Know Before You File: Tax Breaks for 20162016 tax law changes include new rule for Earned Income Tax Credit.

 

As a new year looms on the horizon, taxpayers’ minds are turning — often reluctantly — to tax day. But April doesn’t have to be all doom and gloom. A number of tax breaks are woven into the Internal Revenue Code to help you keep hard-earned dollars. You just have to know where to find these breaks.

The IRS will sometimes make tax changes right up to the tax deadline, so be sure you’re up to date on all of the tax laws and changes. Here is a summary of the rules currently in effect and some key tax law changes. Knowing this information is crucial as you roll up your shirtsleeves to begin preparing your 2016 federal tax return.

Related: 30 Tax Mistakes the Rich Never Make

Tax Brackets, Personal Exemption and Standard Deductions

The income thresholds for tax brackets are indexed to accommodate inflation. They can change annually as the Internal Revenue Service adjusts them upward, with each bracket covering slightly more income than it did the year before.

For example, you can earn up to $91,150 in 2016 as a single taxpayer filing an individual return and still remain in the 25 percent tax bracket. The limit was just $90,750 a year ago. That $400 difference might not sound like much, but every little bit helps. You won’t pay 28 percent in taxes — the next bracket — until you earn dollar 91,151.

These are the income thresholds for 2016 tax filings.

Married Filing Jointly (and Surviving Spouse)
Tax Rate 2016 Taxable Income 2015 Taxable Income
10% $0 – $18,550 $0 – $18,450
15% $18,551 – $75,300 $18,451 – $74,900
25% $75,301 – $151,900 $74,901 – $151,200
28% $151,901 – $231,450 $151,201 – $230,450
33% $231,451 – $413,350 $230,451 – $411,500
35% $413,351 – $466,950 $411,501 – $464,850
39.60% $466,951+ $464,851+
Source: Wolters Kluwer

 

Unmarried Individuals (Other Than Surviving Spouses and Heads of Households)
Tax Rate 2016 Taxable Income 2015 Taxable Income
10% $0 – $9,275 $0 – $9,225
15% $9,276 – $37,650 $9,226 – $37,450
25% $37,651 – $91,150 $37,451 – $90,750
28% $91,151 – $190,150 $90,751 – $189,300
33% $190,151 – $413,350 $189,301 – $411,500
35% $413,351 – $415,050 $411,501 – $413,200
39.60% $415,051+ $413,201+
Source: Wolters Kluwer

 

Head of Household
Tax Rate 2016 Taxable Income 2015 Taxable Income
10% $0 – $13,250 $0 – $13,150
15% $13,251 – $50,400 $13,151 – $50,200
25% $50,401 – $130,150 $50,201 – $129,600
28% $130,151 – $210,800 $129,601 – $209,850
33% $210,801 – $413,350 $209,851 – $411,500
35% $413,351 – $441,000 $411,501 – $439,000
39.60% $441,001+ $439,001+
Source: Wolters Kluwer

 

Married Individuals Filing Separate Returns
Tax Rate 2016 Taxable Income 2015 Taxable Income
10% $0 – $9,275 $0 – $9,225
15% $9,276 – $37,650 $9,226 – $37,450
25% $37,651 – $75,950 $37,451 – $75,600
28% $75,951 – $115,725 $75,601 – $115,225
33% $115,726 – $206,675 $115,226 – $205,750
35% $206,676 – $233,475 $205,751 – $232,425
39.60% $233,476+ $232,426+
Source: Wolters Kluwer

These thresholds became even more important when the American Taxpayer Relief Act of 2012 added a seventh federal income tax bracket of 39.6 percent in 2013. Taxable incomes over the following levels are taxed at the 39.6 percent rate in 2016:

  • Married filing separately: $233,475
  • Unmarried individuals: $415,050
  • Head of household: $441,000
  • Married filing jointly: $466,950

The personal exemption rises by $50 to a rate of $4,050 for all taxpayers in 2016, subject to phaseouts at specific income levels. You can deduct this amount from your income, and doing so can help you remain in a lower tax bracket if your earnings teeter on a tax bracket cutoff point.

Standard deductions are also indexed for inflation. But thanks to a low 2015 national inflation rate, only those who qualify to file as head of household see an increase in 2016. These taxpayers get a $50 bump to $9,300. Other standard deductions have not changed, and include $6,300 for singles and married persons filing separate returns, and $12,600 for married couples filing jointly.

Standard Deduction Amounts
Filing Status 2016 2015 Increase
Married Filing Jointly (& Surviving Spouse) $12,600 $12,600 $0
Married Filing Separately $6,300 $6,300 $0
Single $6,300 $6,300 $0
Head of Household $9,300 $9,250 $50
Source: Wolters Kluwer

Health Savings Accounts

Taxpayers should also take advantage of the increasing contribution limits on health savings accounts. An HSA is one of the greatest options for long-term savings available to taxpayers. These accounts let individuals set aside pretax money that can be used to pay for qualified medical expenses.

Money that is not spent can be rolled over into future years. This is great for most taxpayers, because even if they take steps to remain healthy, they typically will face significantly more health care bills later in life.

The contribution limit on individual HSAs does not increase in 2016, and remains at $3,350. However, the contribution limit for family HSAs increases by $100, to $6,750.

An available catch-up contribution for those 55 and older is not indexed for inflation. Changes to this limit must be statutorily approved — they’re not automatic. This hasn’t happened in 2016, so the limit for catch-up contributions remains at $1,000.

Related: 4 Easiest Ways to Get an EIN

Earned Income Tax Credit

The Earned Income Tax Credit increases in 2016. This credit is refundable and is designed to help lower-income individuals and families by providing additional money to them in the form of tax refunds.

The maximum EITC ranges from $506 for a single individual with no children to $6,269 for individuals with three or more children. The phaseout thresholds for the EITC are also higher in 2016. Single individuals who have one child and earn as much as $39,296 are eligible for at least part of the EITC.

Earned Income and AGI Limits
Filing Status Qualifying Children Claimed
Zero One Two Three or more
Single, Head of Household or Widowed $14,880 $39,296 $44,648 $47,955
Married Filing Jointly $20,430 $44,846 $50,198 $53,505
Data provided by: IRS.gov

The Protecting Americans from Tax Hikes Act of 2015 — known as the PATH Act — has made an important change to how people receive the EITC. Starting in 2017, if you claim the EITC, you won’t get your refund until Feb.15 or later, even if you’re eligible to receive the EITC and you file a return on Jan. 2.

The law applies to your entire tax refund. For example, if you’re eligible for both a $1,000 refund in overpaid taxes and a $506 EITC refund, the IRS cannot give you the $1,000 and retain the $506 until the Feb. 15 deadline. Your entire refund will be delayed. The IRS said the changes brought about by the PATH Act give the agency “more time to help detect and prevent fraud.”

Related: The Best Thing I Ever Did With My Tax Refund

Estate Taxes

Estates valued over certain thresholds are subject to a federal estate tax that tops out at 40 percent and which the estate must pay, correspondingly reducing the amount of money and property available to heirs.

In 2016, estate tax exemptions increase to $10.9 million per married couple and $5.45 million per individual. That means no estate taxes are due up to these amounts. The top 10 percent of the nation’s income earners pay almost all of the estate taxes in America, and few farms or family business are impacted, according to the Tax Policy Center.

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