Taxes: What You Need To Know For 2016
You've still got a little time left to get some year-end transactions in that could result in savings on your 2015 tax return. But as we get ready to start a new tax year, what changes are in store that you should be thinking about?
Well, for starters, what's not changing in 2016 are the tax brackets. The top marginal bracket is still 39.6 percent. But the taxable income levels the tax brackets apply to will all increase by about 0.5 percent because the tax law requires these to rise in step with government inflation benchmarks. So, married filers with taxable income in 2016 exceeding $466,951 and single filers with over $415,051 will pay at this top rate.
Also unchanged in 2016 is the maximum amount workers can contribute to their 401(k) or other similar style retirement plans. This remains at $18,000 ($24,000 for workers over age 50 in 2016). Amounts allowed as contributions to IRAs are also the same ($5,500 and $6,500 for those over age 50).
Families that use Health Savings Accounts (HSAs) will be allowed to contribute an additional $100, for a total of $6,750. In 2016, HSA contributions for individuals remain at $3,350.
However, here are several notable tax changes to keep in mind for next year.
- Higher penalties for those without health insurance: If you aren't covered by qualifying health insurance in 2016, the higher penalty for going uninsured will hurt. The maximum penalty will be the national average premium of the Bronze Plan on the federal exchange, or up to about $2,085. To avoid the penalty for 2016, you'll need to be covered under an employer's plan, or you'll need to enroll in a health plan on an exchange in the first two months of 2016.
- Higher tax-free benefit for mass-transit commuters: One of the expiring tax breaks the huge new federal spending bill has made permanent is a gift to those who pay for mass-transit commuting costs. The bill raises the monthly amount allowed to be paid with pretax income to $255 starting in 2016. The current limit is $130, so this will be a big benefit. The same amount will also apply to the pretax monthly amount car commuters can use for parking costs (which was $250 per month).
The new spending bill also makes permanent other tax breaks that were set to expire:
- IRA charitable transfers: This allows IRA owners age 70-1/2 or older to donate as much as $100,000 to a charity from their IRA tax-free. The charitable transfer also counts toward the IRA owner's required minimum distribution for the year of the transfer.
- State and local sales tax deduction: This allows taxpayers to deduct the greater of either sales tax payments or state and local income taxes on their federal returns. This is mostly used by taxpayers living in states such as Florida, Texas and Washington, which have no state income tax.
- Educator expense deduction: Many teachers use this to deduct as much as $250 of unreimbursed expenses for classroom supplies.
American Opportunity tax credit: This allows a dollar-for-dollar credit against your tax liability of up to $2,500 per year when you pay for qualifying education costs for as many as four years of post-secondary education.
Finally, you'll have more time to file your tax returns in 2016. That's because April 15 falls on a Friday, which is a holiday in Washington D.C. Because of this, the deadline for filing will be Monday, April 18, 2016. And if your filing processing center is in New England, then filing day is Tuesday, April 19 because those states' processing centers will be closed on the 18th in observance of Patriots Day.