For most people, tax season means going through the motions of another filing. But some tax changes implemented in the New Year could affect long-term financial planning. Stay updated on estate tax exemptions changes and 401k and IRA contribution income limit changes.
1 – Leave behind more of your estate, tax free.
Last year, individuals could give away or leave behind up to $5.43 million without having to pay estate taxes. That will rise once again, as it has every year since Congress passed legislation on it in 2012, to $5.45 million. Though it may only affect a small portion of Americans – about 0.5% of them – it’s still significant. A popular feature of estate tax law is referred to as “portability.” Spouses can combine their assets to leave just under $11 million total without owing taxes. If you are one of the few who plan to gift over $5 million, be aware of your limits, as the estate rate is 40%. Even though this is the lowest the rate has been it’s been since the 1930s, it’s still a sizable amount of money.
2 – Increased income limits for 401k and IRA contributions.
An IRA contributor who is not covered by a workplace retirement plan but is married to someone who is can claim the full tax deduction on their IRA contributions until the couple’s joint income exceeds $184,000, an increase of $1,000 since last year. After that, the IRA tax deduction will phase-out for joint income between $184,000 and $194,000.
The little-known saver’s credit is also seeing an increase in income limits in 2016. The tax credit can be claimed up to $2,000 for individuals and up to $4,000 for couples who have contributed to 401ks, IRAs, or other workplace retirement accounts. The new income limits to qualify for the credit are: individuals whose earnings exceed $30,750, heads of household whose earnings exceed $46,125, and married couples whose earnings exceed $61,500.
3 – Additional Medicare taxes for higher income earners.
While the Medicare tax will remain at 2.9% in 2016, those who earn higher wages will more than likely need to pay additional taxes. Wages, compensation, tips, noncash fringe benefits, and self-employment income in excess of $200,000 for single filers and $250,000 for married filers will be subject to an additional 0.9% Medicare tax on the amount above the thresholds. Although the additional Medicare tax went into effect in 2013, it will remain in place for 2016. Employers are required to withhold the additional tax but are not required to notify employees when it begins to withhold that tax. There is no income cap on the additional tax amount.
4 – Make tax-free IRA donations to charity, permanently.
The provision, known as the qualified charitable distribution, that allows IRA owners over the age of 70 ½ years to donate up to $100,000 of assets per year to qualified charities tax free will be made permanent in 2016. While many have had to wait every year to see if this provision would be extended, that wait is over. This permanent tax break gives IRA owners an efficient way to donate to charity without increasing their financial burden. While the provision doesn’t provide tax deduction for donations, these donations will not count as income (unlike many IRA withdrawals) and will still count towards the IRA owner’s required annual withdrawal. Because of this, IRA donors may be able to report a lower income and potentially avoid taxes on Social Security benefits.
5 – Get reimbursed for medical expenses in 2016.
A tax exemption for medical expenses expires on December 31, 2016. This exemption allows individuals to deduct unreimbursed medical and dental care expenses that exceed 7.5% of the tax filer’s adjusted gross income. This can also be used for married couples who are filing jointly, where the combined expenses must exceed 7.5% of the combined income. After December 31, 2016, this percentage rises back up to 10%.
Expenses eligible for deduction may include medical fees from physicians, psychologists and psychiatrists, dental and vision care, surgeries and hospital visits, home modifications for health purposes, prescription medications and devices, and some assisted living expenses. Deductions for travel expenses for an individual to receive medical care may also be available.
Find out how these changes may affect your current estate or retirement plan. Contact the Law Office of Christina Lesher PC today at (713) 529-5900 for legal assistance in estate planning.