What’s New for 2016 Tax Returns (Due in April 2017)?

Sign Shows Year Two Thousand And Sixteen

Each year federal tax laws change, and 2016 was no exception. Fortunately, many of the changes enacted into legislation during the year which impacted individuals were mere extensions of laws that were set to expire during 2016. Below is a highlight of the tax laws that commonly affect individuals which are either new, continuing from a prior year, or scheduled to expire at a future date.

Inevitably, 2017 is likely to present some tax planning challenges as is typical when there is a change in political administrations.  Hopefully, any changes will simplify our client’s understanding of what is expected from them while reducing tax compliance burdens.  We will continue to focus on delivering quality and proactive services regardless of how volatile tomorrow’s tax law changes may be.

Affordable Care Act

Effective in 2014, individuals are required to carry health insurance coverage either through an employer, the government, or private market to avoid being assessed a penalty.  Many individuals who obtained coverage through the Health Insurance Marketplace are eligible to receive the Health Insurance Premium Credit. There are also various exemptions for individuals who did not have coverage the entire year.  This maximum penalty for not having insurance during 2016 has increased compared to the prior year.  The penalty is now $695 per adult, with $347 per dependent child under age 18, subject to a maximum of $2,085 per family; or 2.5% of the amount of annual household income that exceeds income tax filing thresholds capped at the National Average Bronze Plan Premium.

Same-Sex Couples

Legally married same-sex couples must file their 2015 and later tax returns using either the filing status Married Filing Separate or Married Filing Jointly for both federal and state purposes.  There is no longer any distinction in the federal or state tax law between same-sex couples and heterosexual couples.  Refunds may be available for same-sex couples that filed separate returns during 2013 and 2014.

Increased Medical Expense Deduction Limitation

Only amounts exceeding 10% of an individual’s adjusted gross income can be used as an itemized deduction.  However, the old 7.5% threshold remains unchanged through 2016 for individuals age 65 and over.

Increased Exemption Amount

The amount you can deduct for each exemption has increased by $50 to $4,050.  This amount may be limited for those earning at least $259,400 (or $155,650 if married filing separately; or $311,300 if married filing jointly; or $285,350 if filing Head of Household).

Standard Deductions Increase

Standard deductions increased depending on filing status.  2016 standard deductions are listed below.

Filing Status Standard Deduction Additional Deduction if 65 or Older Additional Deduction If Blind
Single/Married Filing Separate $6,300 $7,850 (Single)

$7,550

(MFS)

Add $1,550 (Single)

Add $1,250 (MFS)

Married Filing Jointly/Qualifying Widow(er) $12,600 $13,850 if one spouse is at least 65, $15,100 if both are at least 65 Add $1,250
Head of Household $9,300 $10,850 Add $1,550

Child Tax Credit

The child tax credit remains $1,000 for each child dependent under the age of 17 subject to reduction based on income.

American Opportunity Credit ($2,500)

A credit up to $2,500 per student is available for the first four years of undergraduate education.

Educator Expenses

Teachers and educators are generally allowed to deduct up to $250 of the cost of classroom supplies.  This credit no longer has an expiration date under current law.

Sales Tax Deduction

Individuals are given a choice to either deduct state income tax or state sales tax as an itemized deduction.  This credit no longer has an expiration date under current law.

Student Loan Interest

Many individuals are able to deduct up to $2,500 in student loan interest paid during the year on qualified student loans.

First-Time Homebuyer Tax Credit Repayment

Certain individuals who participated in the 2008 First Time Homebuyer Tax Credit will continue to need to pay back all or a portion of their tax credit.  See IRS website for more specifics.

Energy Credit

A 10% credit for qualified energy efficiency improvements to a primary home is available.  The total cumulative cap is $500 ($200 for windows) for all years after 2005.

Earned Income Tax Credit (EITC)

The amount of Earned Income Tax Credit for taxpayers has slightly increased. Filers can claim up to three (3) children and earn higher levels of income before phasing out of the credit.  The maximum credit for three children claimed during 2016 is $6,269.

Deductible Vehicle Mileage

The following rates apply to most vehicles used for the purposes listed below during 2016.

Purpose
Charitable 14 cents
Business 54 cents
Medical/Moving 19 cents

Additional Medicare Taxes

An additional .9% tax will be imposed on earned income exceeding $200,000 (or $250,000 for married filing jointly filers).  In addition, a 3.8% tax will be imposed on the lesser of net investment income or the amount that exceeds the established thresholds – $125,000 if married and filing separately, $200,000 if filing single, or $250,000 if filing jointly.

Itemized Deductions Limitations

Some individuals earning incomes in excess of $258,250 (or $154,950 if married filing separately) may be subject to having their itemized deductions limited up to 80%.

Expiring Tax Deduction and Credits

Congress recently passed legislation to extend the following tax laws that apply to 2016 tax returns.  These provisions will not be applied to any future tax years unless additional legislation is passed.

Mortgage Insurance Premiums

Individuals are able to deduct mortgage insurance premiums paid on mortgages taken out after 2006.  This deduction will no longer be available effective with the 2017 returns as the law currently stands.

Cancellation of Home Mortgage Debt

Individuals are allowed to exclude all or a portion of debt canceled or forgiven related to a mortgage on their primary home.  This deduction will no longer be available effective with the 2017 returns as the law currently stands.

Tuition and Fees Deduction

Individuals are able to deduct up to $4,000 in tuition and fees paid to eligible colleges and universities.  This deduction will no longer be available effective with the 2017 returns as the law currently stands.

 

Related Articles

What’s New for 2016 North Carolina Tax Returns (Due in April 2017)

IRS List of Tax Deductible Expenses: Itemized Miscellaneous Deductions

Guide for Choosing a Tax Preparer

Standard Deductions vs. Itemized Deductions:  Which Deduction is Better for Tax Returns?

How to File Same-Sex Tax Returns in North Carolina

 

Simply Taxes, LLC is a local year-round tax preparation firm with an office located in North Raleigh. Our Raleigh accountants are ready to work one-on-one with you to help optimize your tax deductions and to resolve any other tax issues in a professional manner.

The information contained within this article is for general guidance only. As such, it should not be used as a substitute for consulting with professional accounting, tax, legal or other competent advisers.  

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