Before you file your annual tax return it's important that you understand changes to the tax code including updated or new laws. Here, Steve Cox, CPA and Controller for TaxSlayer, highlights 11 updates for the 2016 tax-filing year.
1. Tax Brackets
All seven tax brackets have risen slightly to account for inflation. The top tax rate of 39.6 percent now applies to single taxpayers who earned more than $415,050 or married taxpayers filing jointly who earned more than $466,950.
2. Standard Deductions
The standard deduction is unchanged at $6,300 for single taxpayers and $12,600 for married taxpayers filing jointly. However, if you file as head of household, there was a $50 increase, for a standard deduction of $9,300 in 2016.
Personal exemptions for taxpayers and their dependents increased to $4,050. These exemptions begin to phase out if you made $259,400 or more as an individual or if you made $311,300 or more as a married couple filing jointly. Exemptions are reduced by 2 percent for each $2,500 — or $1,250, for married couples filing separately — of adjusted gross income exceeding the established threshold. The exemptions are eliminated entirely at $381,900 for single filers and $433,800 for married couples filing jointly.
4. Mileage Rates for Driving Deductions
The rate for business mileage has decreased from 57.5 cents per mile to 54 cents per mile. The mileage rate for medical or moving has fallen as well, from 23 cents per mile to 19 cents per mile.
5. Foreign Income Exclusion
If you work outside of the United States, the IRS raised the amount of the foreign earned income exclusion to $101,300 — the maximum amount of foreign earnings you may be able to exclude from your taxes, if you meet the requirements.
6. Adoption Credit
The federal adoption tax credit is now $13,460 per child — an increase of $60 from the credit in 2015. Adoptive parents with an adjusted gross income below $201,920 can claim the full credit, while those with incomes above $241,920 cannot claim the credit at all. Families with incomes between $201,920 and $241,920 can claim a partial credit.
7. Roth IRA
Income limits for Roth IRA contributions increased $1,000 from the 2015 limit. You can contribute to a Roth IRA if you made less than $132,000 in adjusted gross income filing individually or less than $194,000 as a married couple filing jointly. However, if your adjusted gross income was greater than or equal to $117,000 for single filers or $184,000 for married couples filing jointly, your contribution would be limited to a reduced rate.
8. Alternative Minimum Tax (AMT) Exemption
The IRS raised the AMT exemption amount to $53,900 for individuals and $83,800 for married couples filing jointly. The exemption begins to phase out at $119,700 for individuals and $159,700 for married couples filing jointly.
9. Earned Income Credit (EIC)
If your income falls below a certain threshold — which depends on your adjusted gross income and the number of qualifying children claimed — you may qualify for the EIC. The 2016 maximum amount of credit for taxpayers with three or more qualifying children is $6,269 — an increase from $6,242 for 2015.
10. Health Expense Accounts
Under a high deductible health plan, you may be eligible for a health savings account (HSA) —to which you can make tax-deductible contributions. The HSA contribution limit remains at $3,350 for individuals; however, the contribution limit for families increased to $6,750. If you are 55 or older, you can contribute an additional $1,000 per year, which is unchanged from last year.
11. Health Insurance Penalty
The Affordable Care Act requires most taxpayers to have health insurance; those who do not have insurance face a tax penalty, which increases each year along with inflation. The penalty in 2016 is the greater of 2.5 percent of your total adjusted gross income or $695 per adult and $347.50 per child, to a maximum of $2,085.
Annual changes to tax-filing laws can be difficult to keep up with, but a tax professional can provide customized help when you prepare your 2016 tax return.