The following are select tax topics affecting individuals and businesses for tax year 2016. Several issues of significance to individuals and businesses for 2015 remain relevant for 2016 and are noted below. The impact of select new topics below, such as individual and business impacts of the Affordable Care Act, are discussed in great depth.
Top Tax Rates
Single filers with taxable incomes exceeding $415,051 ($466,951 for married taxpayers filing jointly) are subject to the top tax rate of 39.6 percent in 2016.
Net Investment Income Tax
Since the net investment tax has been in existence only since the 2013 tax year, continued discussion is warranted. The net investment income tax, or NIIT, applies to individual, trust and estate income tax returns and is 3.8 percent of the lesser of two amounts: net investment income, or the excess of the taxpayer's modified adjusted gross income (MAGI) above $200,000 (single filer) or $250,000 (joint filer). Net investment income includes three broad categories: interest, dividends, annuity, royalty and rental income; net income from a business in which the taxpayer does not materially participate; and business income from trading in financial instruments or commodities, as well as capital gains and other net gains from the sale of investment or passive property. Items excluded from net investment income include, but are not limited to, distributions from certain qualified retirement plans and individual retirement accounts, and municipal bond interest. Repeal of the Affordable Care Act would eliminate the net investment income tax.
Additional Medicare Taxes
An additional 0.9-percent Medicare tax continues to apply to FICA wages and self-employment income exceeding $200,000 for single taxpayers, $250,000 for joint filers and $125,000 for married taxpayers filing separately. This is in addition to the existing Medicare tax of 1.45 percent on all earned income and Social Security tax of 6.2 percent on earned income up to $118,500 for 2016. Repeal of the Affordable Care Act would eliminate the additional Medicare tax
Capital Gains Tax Rate
The maximum tax rate for long-term gains is 20 percent for taxpayers in the highest tax bracket (39.6 percent), remains at 0 percent for taxpayers at or below the 15-percent bracket and remains at 15 percent for all others.
Alternative Minimum Tax (AMT)
The exemption is increased to $53,900 (from $53,600) for single taxpayers, $83,800 (from $83,400) for joint filers and $41,900 (from $41,700) if married and filing separately. These increases are permanent and will continue to be indexed annually for inflation. Also, certain non-refundable personal credits are permitted to offset the entire regular and AMT tax liabilities.
The personal exemption is $4,050 for 2016, an increase of $50. Phase-outs of the exemptions begin with adjusted gross income (AGI) of $259,400 for single taxpayers ($311,300 for married taxpayers filing jointly).
Limitations for Itemized Deductions
The phase-out of itemized deductions (often called the "Pease" Limitation) returned in 2013 and continues to impact taxpayers for 2016. Married taxpayers filing jointly with AGI of $311,300 or higher ($259,400 for single taxpayers) will once again see their itemized deductions reduced by 3 percent of the amount by which their AGI exceeds these thresholds. This reduction is capped at 80 percent of itemized deductions.
Medical Expense Deduction
The medical expense deduction is once again limited to a 10-percent-of-AGI threshold for taxpayers under age 65. Those age 65 and older (or whose spouse is 65 or older) still have through 2016 to use the 7.5-percent threshold previously applicable to all taxpayers. Starting in 2017, the deduction will be limited to 10-percent-of-AGI for all taxpayers.
Standard Mileage Rates
The standard mileage rate is 54.0 cents per mile for business use of car, 19.0 cents per mile for medical and moving purposes and remains at 14 cents per mile for charitable purposes.
Retirement Savings Plans Continue
IRA deductions may be available for those covered by other plans subject to certain dollar limits and phased out for single and joint taxpayers with AGI between $61,000 to $71,000 and $98,000 and $118,000, respectively. For joint filers where only one spouse is covered by another plan, the phase-out range is $184,000 to $194,000. The overall contribution limits remain the same, at $5,500 for a traditional or Roth IRA, with an additional $1,000 available for those over age 50.
Roth IRA Income Limits
Roth contributions may be allowed for those with MAGI of less than $132,000 for single taxpayers and $194,000 for joint filers.
American Opportunity Tax Education Credit Continues
Up to $2,500 of credit per student is available for qualified higher-education expenses, such as tuition and cost of books. Phase-out begins at MAGI of $80,000 for single filers and $160,000 for joint filers.
