Last January when I wrote Tax update article for readers, I received a lot of emails acknowledging that this article really provided them the information they needed to prepare their 2016 tax return. We are now in New Year, 2017 and the tax returns for 2016 are due on or before April 15, 2017 or October 15, 2017 (if timely extended). Here is your quick reference guide for the preparation of 2016 tax returns.
General Tax Updates
Tax Bracket Adjustment – Adjusted for inflation, income tax bracket rose slightly. The chart below shows marginal tax brackets.
What does marginal income tax bracket mean for a high-income tax payer? If you are Married Filing Joint filer and make $466,950 or more, only the income that exceeds that amount would be taxed at the highest tax bracket of 39.6%.
Similarly, for a single filer who makes $35,000, the first $9,275 would be assessed at 10% and the remaining $25,725 would fall in to the 15% tax bracket.
Changes to Standard Deduction – The standard deduction increased by $50 for Head of Household to $9,300, but stayed the same in 2016 for Single and Married Filing Separate returns at $6,300. It also remained the same at $12,600 for Married Filing Joint taxpayers.
Changes to Personal Exemption – The personal exemption rose by $50. 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.)
Alternative Minimum Tax – The Alternative Minimum Tax (AMT) exemption rose marginally in line with inflation. For tax year 2016, the AMT exemption for single filers is $53,900 and begins to phase out at $119,700. For married couples filing jointly the AMT exemption is $83,800 and begins to phase out at $159,700. For tax year 2016, the 28 percent AMT tax rate applies to taxpayers with taxable incomes above $186,300 ($93,150 for married individuals filing separately).
- The gift tax exclusion will remain at $14,000.
- Health Flexible spending arrangements (FSA) employee contribution limits will rise by $50 to $2,550.
- Foreign earned income exclusion increased by $500 to $101,300 despite the rise in the US dollar.
- Penalties for not having health insurance under the Affordable Care Act (ACA) have increased substantially from 2015 to 2016. In 2016, the penalty rose to $695 or 2.5% of income for Single taxpayers. For families, the penalty increased to $2,085 per family or 2.5% of income, whichever is greater.
- Scrutiny around compliance of foreign reporting continues as more financial institutions report offshore assets of US individual taxpayers. This trend has been pronounced in recent years and seems to be continuing.
- New Tax Filing deadlines –
- Partnership (Calendar year end) – March 15 / September 15 (with extension)
- C Corporation (Calendar year end) – April 15 / September 15 (with extension)
- FinCen Report 114 (FBAR) – April 15 / October 15 (with extended personal return)
2016 Federal Tax Rates and IRS Marginal Tax Brackets
|Tax Rate||Single Filers||Married Filing Jointly||Married Filing Separate||Head of Household|
|10%||$0 – $9,275||$0 – $18,550||$0 – $9,275||$0-$13,250|
|15%||$9,275 – $37,650||$18,551 – $75,300||$9,275 – $37,650||$13,251-$50,400|
|25%||$37,651-$91,150||$75,301 – $151,900||$37,651 – $75,950||$50,401-$130,150|
|28%||$91,151-$190,150||$151,901 – $231,450||$75,951 – $115,275||$130,151-$210,800|
|33%||$190,151-$413,350||$231,451 – $413,350||$115,276 – $206,675||$210,801-$413,350|
|35%||$413,351-$415,050||$413,351 – $466,950||$206,676 – $233,475||$413,351-$441,000|
|39.6%||over $415,050||over $466,950||over $233,475||over $441,000|
Effective Tax Planning
Effective tax planning can be challenging, given the complexity of the US tax code. However, done properly, tax planning can provide significant benefits and savings. Below are key strategies that can help every tax payers in effective tax planning.
Deferring taxable income via 401(k) plans – Consider making the maximum contribution to your 401(k)-retirement plan. These contributions lower your current-year taxable income, and the earnings in the plan grow tax-deferred. This will allow you to delay the payment of tax until retirement, while saving for your future. Make sure you at least contribute enough to your 401(k) plan to receive any matching contribution, if your employer provides one.
Health Savings Account – Another possible way to defer income is to use a health savings account (HSA). Contributions to an HSA are tax-deductible, similar to 401(k) plans or flexible spending accounts (FSAs). Unlike an FSA, however, any money in your HSA that you don’t use during the year is not forfeited and can grow tax-deferred. In HSA, you have flexibility with the kind of investments, which may include regular savings accounts, money market funds, certificates of deposit (CDs), or mutual funds. An HSA belongs to you, not your employer, so you take it with you when you change jobs.
Business owners’ and self-employed individuals’ income – Business owners or self-employed individuals have more flexibility in the timing their compensation, as well as when they pay their business expenses. Because income for cash basis taxpayers is not taxed until it is received, self-employed individuals have an incentive to defer billing and collections until following year. Individuals may also be inclined to accelerate expense payments in current taxable year, since doing so will enable expenses to be offset against current year income, thus resulting in current tax savings for the individual business owner.
Capital gains and losses – A capital gain or loss can arise from the sale of an asset that is held for personal or investment purposes. Short-term capital gains held for one year or less are taxed at a maximum rate of 43.4% including Net Investment Tax, while long-term capital gains are taxed at a maximum preferential rate of 23.8%, including Net Investment Tax. Therefore, you might want to consider to carryover losses to offset short term capital gains when possible, regardless of whether those losses resulted from short- or long-term transactions. If you have overall net capital losses in current tax year, you may use up to $3,000 of the capital loss to offset ordinary income, with the rest of the loss carried forward to offset capital gains in future years until it is fully utilized. For capital transactions that will produce capital losses, it might be best to proceed with those transactions before the end of the year, whereas transactions that will result in a gain might best be deferred. Speak to your Tax / Finance Advisor on selecting the stocks to sell. Also, be aware of Wash Sale rule before making the re-purchase of the sold security.
Itemized deductions – The timing of your itemized deductions should play a role in your overall income tax planning. Generally, taxpayers should consider accelerating year-end state income tax, real estate tax, and charitable contribution payments into the current year to obtain the maximum deduction for that year. Charitable contribution planning should be done by year-end to ensure maximum deductions.
Kiddie tax Income-shifting – This generally involves transferring income-producing property from a high-income taxpayer to someone who is taxed at a lower rate. For high-income individuals, shifting income to children or other family members who are in lower tax brackets generally proves an effective long-term planning strategy.
The above are some common tax planning strategies. There are many more that can apply and need to be strategically planned to get best planning advantage.
Contact Umang Thakkar, Enrolled Agent for all your Tax Filing, Tax Planning & Financial Planning needs. You can reach us at 770.682.3119 or thru email at email@example.com with your questions and comments.