Q. Are there any big changes to tax laws for 2016 of which the average tax-payer/small business owner should be aware?
A. Some things have not changed, some were made permanent and some have changed. The following are some of the most significant:
▪ For individuals the top tax rate of 39.6 percent applies to those with taxable income of $413,200 in 2015. This goes up to $415,050 for 2016. For those filing married jointly the amount is $464,850 for 2015 and $466,950 for 2016.
▪ Standard deduction for heads of household will increase from $9,250 in 2015 to $9,300 in 2016.
▪ For joint filers with three or more qualifying children the maximum earned income credit increases to $6,269 in 2016 up from $6,242 in 2015. This enhanced earned income tax credit was made permanent.
▪ The maximum amount available under the American Opportunity tax credit which helps individuals offset college expenses is now permanently set at $2,500.
▪ Personal exemptions will increase from $4,000 in 2015 to $4,050 in 2016.
▪ The alternative minimum tax exemption will increase by $300 to $53,900 for those filing single and by $400 to $83,800 for those filing jointly.
▪ 401(k) employee contribution limits remain unchanged at $18,000 as well as the $6,000 catch-up contribution for those age 50 or older.
▪ For those not covered by a workplace retirement plan but married to someone that is covered, the deduction phase-out for an IRA contribution will increase by $1,000 in 2016 to between $184,000 and $194,000.
▪ For Roth IRA contributions the AGI (adjusted gross income) phase-out range has also increased by $1,000. Up to $184,000 and $194,000 for those filing jointly and to $117,000 and $132,000 for those filing single or head of household.
▪ Contribution limits remain the same, $5,500 and a $1,000 catch-up for those age 50 or older.
▪ Estates of decedents will have an exemption of $5,450,000 in 2016, up from $5,430,000 for those who passed in 2015.
▪ The provision allowing tax-free charitable donations directly from IRA accounts was made permanent. This allows those IRA owners age 70 1/2 and older to transfer up to $100,000 per year directly to a qualified charity without increasing their tax burden.
▪ The option to deduct state and local sales taxes rather than state income taxes was made permanent. This provision is most favorable to those living in states with no state income tax.
▪ The above line deduction for K-12 teachers to deduct up to $250 for school supplies purchased with their own money was made permanent. The amount will be indexed to inflation and for 2016 the amount is $257.
▪ The exclusion for cancellation of indebtedness income on a principal residence is extended through 2016. This allows those who renegotiate mortgages or go through foreclosure to exclude up to 2 million dollars from gross income.
▪ The deduction for the cost of depreciable assets of up to $500,000 on purchases up to 5 million dollars made by small businesses (businesses with under 50 million dollars in gross revenue) is allowed in the year of purchase. This is now a permanent provision under IRC Section 179 and the amounts will be indexed for inflation in future years.
▪ The Research and Development tax credit is now permanent and beginning with this year, small businesses will also be entitled to use this credit to offset their alternative minimum tax liability.
These are the highlights, I’m sure your tax professional is aware of these and any other changes that are applicable to your situation.
Wishing all a happy and prosperous 2016!
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624