Tax Benefits for Adoption
The maximum adoption credit increased to $13,460 for out-of-pocket expenses for the legal adoption of a child. The credit is nonrefundable and phases out for taxpayers with MAGI exceeding $201,920.
A Residential Energy Efficient Property Credit is still available to taxpayers who install certain energy-efficient property, such as photovoltaic panels, solar water heating property, fuel cell property, small wind energy property and geothermal heat pumps. The credit is available for expenditures incurred for such property up to a specific percentage, although a cap applies to fuel cell property. The property purchased cannot be used to heat swimming pools or hot tubs. This credit expired at the end of 2016 and is unlikely to be renewed for 2017.
Individual Tax Extenders
The Protecting Americans from Tax Hikes Act of 2015 (PATH), signed into law by President Obama on December 18, 2015, renewed or made permanent certain individual tax extenders. Some of the relevant tax extenders include:
- State and Local Sales Tax Deduction (made permanent) – the option to take an itemized deduction for state and local general sales taxes instead of the itemized deduction permitted for state and local income taxes.
- Higher Education Deduction (expiring in 2016) – an above-the-line deduction is available for qualified tuition and fees for post-secondary education. The maximum deduction is $4,000 for taxpayers with AGI not exceeding $65,000 ($130,000 for married taxpayers filing jointly), $2,000 for taxpayers with AGI between $65,000 and $80,000 ($130,000 to $160,000 for married taxpayers filing jointly) and $0 for other taxpayers.
- Teachers' Classroom Expense Deduction (made permanent and indexed for inflation) – an above-the-line deduction is available for primary and secondary education professionals (grades K-12, including school administrators and assistants) reflecting qualified out-of-pocket expenses of up to $250. New rules also provide that expenses for professional development shall be considered eligible expenses.
- Mortgage Debt Exclusion (expiring in 2016)– up to $2 million ($1 million for married taxpayers filing separately) may be excluded from income for cancellation of mortgage debt on a principal residence. Expiring in 2016 unless discharge was pursuant to a binding written agreement entered into prior to January 1, 2017.
- Mortgage Insurance Premium Deduction (expiring in 2016) – a deduction is available for premiums paid or accrued in connection with acquisition debt of a primary or second home. The PMI deduction is reduced by 10 percent for each $1,000 by which the taxpayer's AGI exceeds $100,000. The deduction disappears completely for most homeowners whose AGI is $109,000 ($54,500 for married taxpayers filing separately).
- Charitable Distributions from IRAs (made permanent) – individuals age 70-½ and older may make annual tax-free distributions, up to $100,000 per taxpayer, from IRAs to qualified charitable organizations. All or part of the taxpayer’s required minimum distribution (RMD) may be included in the QCD.
- Mass Transit and Parking Benefits (made permanent and adjusted for inflation)– up to $255 per month may be excluded from income for employer-provided mass-transit and parking benefits each.
- Contribution of Real Property for Conservation Purposes (made permanent) – a maximum deduction of 50 percent of AGI in any given year is available for the donation of a conservation easement.
Social Security Cap Increased for 2017
While the 2016 cap on wages subject to Social Security Tax is still $118,500 the 2017 cap has been increased to $127,200. This increases the maximum social security tax withheld on a single employee to $7,886.40 (from $7,347) and for a self-employed individual to $15,772.80 (from $14,694).
Estate and Gift Tax Changes
The top estate and gift tax rate increased to 40 percent, the estate tax exemption increased to $5.45 million and the annual per-donee gift tax exclusion remains at $14,000 for 2016. Additionally, estate tax portability was made permanent in 2014.
FBAR Due Date
The due date for filing FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), is April 15 of the year following the calendar year being reported. Taxpayers can also request a six-month extension of time to file the FBAR. In prior years, Form 114 was due June 30 with no extension.
Property Purchased by Businesses
Effective for taxable years beginning on or after January 1, 2014, the IRS finalized regulations that provide guidance for when taxpayers should capitalize or deduct as a current expense repairs on tangible property, plus the deductibility of materials and supplies. A deduction for materials and supplies is allowed under a de minimis rule that includes property that has an acquisition or production cost of $200 or less. Also, another de minimis safe harbor states that for repairs to be deductible, among other requirements, the unit of property must cost less than $5,000 per invoice or item substantiated by the invoice for taxpayers with applicable financial statements and $2,500 per invoice for taxpayers without applicable financial statements.
