Keeping up with changes in the tax law requires an annual update. Each year Congress makes adjustments to tax deductions, and changes in tax laws that directly impact consumers. Some years there are significant changes which can occur anytime before December 31. For the 2016 tax year, filed the first quarter of 2017, there were adjustments to deductions, tax brackets, and the personal exemption along with a major change in how the IRS processes each tax return.
Addressing the Rising Problem of Tax Fraud
In 2015 Congress passed an Act called Protecting Americans From Tax Hikes Act (PATH), which made permanent changes in many tax benefits and put in place additional processes to reduce fraud, particularly among tax filers claiming the Earned Income Tax Credit (EITC).
The goal of the IRS is to reduce the number of fraudulent payments made into criminals. As tax fraud grows, it not only steals your tax dollars, but significantly delays impacted returns. If a criminal files taxes under your social security number, it could delay the refund an average of three months.
For the 2017 tax season (filing for the 2016 tax year), fraud prevention is the number one priority for the IRS.
Last year, the IRS began testing a verification system with the W-2. The process will ensure each filed W-2 comes from a legitimate employer. The IRS also put in place an additional authentication for tax filers as well as anyone requesting returns from previous years.
In addition to these changes, all returns which include the EITC or additional cfhild tax credit will receive additional review to ensure only the correct people receive a refund. What this means for you is that the initial round of returns will not process until after February 15, 2017, and all returns with the EITC could take longer to receive a refund.
Positive Changes in The Tax Laws
Most other changes will increase your refund, due to inflation adjustments, which allow you to make more money without paying higher taxes. Here is a breakdown:
Standard Deduction and Personal Exemption Increases
The standard deduction is a fixed amount you may claim on your return if you do not itemize. Those with a lot of deductions can itemize and take the larger of the two benefits. Standard deduction uses filing status to establish the amount you can subtract from income, before determining the taxable income. Only tax filers using the Head of Household status, received a cost of living increase of $50, to $9,300.
The personal exemption rose for everyone by $50. In 2016, you will receive a $4,050 deduction for each dependent claimed on your tax return.
hEarned Income Tax Credit (EITC) Increases
Low and middle-income tax filers receive additional help come tax time due to the EITC. It is a refundable tax credit, meaning even if you do not owe taxes, you can still increase your refund by the amount of the credit. While qualifying for the EITC will delay your refund, it is a significant help for millions of lower to middle-income families.
The EITC requires paid employment during the year and does not include any passive income such as social security payments, disability, earnings from dividends or interest. You qualify for the credit based on a sliding scale which reduces the credit at the higher income levels. It takes into account your filing status, earned income, and the number of dependents.
Single filers without dependents may qualify for the credit if total earned income is below $14,880, you can receive a credit up to $506. Families filing a joint return with three dependents can earn up to $53,505, an increase of $238 more than 2015. The tax credit for joint filers with three or more dependents can be as high as $6,269.
Tax Bracket Increases Accounting for Inflation
The tax brackets establish the tax rate, as a progressive tax, based on income thresholds. The first tax bracket for those married filing jointly ranges from zero to $18,550 in taxable income at a rate of 10%. Everyone in that filing status will pay 10% on the first $18,550 in taxable income. When your income exceeds that amount, you only pay the higher tax on earnings which exceed the first bracket.
In 2016, the 10% tax bracket increased by $100. The second tax bracket, taxes income from $18,551 to $75,300 in taxable income, taxed at 15%, which is a $400 increase over 2015. The next tax bracket is 25% and covers income up to $151,900, which is a $700 increase.
Contribution Limit Increases on Healthcare Accounts
Healthcare Savings Account (HSA) Limits are higher in 2016. To qualify for an HSA account, you must enroll in a high-deductible health insurance plan which meets the Minimum Essential Coverage (MEC) definition. Going forward, from 2017 and beyond, anyone enrolled in a plan with a high deductible will qualify for an HSA account. The Affordable Care Act defines a high deductible plan as $1,300 for an individual policy and $2,600 for a family policy.
In 2016, individual contributions cap out at $3,350, which remained the same in 2016 but will increase by $50 in 2017, to $3,400. Family plans received an increase in 2016 to $6,750, but will not receive an increase in 2017. Anyone 55 and over can add an additional $1,000 in annual contributions until you reach age 65 when you may no longer contribute to the account.
The major benefit of an HSA account is the tax treatment. You deduct all contributions from income, which then grow tax-free, and offers tax-free withdrawals for qualified medical expenses. Funds roll over from one year to the next, and you have a wide choice of investment options, much like an IRA. Medical bills not covered by insurance, co-pays, vision, dental, and other care, qualifies as a medical expense, although insurance premiums do not. Using funds for non-medical reasons will result in taxation plus a 20% penalty.
Medical Savings Accounts (MSA) Limits are also higher in 2016. MSAs are used by the self-employed to save money on medical expenses. They work similar to the HSA, except contributions are not tax deductible up front. A single account may add $4,500 per year and families may contribute $6,750 each year, with catch-up contributions, of up to $1,000 available to those over 55.
Insurance Penalty Increases
Each year the penalty for lack of health insurance coverage rises. For 2016, it goes up to $695 per adult and $347.50 per child or 2.5% of income. Both the percentage and dollar amount rose over 2015. You pay the higher of 2.5% or a maximum of $2,085 per family if you do not carry minimum essential coverage for at least ten months out of the year, or have a qualified exception.
Most of the 2016 tax changes will lead to a larger refund, even though it will take a little longer to receive your refund.