CARL WATTS & ASSOCIATES

November 02, 2015

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It has become customary, around this time of year, for the IRS to announce annual inflation adjustments for a series of tax provisions for the following year. For tax year 2016, the IRS announced the annual inflation adjustments for more than fifty tax provisions on October 21st.


Even if you already heard about this elsewhere in the media, we still urge you to take a little bit of your time and go through the tax items listed bellow for tax year 2016 and see which ones are of most interest to you and your specific tax circumstances.

The first change that usually interests taxpayers concerns the tax rates and the related income tax thresholds. For tax year 2016 you can find all the details in the IRS Revenue Procedure 2015-53.

Here is a comparison table between 2015 and 2014 tax schedules for singles:

Tax Rate 2015 $ Maximum Thresholds 2016 $ Maximum Thresholds

10% 9,225 9,275
15% 37,450 37,650
25% 90,750 91,150
28% 189,300 190,150
33% 411,500 413,350
35% 413,200 415,050
39.6% Over 413,200 Over 415,050

The 39.6 percent tax rate affects married taxpayers filing jointly whose income exceeds $466,950, up from $464,850.

The 39.6% rate also applies for head of households whose income exceeds $441,000 (up from $439,000 in 2015), and married filing separately whose income exceeds $233,475 in 2016 (up from 232,425 in 2015).

The standard deduction for heads of household rises to $9,300 for tax year 2016, up from $9,250, for tax year 2015. The other standard deduction amounts for 2016 remain as they were for 2015: $6,300 for singles and married persons filing separate returns and $12,600 for married couples filing jointly.

The personal exemption for tax year 2016 rises $50 to $4,050, up from the 2015 exemption of $4,000. However, the exemption is subject to a phase-out that begins with adjusted gross incomes of $259,400 ($311,300 for married couples filing jointly). It phases out completely at $381,900 ($433,800 for married couples filing jointly.)

The limitation for itemized deductions to be claimed on tax year 2016 returns of individuals begins with incomes of $259,400 or more ($311,300 for married couples filing jointly).


The Alternative Minimum Tax exemption amount for tax year 2016 is $53,900 and begins to phase out at $119,700 ($83,800, for married couples filing jointly for whom the exemption begins to phase out at $159,700). The 2015 exemption amount was $53,600 ($83,400 for married couples filing jointly).  For tax year 2016, the 28 percent tax rate applies to taxpayers with taxable incomes above $186,300 ($93,150 for married individuals filing separately).

The tax year 2016 maximum Earned Income Credit amount is $6,269 for taxpayers filing jointly who have 3 or more qualifying children, up from a total of $6,242 for tax year 2015. The revenue procedure has a table providing maximum credit amounts for other categories, income thresholds and phase-outs.

For tax year 2016, the monthly limitation for the qualified transportation fringe benefit remains at $130 for transportation, but rises to $255 for qualified parking, up from $250 for tax year 2015.
For tax year 2016 participants who have self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,250, up from $2,200 for tax year 2015; but not more than $3,350, up from $3,300 for tax year 2015. For self-only coverage the maximum out of pocket expense amount remains at $4,450. For tax year 2016 participants with family coverage, the floor for the annual deductible remains as it was in 2015 -- $4,450, however the deductible cannot be more than $6,700, up $50 from the limit for tax year 2015. For family coverage, the out of pocket expense limit remains at $8,150 for tax year 2016 as it was for tax year 2015.



Changes in Tax Benefits and
Pension Plans for 2016

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For tax year 2016, the adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit is $111,000, up from $110,000 for tax year 2015.

For tax year 2016, the foreign earned income exclusion is $101,300, up from $100,800 for tax year 2015.

Estates of decedents who die during 2016 have a basic exclusion amount of $5,450,000, up from a total of $5,430,000 for estates of decedents who died in 2015.

The same day the IRS also announced cost-of-living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2016.


In general, the pension plan limitations were not changed for 2016 because the increase in the cost-of-living index did not meet the statutory thresholds that trigger their adjustment. However, other limitations were changed because the increase in the index did meet the statutory thresholds.

The highlights of limitations that changed from 2015 to 2016 include the following:

  • For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $184,000 and $194,000, up from $183,000 and $193,000.
  • The AGI phase-out range for taxpayers making contributions to a Roth IRA is $184,000 to $194,000 for married couples filing jointly, up from $183,000 to $193,000. For singles and heads of household, the income phase-out range is $117,000 to $132,000, up from $116,000 to $131,000.


  • The AGI limit for the saver’s credit (also known as the retirement savings contribution credit) for low- and moderate-income workers is $61,500 for married couples filing jointly, up from $61,000; $46,125 for heads of household, up from $45,750; and $30,750 for married individuals filing separately and for singles, up from $30,500.


The highlights of limitations that remain unchanged from 2015 include the following:

  • The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains unchanged at $18,000.
  • The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains unchanged at $6,000.
  • The limit on annual contributions to an Individual Retirement Arrangement (IRA) remains unchanged at $5,500. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.
  • The deduction for taxpayers making contributions to a traditional IRA is phased out for those who have modified adjusted gross incomes (AGI) within a certain range. For singles and heads of household who are covered by a workplace retirement plan, the income phase-out range remains unchanged at $61,000 to $71,000. 
  • The AGI phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

We will keep you up-to-date with any other changes in store for 2016 tax year and would like to remind you that now may be the best time to discuss with your tax professional the means by which you can reduce your tax burden for 2016 and enhance tax benefits that you may be entitled to.