08 December 2016
With the election of Donald Trump as President and the return of a Republican Congress to Washington the press is jumping with speculation about changes to U.S. tax laws. I suspect some tax law changes are coming in 2017, but I won’t try to speculate about what the final outcome is going to be. I don’t have a working crystal ball, and if I did I wouldn’t be giving away its secrets for free on the internet. As I’ve said elsewhere, if I could predict the future you probably couldn't afford me.
Instead, let’s focus on what we actually know for sure. There are some known tax changes on the way. Some are already here and some are coming. Knowing them can help you prepare your taxes this year and plan for the future. That is valuable information. Far more valuable than me guessing about what President-elect Trump is going to do.
Issues Impacting 2016 Taxes.
1. The standard deduction increased for Head of Household filers in 2016. (Everyone else stayed the same.) The 2016 standard deduction amounts are in the table below.
|Filing Status||2016 Standard Deduction (2015 value)|
|Married Filing Jointly||$12,600|
|Head of Household||$9,300 ($9,250)|
|Married Filing Separately||$6,300|
2. The personal exemption for each person claimed on your 2016 tax return increases to $4,050 (from $4,000 in 2015). This amount gets adjusted for inflation every year, and is always rounded to the nearest $50.
3. Due Diligence forms for the AOC and CTC tax credits. This is new and annoying. The American Opportunity Tax Credit (AOC) and the Child Tax Credit (CTC) are partially refundable. That means you can have a zero ($0) tax liability to the IRS and still collect a ‘refund’. Free money from the government attracts fraud, and the IRS solution is to turn tax preparers into Tax Cops. They do this by forcing tax preparers to interview tax clients and record their responses on a special form that gets submitted with your tax return. If you are eligible to receive either of these credits I will be asking you several seemingly silly questions designed to prove that your children are your children and they are really going to college as you claim. I apologize in advance – it wasn’t my idea.
4. ACA Penalty Increases. The shared responsibility payment (a.k.a Obamacare Penalty) for not having health insurance is now $695 per uninsured adult and $347.50 per uninsured child OR 2.5% of your AGI – whichever is GREATER. (I have seen predictions the ACA will be repealed, but as of this writing it remains the law of the land.)
5. HSA contribution limit increased if you have family coverage. In 2016 you can contribute up to $6,750 if you have family health insurance coverage on a high deductible health care plan (up from $6,650 in 2015). If you have individual coverage you can contribute up to $3,350 (same as 2015). HSA contribution limits include money your employer contributes as well as your own contributed money. You can contribute to your HSA up until the tax filing deadline (April 18, 2017) and still take the deduction on your 2016 tax return.
6. IRS Launches More Online Tools. The IRS is attempting to move more customer service features online to allow taxpayers to resolve tax issues without involving an actual agent. These new tools allow a taxpayer to see if they owe a balance to the IRS and integrate with existing payment options to allow taxpayers to “take care of their tax obligations in a fast and secure manner”. Given the significant difficulties the IRS has had with existing online tools, I suspect there may be some growing pains. I’ll be standing by to see if/how this works.
For Planning Purposes Going Forward.
47 provisions of the tax code will automatically expire at the end of 2016. Most of them you’ve never heard of, and will have no impact on you (unless you were looking for accelerated depreciation of your race horse, or a tax credit for mine rescue training…). There are a few, however, worth discussing.
- Tuition and Fees Deduction. This provided an alternative to the Lifetime Learning Credit (LLC). It rarely provided a better tax benefit than the LLC, but in some circumstances it did. I am sorry to see this option going away.
- Mortgage Insurance Premium Deduction. Some taxpayers were able to deduct their mortgage insurance premiums on their tax return. 2016 will be the last year this deduction is allowed. (Another reason to get out of paying for mortgage insurance as soon as possible.)
- Home Energy Improvement Credit. 2016 will be the last year to claim a tax credit of up to $500 for certain energy efficiency improvements to your home.
- Credit for power production no longer covers wind turbines, fuel cells, and geothermal. After 2016 you will no longer get tax credits for using any alternative energy sources at your residence except solar. The tax credit for solar is currently good through 2021.
- Mortgage forgiveness relief. Cancelled debt, with a few exceptions, is considered taxable income. One of those exceptions has been if the cancelled debt was the mortgage to your primary residence. Starting in 2017 cancelled mortgage debt will once again be considered income (unless you qualify for another exception).
- Medical Expense deduction threshold for those over 65 remains at 7.5%. This is a strange one, because it’s a double negative that turns out to be a positive. One of the provisions of the Affordable Care Act was to raise the threshold for deducting medical expenses from 7.5% to 10% of AGI. There was an exception for taxpayers over age 65 – they were to remain at 7.5%. There was an extender that was going to raise that threshold to 10% just like everyone else. The way the law was worded, when this particular tax extender expires the medical expense deduction for taxpayers over 65 will remain at 7.5%.
Taxes are complicated, that’s why some tax firms charge ridiculous fees for their service. While we can’t do too much with speculation on where the tax code is going to be next year, there is a lot we can do with the hard information we have about changes that have already happened or are about to happen. As always, if you have any questions, please contact me.