In one of its final legislative actions at the close of the year, Congress cleared the “Protecting Americans from Tax Hikes” (PATH) Act of 2015, which permanently reinstated a number of popular tax provisions that had lapsed in previous years (you can read more about the bill here).
Beyond the passage of the PATH Act, 2016 will bring a handful of minor changes that you’ll need to keep on your radar for next year. Right now, you’re probably thinking, “That’s great and all, but I’m focused on finalizing my 2015 tax return — I can’t even think a full year ahead.”
Sure, it may sound daunting — but it’s important to remember that tax planning is a year-round process, one that doesn’t halt once your return is signed and filed. The sooner you plan ahead and start the preparation process, the better your chances of achieving greater savings (and avoiding any unwelcome surprises) next year.
The first step: schedule a meeting with your advisor to get up-to-speed on the new adjustments and assess whether they’ll affect your tax plan moving forward.
Here’s a quick look at the top changes that will take shape in 2016:
1. The Inflation Factor
Every year, the IRS releases a list of tax provisions that are adjusted for inflation.
Here’s a quick look at what’s changing this year:
Tax Brackets: The income limits for all tax brackets and filers will increase by 0.4% in 2016.
Personal Exemption: This exemption — which all taxpayers are permitted to take on their returns each year — is increasing to $4,050, up $50 from 2015.
Estate Tax Exemption: This year, the lifetime exemption for gift and estate taxes will see a big boost — the limit is expected to rise to $5.45 million, up $20,000 from 2015 (the limit applies to estates of those who pass away in 2016).
Alternative Minimum Tax (AMT) Exemption: For single filers, the AMT exemption will increase to $53,900 and start to phase out at $119,700; for joint filers, the exemption is $83,800 and will begin to phase out at $159,700.
Standard Deductions: In 2016, heads of household will be able to take a deduction of up to $9,300, though limits for singles and married couples filing separately and jointly will remain the same ($6,300 for both singles and couples filing separately, and $12,600 for couples filing jointly).
Click here for more information about these changes, as well as other inflation-adjusted tax provisions for 2016.
2. A Steeper Penalty for the Uninsured
Don’t have health insurance? Be prepared to pay a hefty fine in 2016. Under the Affordable Care Act, the penalty for not having minimum essential medical coverage is calculated two ways: as a percentage of your household income and per person. You will pay whichever amount is greater. In 2016, the maximum penalty has risen to 2.5% of your household income, up from 2% in 2015. The per-person penalty has risen to $695 per adult and $347.50 per every child under the age of 18 — a grand total of $2,085.
3. Health Savings Accounts (HSAs): A Step Up for Family Contributions
Families can bump up their health savings account (HSA) contributions by $100 this year, with the maximum limit rising to $6,750. The contribution limit for individuals will remain at $3,350, as will the catch-up contribution limit of $1,000 for those over age 55.
Before you give yourself a pat on the back for being prepared (though you should do that, too!), there’s one more item you’ll need to add to your tax prep to-do list — for this April, that is. Remember that the deadline to file your 2015 income tax return has been pushed back to April 18, which means you have a little extra time to gather your paperwork.
The reason for the change? Emancipation Day (a federal holiday) falls on Friday, April 15, this year, which requires the IRS to push the deadline to the following Monday.
As you run through this list, keep in mind that these changes aren’t exhaustive — tax bills are still moving through Congress, which could bring more adjustments over the course of the year. Meet regularly with your advisor throughout the year to ensure your plan is up-to-date — for 2016, 2017 and beyond.
Want to find out how these changes might affect your financial plan? Please call 888-520-3040 or find an advisor at an office near you