels. For those who qualify as heads of household, the standard deduction will increase $50 to $9,300 in 2016.
Not All Things Are Affected by these Tax Changes
Not all of the typical tax changes are happening in 2016. Contribution limits to 401(k) plans, IRA’s and flexible spending accounts are staying the same as they were in 2015.
Like a lot of folks you may be tempted to put off tax planning to the last minute, but by planning for these changes before they take effect, you can can be better prepared for next year. If you have questions about how’ll these changes will impact you, contact us and we’ll be happy to refer you to a tax professional!