With 2016 upon us, people are thinking about taxes and the best ways to deal with the annual headaches that accompany filing a return. Every year, the IRS makes a litany of changes to the tax code throughout the year. Congress often weighs in with its own alterations as well.
Last year was no different, and indeed the year-end budget deal included several key changes. As a result, some forms and materials needed for tax filing might take a few more weeks to arrive in some areas.
In the meantime, here are nine new and improved deductions for 2016. All changes apply to the tax return you will file this year. Study these, and you can minimize the annual pain of paying taxes to Uncle Sam.
1. New Hard Cider Deduction
Among the new deductions in the December budget deal was a provision that alters the tax treatment of hard apple cider. This new tax break for hard cider is aimed at businesses with special backing from constituents in apple-growing states such as New York and states with a significant concentration of cider producers such as Oregon.
The new break comes at a cost of $12 million over 10 years, according to the New York Times. It increases the permissible alcohol and carbonation levels for the popular apple drink, which reduces the excise tax on some products that exceed such levels.
2. New Small-Business Equipment Deduction
It’s not easy running a small business and competing with giant multinational corporations. Unfortunately, the government has often made things more difficult by creating paperwork and tax nightmares for small-business owners.
However, in 2015, Congress passed a new tax deduction that the National Federation of Independent Business called “easily the most positive thing Congress has done for small business in the past several years.”
Under the new deduction — which had broad bipartisan support — small businesses can deduct up to $500,000 annually for expenses of machinery, office equipment and computer technology. That deduction comes at a cost to government coffers of $77 billion for 10 years, according to the Times. However, it should help small businesses invest in new machinery and equipment while cutting their tax bill.
3. New Racehorse Deduction
Most capital equipment purchases have to be deducted over a long period of time based on an IRS schedule of their theoretical useful life. That applies to all sorts of business expenses, from trucks to printing presses. It even applies to animals like cows and horses.
This year, though, Congress included a sweetener in its year-end budget deal that reduces the depreciation period for racehorses to a three-year period, rather than the IRS’ traditional seven-year schedule. The break comes at a cost of $168 million for 2016-17, the Times reports. However, that cost is modified by changes in later years that might or might not end up coming to fruition.
Unsurprisingly, the change was backed by politicians from horse-racing states, most notably Kentucky.
4. Increased Personal Exemptions
In addition to new tax benefits, a number of existing tax benefits are also becoming more valuable. The most useful of these is actually an exemption — rather than a deduction — for everyone.
According to the IRS, “The personal exemption for tax year 2016 rises $50 to $4,050, up from the 2015 exemption of $4,000. However, the exemption is subject to a phase-out that begins with adjusted gross incomes of $259,400 ($311,300 for married couples filing jointly). It phases out completely at $381,900 ($433,800 for married couples filing jointly.)”
This exemption benefits all taxpayers by directly lowering taxable income by $50, making it a sort of belated Christmas present for all.
5. Improved Schoolteacher Expense Deduction
Elementary and secondary schoolteachers often spend their own money to decorate classrooms or offer fancier school supplies to students. These expenses are tax-deductible, thanks to the political clout of the teaching profession.
For 2016, such expenses are eligible for an above-the-line deduction for schoolteacher expenses, up to $250. As part of the year-end budget deal, this amount will be adjusted for inflation in future years. Also, beginning in 2016 these schoolteacher expenses are expanded to include professional development expenses such as conferences and classes.
The deductions apply only to people working in elementary or secondary settings, not colleges or universities.
6. Enhanced Parking Deduction
In many major cities, transportation to and from work is a big cost for employees. The deduction for transportation costs has not changed this year and remains at $130 per month.
However a related benefit — for parking at work — has increased. For tax year 2016, the monthly limitation for the qualified transportation fringe benefit rises to $255 for qualified parking, up from $250 for tax year 2015.
7. Less Burdensome Estate Tax
The estate tax has long been a major issue for many upper-income Americans dealing with tax planning for descendants. The issue is especially acute for owners of small businesses that might have high paper values, but don’t throw off enough cash to let an inheritor pay the taxman.
That burden is a little less onerous now, as the estates of decedents who die during 2016 have a basic exclusion amount of $5,450,000. This is up from a total of $5,430,000 for estates of decedents who died in 2015.
8. Increased Long-Term-Care Insurance Premium Deduction
Individual long-term-care insurance can be expensive. Premiums for this coverage can be deductible if your medical bills are high enough to allow you to itemize your medical expenses.
The IRS is increasing the LTCI premium deduction limit in 2016 to:
- $390, from $380, for taxpayers ages 40 or younger
- $730, from $710, for taxpayers ages 41 to 50
- $1,460, from $1,430, for taxpayers ages 51 to 60
- $3,900, from $3,800, for taxpayers ages 61 to 70
- $4,870, from $4,750, for taxpayers ages 70 and older
The largest dollar amount increases are for senior citizens. But on a percentage basis, the increase is largest for taxpayers in their 40s.
9. Increased Threshold for PEP and Pease
PEP and Pease are two of the most maligned provisions of the Internal Revenue Code. They increase taxable income for high-income earners by limiting the value of deductions and exemptions. PEP is the phase-out of the personal exemption. Pease, named for Democratic Sen. Donald Pease, reduces the value of most itemized deductions once a taxpayer’s adjusted gross income reaches a certain amount.
In 2016, these two provisions are becoming a bit less of a burden for many Americans, as the threshold for when each takes effect is increasing. The income threshold for both PEP and Pease will be $259,400 for single filers and $311,300 for married filers.
These numbers are up from $258,250 and $309,900 for single and married filers in 2015 filings. PEP will end at $381,900 for singles and $433,800 for married couples filing jointly, meaning these taxpayers will no longer have a personal exemption.