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What's New In Taxes For 2016: Individuals, Businesses And Estates

(posted: February 29th, 2016)

There is a lot of ground to cover here, and there are changes across all categories, from rules that affect individual taxes to business taxes and even estate taxes, so we'll jump right in!

Obamacare

Employer Mandate

More employers are subject to the health reform law's employer mandate. Starting in 2016, all companies with at least 50 full-time-equivalent employees must offer affordable heath coverage to full-timers and their dependents or pay a fine. To pass muster, the employer's insurance plan must also provide "minimum value," meaning that it is designed to pay at least 60% of the cost of covered health benefits and provide substantial coverage of inpatient hospital and physician services.

The fines for noncompliance rise.
One hits companies that don't offer coverage to at least 95% of full-time workers in 2016 if even one full-timer opts to buy insurance through a government exchange and receives a subsidy to help pay the premiums. For 2016, the fine equals $2,160 times the number of full-time employees, less 30.

Firms offering unaffordable insurance also owe a higher penalty:
$3,240 for each full-time employee who gets a tax credit for buying coverage on an exchange.

Employer reporting of worker health coverage kicks in.

Beginning in 2016, companies with 50 or more full-time-equivalent employees must use IRS Form 1095-C to report 2015 insurance data for each full-timer to the Service and worker. Firms will also file with the agency Form 1094-C, which requires more information. Businesses with fewer than 50 employees that provide self-insured medical coverage must also comply. They'll use Form 1095-B to report 2015 coverage information to employees and IRS and 1094-B to transmit the health returns to the Service. The forms are due to employees by March 31 and to IRS by May 31; June 30 if e-filing. Employers will not be given additional time to make these filings.

The individual mandate's fine for going without health coverage soars in 2016.

The tax is typically the greater of two amounts: the basic fine or an income-based levy. The basic fine is rising to $695 per adult ($347.50 per child) with a family ceiling of $2,085, up from $325 and $975 in 2015. The income-based levy increases from 2% to 2.5% of the excess of household income over the tax return filing threshold.

The income levels to qualify for the health premium credit in 2016 also go up.

For 2016, it is available to filers with household incomes ranging from 100% to 400% of the 2015 federal poverty level: $11,770 to $47,080 for singles and $24,250 to $97,000 for a family of four. Folks eligible for Medicaid or other federal insurance don't qualify. Nor do individuals who can get affordable health insurance through their employer.

Individuals

There's no hike in the 2016 Social Security wage base.

It remains at $118,500. And the Social Security tax rate on employers and employees stays at 6.2%. Employers pay the 1.45% Medicare tax on all pay. The same goes for employees, but they also pay an additional 0.9% Medicare surtax on wages that exceed $200,000 for singles and $250,000 for married couples. This extra levy doesn't hit employers. Self-employeds are also subject to the 0.9% surtax on earnings above the thresholds.

The earnings test limits don't change either. People who turn 66 in 2016 will not lose any benefits if they earn $41,880 or less before they reach that age. Individuals who are 62 through 65 by the end of 2016 can make up to $15,750 before they lose any benefits. There is no earnings cap once a beneficiary turns 66. But the amount needed to qualify for coverage inches up to $1,260 a quarter. So earning $5,040 anytime during 2016 will net the full four quarters of coverage. You need 40 quarters of coverage to qualify for Social Security retirement benefits. The income level triggering the nanny tax rises to $2,000 in 2016, up $100.

For most, the monthly Medicare Part B premium remains $104.90 in 2016.

However, the basic premium increases to $121.80 a month for some people. The affected group that pays more includes individuals who first enroll for 2016 and folks who do not have premiums deducted from monthly Social Security benefits.

Upper-income seniors also pay more for Parts B and D coverage in 2016.

If their modified adjusted gross income for 2014 exceeded $170,000 for joint filers or $85,000 for single people. Here, modified AGI is AGI plus any tax-exempt interest. For Part B, they pay the higher $121.80 basic monthly premium plus a surcharge. They also owe a surcharge on Part D premiums for prescription drug coverage. The combined surcharges on upper-incomers can be as large as $340.90 a month.

Transportation Fringe Benefits

The monthly exclusion amounts for mass transit passes and van pool benefits will permanently match the exclusion for qualified parking benefits. The maximum monthly exclusion for 2016 is $255.

Educator Expenses

The above-the-line deduction for educator expenses is made permanent. Moreover, it has been enhanced so that it includes professional development courses as a qualifying expense. It will be indexed for inflation starting in 2016.

Principal Residence COD Exclusion

The PATH Act retroactively extends the exclusion for cancellation of debt on a qualified principal residence so that it applies to debts discharged before January 1, 2017. In addition, the Act modifies the exclusion to apply to discharges that occur in 2017 if the discharge is pursuant to a written agreement entered into in 2016.

Tuition Deduction

The tuition deduction is extended retroactively to 2015 and through 2016.

Section 529 Education Plans

The Sec 529 rules are enhanced in the following ways:

  • Computer technology and equipment are permanently allowed as qualified higher education expenses
  • Individuals are allowed a 60-day "rollover" period for nonqualified distributions; that is, the law will give individuals up to 60 days to re-deposit the distribution into a qualifying account for that individual without the distribution being taxable.

