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2016 Tax Planning Environment
Tags: IRS; Tax Planning

The Tax Planning Environment in 2016

While more than 15 major pieces of tax legislation have been enacted into law since 2000, the current tax planning environment has been heavily shaped by the American Taxpayer Relief Act of 2012, passed in January 2013, and the Protecting Americans from Tax Hikes (PATH) Act of 2015, passed late last year.

Together, these legislative acts made permanent a number of significant tax provisions that had previously existed only in temporary form, and introduced new rates and limitations that target high-income individuals. But while a host of popular tax benefits commonly referred to as "tax extenders" are now permanent fixtures in the tax code, others were simply extended, some only through the 2016 tax year. As a result, 2016 tax planning takes place in a relatively stable tax environment, with some small degree of uncertainty regarding the potential availability of specific provisions heading into the 2017 tax year.

Permanent provisions

These provisions are now part of the permanent tax landscape:

  • The six individual federal income tax rates (10%, 15%, 25%, 28%, 33%, and 35%) that had existed in temporary status for more than a decade, and a top 39.6% tax rate that applies to those with the highest incomes
  • Special maximum tax rates generally apply to long-term capital gains and qualified dividends; the rate is 0%, 15%, or 20% depending on your federal income tax bracket
  • Higher alternative minimum tax (AMT) exemption amounts are in effect and adjusted for inflation; the AMT is essentially a parallel federal income tax system with its own rates and rules, and the higher exemption amounts and other related provisions significantly limit the reach of this tax
  • Personal and dependency exemptions phase out at higher incomes, and itemized deductions may be limited
  • "Marriage penalty" relief is now permanent in the form of an increased standard deduction for married couples and an expanded 15% federal income tax bracket
  • Expanded tax credit provisions relating to the dependent care tax credit, the adoption tax credit, and the child tax credit
  • Increased limits and more generous rules of application relating to certain education provisions, including Coverdell education savings accounts, employer-provided education assistance, and the student loan interest deduction
  • Individuals age 70½ or older can make qualified charitable distributions (QCDs) from their IRAs, and exclude the distribution from gross income (up to $100,000 in a year); QCDs count toward satisfying any required minimum distributions (RMDs) that would otherwise have had to be made from the IRA
  • Individuals who itemize deductions on Schedule A of IRS Form 1040 can elect to deduct state and local general sales taxes in lieu of the deduction for state and local income taxes
  • The maximum amount that can be expensed by a small business owner under IRC Section 179 rather than recovered through depreciation deductions is $500,000, reduced by the amount by which the cost of qualifying property placed in service during the year exceeds $2,010,000 (2016 figures; will be adjusted for inflation in future years)

Other "tax extender" provisions

Provision Summary Status
American Opportunity Tax Credit The American Opportunity Tax Credit is a modified version of the original Hope Credit, with a higher maximum credit amount ($2,500 per eligible student per year), more years of education covered, and an increased income phaseout range. A portion of the credit is also refundable. Made permanent
Bonus depreciation An additional 50% first-year depreciation deduction is available for property placed in service during the taxable year. (The bonus percentage is reduced to 40% in 2018 and 30% in 2019.) Extended through 2019 as modified
Child tax credit The refundable portion of the child tax credit (the "additional child tax credit") can generally be up to 15% of earned income over $3,000. Made permanent
Credit for nonbusiness energy property A 10% credit is available for the purchase of certain energy-efficiency improvements, including qualifying insulation, roofing, windows, and doors; specific credit amounts apply for the purchase of specified energy-efficient property, like qualified furnaces and hot water boilers. A $500 lifetime cap applies (no more than $200 can apply to the purchase of windows). Extended through 2016
Deduction for qualified higher-education expenses You may be entitled to a deduction if you paid qualified higher-education expenses during the year--this includes tuition and fees (for yourself, your spouse, or a dependent) for enrollment in a degree or certificate program at an accredited post-secondary educational institution. The maximum deduction is generally $4,000. Limitations based on adjusted gross income (AGI) apply. Extended through 2016
Deduction for classroom expenses paid by educators If you're an educator, you can claim up to $250 of unreimbursed qualified classroom expenses you paid during the year as an "above-the-line" deduction. Qualifying expenses include the cost of books, most supplies, computer equipment, and supplementary materials used in the classroom. Starting in 2016, qualifying expenses also include qualifying professional development expenses. Teachers, instructors, counselors, principals, and aides for kindergarten through grade 12 are eligible, provided a minimum number of hours are worked during the school year. Made permanent
Deduction for mortgage insurance premiums Premiums paid or accrued for qualified mortgage insurance associated with the acquisition of your main or second home can be treated as deductible qualified residence interest on Schedule A of IRS Form 1040, subject to AGI limitations. Extended through 2016
Discharge of qualified personal residence debt Individuals are able to exclude from gross income the discharge of up to $2 million ($1 million if married filing separately) of qualified principal residence indebtedness--debt incurred in acquiring, constructing, or substantially improving a principal residence. Refinanced qualified principal residence debt that is discharged can also qualify for the exclusion. Extended through 2016
Earned income tax credit Credit percentage is increased for families with three or more qualifying children, and the income threshold phaseout range is increased for married couples filing joint returns. Made permanent
Mass transit benefits The monthly exclusion for employer-provided transit pass and vanpool benefits is set to the same level as the exclusion for employer-provided parking ($255 monthly for 2016). Made permanent
Qualified small-business stock 100% of capital gain from the sale or exchange of qualified small-business stock acquired at original issue during the tax year can be excluded from income provided that certain requirements, including a five-year holding period, are met. Made permanent
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Securities and Investment Advisory Services offered through KCD Financial,Inc.,MemberFINRA&SIPC. Securities are offered in Maryland,Virginia, Pennsylvania, New Jersey and North Carolina. For the residents of the other states,information provided here is for educational purpose only.

Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual's personal circumstances.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

This communication is strictly intended for individuals residing in the state(s) of MD, NJ, NC, PA and VA. No offers may be made or accepted from any resident outside the specific states referenced.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016.

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 *"Securities and Investment Advisory Services offered through KCD Financial, Inc., Member FINRA & SIPC. Securities are offered in Maryland, Virginia, Pennsylvania, New Jersey and North Carolina. For the residents of the other states, information provided here is for educational purpose only."

This communication is strictly intended for individuals residing in the state(s) of MD, NJ, NC, PA and VA. No offers may be made or accepted from any resident outside the specific states referenced.

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