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Inflation-Related Tax Law Changes for 2016

Updated for Tax Year 2016


OVERVIEW

Many taxpayers will benefit from inflation-based adjustments to various deductions, exemptions, credits and thresholds for the 2016 tax year. A number of changes went into effect. The net effect is essentially a tax cut for the taxpayers who are affected.


For the 2016 tax year, many taxpayers will benefit from inflation-based adjustments to various deductions, exemptions, credits and thresholds. By law, the Internal Revenue Service must make these adjustments based on the inflation rate. While not every amount is changed every year, there are always some adjustments. A number of changes went into effect in 2016. The net effect is essentially a tax cut for the taxpayers who are affected.

Deductions and exemptions

Most taxpayers enjoy an exemption for themselves and any dependents. For 2016, this exemption rises to $4,050, $50 more than 2015. For the bulk of taxpayers, who don't itemize deductions, the standard deduction does not change for 2016. Only those filing as head of household will see a change from $9,250 to $9,300. Taxpayers using the foreign earned income exclusion will see a rise to $101,300, up $500 from 2015.

Credits and phase-outs

The earned income tax credit (EITC) is an important tax benefit for low- and middle-income taxpayers, particularly those with dependent children. For 2016, the maximum credit rises from $6,242 to $6,269. For purposes of qualifying for the EITC, the maximum income rises to $53,505, up from the 2015 maximum of $53,267.

The phase-out of the lifetime learning credit begins at a modified adjusted gross income of $111,000 for joint filers, a rise from 2015's $110,000 limit. For singles and heads of household, the limit remains $55,000.

Phase-out limits for the deduction on student loan interest are unchanged for 2016 with the deduction phasing out from $65,000 to $80,000 for individual taxpayers and from $130,000 to $160,000 for joint filers.

Tax bracket thresholds

All tax brackets except the highest benefit from a widening in 2016, thanks to the IRS inflation adjustments. The 39.6 percent tax bracket is the highest bracket in addition to the 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent brackets.

Estate and gift taxes

Wealthy taxpayers see a rise in the amount that can be left to heirs without paying estate tax for 2016, up to $5.45 million from $5.43 million in 2015. However, the annual gift tax exclusion remains at $14,000.

A 2016 inflation adjustment comes into play for estate executors choosing the special use valuation for qualified real property. Essentially, the special use valuation allows an executor to assign a property a lower value -- and consequently a lower estate tax liability -- if its "special use" lowers its value below what would otherwise be fair market value. For 2016, executors can lower the value of property in this manner by up to $1.11 million up $10,000 from 2015.

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The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.


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