American Opportunity Credit

The American Opportunity Tax Credit is made permanent. Taxpayers are no longer allowed to claim the credit unless the taxpayer is in possession of Form 1098-T, Tuition Statement. This change is effective for tax years beginning in 2015.

State Sales Tax Deduction

The option for itemizers to deduct sales tax in lieu of state income taxes has been made permanent.

Small Business Stock

The PATH Act makes permanent the exclusion of 100% of the gain on small business stock. Thus, qualifying stock purchased on or after September 28, 2010, will qualify for the 100% exclusion.

Solar Energy Credit

The credit for qualified solar water and electricity property expenditures has been extended for five years so that it applies to property placed in service before January 1, 2022. The credit is phased out for expenditures after 2019 as follows:

  • 30% for expenditures before January 1, 2020
  • 26% for expenditures in 2020
  • 22% for expenditures in 2021

The annual cap on deductible contributions to HSAs rises to $6,750 in 2016 for account owners with family coverage.

  • The ceiling for self-only coverage remains $3,350.
  • Individuals born before 1962 can put in an additional $1,000.
  • Minimum policy deductibles stay at $2,600 for families and $1,300 for singles.
  • The limits on out-of-pocket costs, such as deductibles and copayments, go up to $13,100 for people with family coverage and to $6,550 for individual coverage.

Most key dollar ceilings on retirement plans do not change for 2016.

The 401(k) contribution limit remains $18,000, but folks born before 1967 can put in $6,000 more. These maximums apply to 403(b) and 457 plans, too. The cap on SIMPLEs stays at $12,500, $15,500 for individuals age 50 or older.

The 2016 limits for IRAs and Roth IRAs also stays steady at $5,500, plus $1,000 as an additional catch-up contribution for taxpayers 50 and older.

Deduction phaseouts for regular IRAs
start at the same levels in 2016, from $98,000 to $118,000 of AGI for couples and from $61,000 to $71,000 for singles. If only one spouse is covered by a plan, the phaseout zone for deducting a contribution for the uncovered spouse rises a bit. It'll start at $184,000 of AGI and end at $194,000.

But the income ceilings for Roth IRAs tick upward.
They phase out at AGIs of $184,000 to $194,000 for couples and $117,000 to $132,000 for singles.

Charitable Donation from IRA

Tax-Free direct payouts from IRAs to charity of up to $100,000 for individuals age 70 1/2 and older.

Estate Tax

The estate and gift tax exemption for 2016 rises to $5,450,000.

The rate remains 40%. The gift tax exclusion stays the same, $14,000 per donee. Up to $1,110,000 of farm or business realty can receive discount estate tax valuation.

Executors of taxable estate have a new reporting rule.

Under a 2015 law, they are required to report to heirs and the IRS about the basis of inherited assets within 30 days of filing the 706 form. IRS has said the earliest date any reports will be due is Feb. 29, 2016, in order to give the Service time to develop the form.

Business

De Minimis Expensing Safe Harbor

The de Minimis safe harbor expensing election has been increased from $500 to $2,500 for taxpayers without an Applicable Financial Statement. The election for taxpayers with an Applicable Financial Statement (audited financial statement) remains at $5,000.

Luxury Auto Caps

For vehicles placed in service in 2015, the maximum depreciation for a passenger automobile is $11,160 and $11,460 for a light van or truck. The additional depreciation that can be claimed on an auto is as follows:

  • $8,000 for autos placed in service prior to 2017
  • $6,400 for autos placed in service in 2018
  • $4,800 for autos placed in service in 2019

Bonus Depreciation

The PATH Act retroactively extends 50% bonus depreciation for two years. Thus, it applies to qualified property placed in service before January 1, 2018. After 2017, bonus depreciation is phased down:

  • 40% in 2018; and
  • 30% in 2019.

Qualified improvement property

Bonus depreciation is enhanced to include as qualified property certain improvements to an interior portion of a building which is nonresidential real property if such improvement is placed in service after the date that building was first placed in service.

Such improvements do not include:

  • The enlargement of the building;
  • Any elevator or escalator; or
  • The internal structural framework of the building.

Section 179 Depreciation

The Act retroactively makes permanent the $500,000 expense limitation and the $2 million phaseout threshold. In addition, both limitations will be indexed for inflation for taxable years beginning after 2015.

Section 179 for qualified real estate is made permanent. As a consequence, the limitation on carryovers of disallowed expensing to tax years beginning after 2015 is removed. In addition, the $250,000 limitation with respect to qualifying real property is eliminated.

Heating and air conditioning units now qualifying property

The Act provides that, for property placed in service after December 31, 2015, heating and air conditioning units are treated as eligible property for purposes of Section 179 depreciation.

Restaurant property, leasehold improvements, and qualified retail improvement property

The Act retroactively makes permanent the 15-year straight-line recovery period for qualified real estate.

Built-in Gains

The five-year holding period for purposes of computing built-in gain on the conversion from a C corporation to an S corporation is made permanent. For California purposes, the holding period is still 10 years.

Research & Development Credit

The R&D credit, with enhancements for expenses incurred in post-2015 years, has been made permanent. This credit was the longest credit to have been temporarily extended.

NOTE: At this time, California has not conformed to any of the above changes with the exception of the exclusion from income of charitable contributions from IRA accounts for individuals 70 or older.

If you have questions or concerns about how these changes may affect you, please contact us.

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