Business Start-up and Organizational Costs
Deductions of up to $5,000 of business start-up and $5,000 of organizational costs paid are still available in the year in which an active trade or business begins. The $5,000 deduction is reduced by the amount of total start-up or organizational costs that exceed $50,000. Any remaining costs must be amortized over 180 months.
Small Employer Pension Plan Startup Cost Credit: For 2016
Certain small business employers that did not have a pension plan for the preceding three years may claim a nonrefundable income tax credit for expenses of establishing and administering a new retirement plan for employees. The credit applies to 50 percent of qualified administrative and retirement-education expenses for each of the first three plan years. However, the maximum credit is $500 per year.
Employer-Provided Child Care Credit: For 2016
Employers may claim a credit of up to $150,000 for supporting employee child care or child care resource and referral services. The credit is allowed for a percentage of "qualified child care expenditures," including for property to be used as part of a qualified child care facility, for operating costs of a qualified child care facility and for resource and referral expenditures.
Business Tax Extenders
The Protecting Americans from Tax Hikes Act of 2015 (PATH), signed into law by President Obama on December 18, 2015, renewed or made permanent certain business tax extenders through. Some of the relevant tax extenders include:
- Bonus Depreciation (extended with expiring provisions) – extended for property placed in service during 2015 through 2019; the 50-percent rate is phased down to 40 percent for property placed in service during 2018 and 30 percent for property placed in service during 2019. Phase down is also required for the $8,000 increase, for bonus-depreciation eligible cars, of the first-year depreciation and expensing dollar cap for cars. The provision makes qualified building improvements (no longer just qualified building leasehold improvements) bonus depreciation eligible.
- Section 179 Deduction (made permanent and indexed for inflation) – businesses can expense up to $500,000 of qualified depreciable property under Section 179, with phase-out beginning when property placed in service exceeds $2.01 million. Off-the-shelf software continues to qualify for the election, as well.
- Qualified Leasehold/Retail Improvements, Restaurant Property (made permanent) – an election to treat up to $500,000 of qualified property as Section 179 property is available starting in 2016.
- Research Tax Credit (made permanent) – a credit for business-related qualified research expenditures and for increases in payments to universities and other qualified organizations for basic research is available. The research credit generally allows taxpayers a 20-percent credit for qualified research expenses or a 14-percent alternative simplified credit. Starting in tax years after 2016, a new provision provides that, in the case of an eligible small business, the research credit is a specified credit. Thus, these research credits of an eligible small business may offset both regular tax and AMT liabilities.
- Work Opportunity Tax Credit (extended to 2019) – a credit is available for employers that hire military veterans and other qualified individuals. The credit amount is generally equal to 40 percent of up to $6,000 (higher for some veterans) in qualified first-year wages. Starting in 2016 a new group includes Qualified long-term unemployment recipients which for purposes of this credit are individuals who have been certified by the designated local agency as being in a period of unemployment of 27 weeks or more, which includes a period in which the individual was receiving unemployment compensation under state or federal law.
- Exclusion for Gain on Qualified Small Business Stock (made permanent) – 100-percent exclusion of gain on the sale or exchange of qualified stock held for more than five years by non-corporate taxpayers.
- Reduced Recognition Period for S Corporation Built-in Gains Tax (made permanent) – the recognition period is five years versus 10 years for built-in gain following conversion from a C to an S corporation.
Qualified Leasehold Improvement Property
New rules effective for tax years after 2015 allow additional first-year depreciation for qualified improvement property without regard to whether the improvements are property subject to a lease. The new law also removes the requirement that the improvement must be placed in service more than three years after the date the building was first placed in service.
Filing Deadlines for Corporate returns
For tax years beginning after December 31, 2015, the due date for filing Form 1120 (C corporations) is April 15 (15th day of 4th month after the close of the tax year for fiscal year corporations). S corporations will continue to have a due date on the 15th day of the 3rd month (March 15th for calendar year S corporations).
Partnership Return Filing Deadline
For tax years beginning after December 31, 2015, the due date for filing Form 1065 and providing partners with a Schedule K-1 is March 15 (15th day of 3rd month after the close of the tax year for fiscal year partnerships).