As you enter 2016, tax law changes are going to become an increasingly big issue when filing your Federal tax return. Federal taxes and laws change every year, but it pays to pay attention to those changes to maximize refunds and minimize payments. Here are six of the biggest tax law changes that will affect you in 2016.
1. New 2016 Filing Dates
For 2016, the first major change to be aware of is the date of the deadline for filing Federal tax returns. Typically, taxes are due on April 15 of each year; but this year, the Washington D.C. holiday of Emancipation Day is on Friday, April 15. As a result, the tax deadline is extended by Federal law through the weekend until April 18 for most filers. However, it’s extended until April 19 if you live in parts of New England — like Massachusetts — where Patriot’s Day is a holiday.
2. Rising Obamacare Penalties
Another major issue filers should be aware of is the increasing penalties related to Obamacare. Obamacare penalties rise this year based on the schedule established under the law. The changes to Obamacare this year are significant especially on the penalties side.
Those penalties started at $95 per adult or 1 percent of income above the filing threshold in 2014, then rose to $285 per adult or 2 percent of income above the filing limit for the filing year 2015. Now, in 2016, those penalties will rise again to $695 per adult or 2.5 percent of income. There is a family maximum in place for 2016, however, of $2,085 per person.
3. Tax Brackets and Deductions
Tax brackets and deductions are also going up again for filers this year. The average bracket is set to rise by about 0.5 percent this year which is consistent with some estimates for rough inflation. Standard deductions are also set to rise, but only in the head of household category.
The filing statuses of single, married filing jointly and married filing separately are not seeing any change in standard deductions because the inflation rate was very low for 2015. Head of household filers get a $50 bump to $9,300. On the positive side, personal exemptions are rising for all tax payers by $50 to a rate of $4,050.
4. Health Savings Account Contribution Limits
Tax payers should also be aware of — and take advantage of — the increasing contribution limits on health savings accounts (HSAs). HSAs are some of the greatest options for long term savings that are available to tax payers. The accounts let individuals set aside money on a pre-tax basis which can then be used to pay for qualified expenses. Money that is not spent can be rolled over into future years until it is spent.
This is great for most tax payers since they will end up facing significantly more in healthcare expenses later in life. For 2016, the contribution limit on individual HSAs is $3,350 and the contribution limit for families rises to $6,750 with an available catch-up contribution of $1,000 for those 55 and older.
5. Estate Tax Exemption Increases
Estate tax exemptions are also increasing this year. For 2016, estate tax exemptions are rising to $10.9 million per married couple and $5.45 million per individual. At this level, only about 0.1 percent of estates in 2016 will be affected.
Given this slow rise of the last few years, individuals working on estate planning should be less concerned with Federal estate taxes and more concerned with state level estate taxes and with minimizing capital gains taxes. Both of these can take a significant chunk out of the wealth passed onto heirs.
6. Higher Earned Income Tax Credit
Finally, the Earned Income Tax Credit (EITC) is also increasing this year. The EITC is designed to help lower income individuals and families by providing money to them. For 2016, the maximum EITC ranges from as little as $506 for a single individual with no children to $6,269 for individuals with three or more children. The phase out thresholds for the EITC are also higher so for instance single individuals with one child earning as much as $39,295 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|
In 2016, you should be aware of these tax law changes as you’re filing federal tax returns. As a tax payer, you should take advantage of these changes to choose the optimal filing status for you. Carefully decide how to approach Obamacare taxes, estate taxes and more while doing your taxes this year.