Not too long ago, the IRS released the latest information for 2016 tax brackets. It is the information you’ll use when you file your taxes in 2017. However, even though these numbers won’t be used when you file your 2015 taxes in the coming months, understanding some of these changes now can help you plan your tax strategy for the next year. You can use the information to change your withholdings or to better understand how a major life change might impact your tax bill.
Inflation Changes the 2016 Tax Brackets
Even though the IRS didn’t allow for a cost-of-living increase for Social Security benefits in 2016, the IRS does recognize some level of inflation. The 2016 tax brackets have been adjusted to reflect this, with the top tax bracket not affecting singles until they reach $415,050 in annual income and joint filers reaching $466,950. This is a relatively small change since the income levels in 2015 were $413,200 and $464,850, respectively.
It’s worth noting that the standard deduction hasn’t changed for single and joint filers. However, those who file as head of household will see a slightly higher increase in the standard deduction, from $9,250 to $9,300.
Personal Exemption, Itemized Deductions, and EIC
There are some small changes to what you can expect for your personal exemption and tax deductions if you itemize them as well. The personal exemption for 2016 will be $4,050, which represents a very modest increase from the 2015 level of $4,000. There is a phase-out starting at $259,400 for single filers and $311,300 for joint filers. Once the income level of $381,900 (single) or $433,800 (joint) is reached, the personal exemption is completely phased out.
Itemized deductions are also subject to limits. Those with higher incomes can’t claim the same level of deductions. In 2016, the phaseout begins at the same levels as the personal exemption. Some of the more common itemized deductions include mortgage interest, charitable donations, and medical expenses (but you can only claim out-of-pocket expenses that amount to more than 10% of your AGI).
The Earned Income Credit (EIC) will also see changes in 2016. The maximum credit has been raised from $6,242 in 2015 to $6,269 in 2016. It’s important to understand that your EIC amount depends on your income and the number of qualifying children that you have. Not everyone qualifies for the maximum amount.
Other 2016 Changes
Some of the other changes to expect in 2016 include:
- Foreign earned income exclusion will be $101,300, up from the 2015 level of $100,800
- Reduction in Lifetime Learning Credit starts at $111,000 in 2016, as opposed to $110,000 in 2015
- Qualified transportation benefit is $130 for transport each month in 2016, but rises by five dollars to $255 for qualified parking
- The AMT exemption amount for 2016 is $53,900 for single filers and begins to phase out at $119,700 ($83,400 and phases out beginning at $159,700 for joint filers)
There are plenty of other changes coming to the 2016 tax amounts, so you’ll want to pay attention to what matters most to you and consult with a professional who can help you plan your tax strategy accordingly.