Sutton Tax, LLC

Tax Changes 2016

To keep pace with inflation the IRS has widened the federal income tax brackets and increased certain exemptions, deductions and credits. The Affordable Care Act’s ‘individual mandate’ fine soars for going without health coverage, but income levels to qualify for the Health Premium Credit also go up for 2016.

2016 Federal Income Tax Brackets

Tax rate on Ordinary Income
SINGLE    on “taxable income”
Tax rate on Qualified Dividends & Long Term Capital Gains
over to
10% $0 $9,275 0%
15% $9,275 $37,650 0%
25% $37,650 $91,150 15%
28% $91,150 $190,150 15%
33% $190,150 $413,350 15%
35% $413,350 $415,050 15%
39.60% $415,050 20%
MARRIED FILING JOINTLY /
QUALIFYING WIDOW OR WIDOWER             “taxable income”
over to
10% $0 $18,550 0%
15% $18,550 $75,300 0%
25% $75,300 $151,900 15%
28% $151,900 $231,450 15%
33% $231,450 $413,350 15%
35% $413,350 $466,950 15%
 39.60% $466,950 20%

Payroll and Medicare taxes

Payroll taxes for Social Security benefits are collected under the authority of the Federal Insurance Contributions Act (FICA), and often referred to as the FICA tax. For 2016, Social Security (Old-Age, Survivors and Disability Insurance, or OASDI) withholding remains 6.2%, and so does the wage base limit of $118,500. That means a maximum of $7,347 per employee will be withheld in 2016 ($118,500 × .062).

The wage base for Medicare withholding remains unlimited (employee tax rate of 1.45%), but healthcare reform legislation in 2013 increased Medicare payroll withholding by 0.9% to 2.35% for amounts over $200,000 (single filers) or $250,000 (married filing jointly). Also, an additional 3.8% surtax applies to net investment income for taxpayers with adjusted gross income (AGI) over $200,000 (single filers) or $250,000 (married filing jointly).

For more information on these and other changes, please see the article on inflation adjustments on the IRS website or read about Social Security cost-of-living adjustments at SSA.gov.

Long-term capital gains and qualified dividends

A top rate of 15% applies to qualified dividends and the sale of most appreciated assets held over one year (28% for collectibles and 25% for depreciation recapture) for single filers with taxable income up to $415,050 ($466,950 for married filing jointly). Long-term capital gains or qualified dividend income over that threshold are now taxed at a rate of 20%.

EXAMPLE: If a married couple already has $466,950 of taxable income and an additional $100,000 in long-term capital gains and qualified dividends, the entire $100,000 would be subject to the 20% rate. If, however, they only had $400,000 of taxable income and $100,000 in long-term capital gains and qualified dividends, then $66,950 of the additional amount would be taxed at 15% and $33,050 would be taxed at 20%.

Phase-out of itemized deductions and exemptions

For 2016, the phase-out of certain itemized deductions and exemptions applies to single taxpayers with AGI above $259,400 and married taxpayers filing jointly with AGI above $311,300.

Alternative Minimum Tax (AMT)

The AMT income exemption amounts increase in 2016 to $83,800 for married couples filing jointly and $53,900 for single filers.

Lower tax rates for children

In 2016, children under 19 will pay no federal income tax on the first $1,050 of unearned income (such as capital gains or interest) and will be taxed at their own rate on the next $1,050. However, they will be taxed at their parents’ tax rate on unearned income in excess of $2,100. (This will also be the case for full-time college students under age 24, unless their earned income is greater than one-half of their parents’ support.)

Individuals age 19 and older (and dependent full-time college students age 24 and older) pay taxes at their own rate.

2016 Business Mileage Rate decreases to 54 cents/mile