New Year, New Tax Rules

With a new year come new tax rules. Keep abreast of several tax changes for the 2016 and 2017 tax filing seasons.  

Indexed for inflation

Each year, the Internal Revenue Service adjusts some tax categories to account for inflation. The IRS is aiming to avoid bracket creep, the drift into higher tax brackets (and rates) due to cost of living adjustments and inflation.

In 2016, all six tax brackets had a threshold increase. For example, the 2016 25 percent tax bracket includes single filers who earned between $37,650 and $91,150 and married couples filing jointly who earned between $75,300 and $151,900.1 Next year, the 25 percent tax bracket will be for single filers earning between $37,950 and $91,900 and $75,900 to $153,100 for married couples filing jointly.2 See the full list of IRS tax brackets for 2016.

Standard deductions remained the same in 2016 except for head of household filers who may claim $9,300. In 2017, the standard deduction will increase for all filers:

  • Single tax filers will be able to claim $6,350
  • Head of household filers will be able to claim $9,350
  • Married couples filing jointly will be able to claim $12,7002

Finally, each tax filer is allowed to claim one personal exemption of $4,050, a $50 increase over 2015. The personal exemption amount will stay the same in 2017.2

Health savings accounts get healthier

Health savings accounts (HSA) allow those with high deductible health insurance plans to set aside money in a separate account to pay deductibles. Any remaining money can continue to grow to help pay for future healthcare expenses or be used in retirement. HSAs are also tax deductible and the interest is tax free.

While people didn’t see an increase in their maximum annual contribution in 2016, they will be able to contribute up to $3,400 this year. Families, meanwhile, will still be able to contribute $6,750, as there will be no change in 2017.3

Penalty fees for no coverage

With the Affordable Health Care Act, people without health care must obtain at least a minimal amount of coverage. Those who don’t follow this rule must pay a fee. In 2014, the fee was $95 per adult or 1 percent of income, whichever was higher.4 In 2016, it reached its highest amount, $695 per adult (and $347.50 per child under 18) or 2.5 percent of income, whichever was higher. To avoid the payment, taxpayers must submit a 1095 form from their healthcare provider indicating proof of coverage.
 

Some taxpayers may feel paying the penalty is cheaper than obtaining health insurance. However it’s important to consider the potential financial consequences of not having healthcare coverage during a major health event.

Higher estate tax exclusions

Each year, the IRS also adjusts the size of estates that are exempt from estate tax. For 2016, that amount was $5.45 million for individuals and $10.9 million for married couples. In 2017, estates of $5.49 million or less for singles and $10.98 million or less for couples will be excluded from the estate tax.5
 

While the federal estate tax exemption is fairly high and indexed to inflation, there are some states that impose their own, lower, estate tax exemptions. For example, in Massachusetts, Oregon and Washington, D.C., only $1 million is exempt from the state’s estate tax.6 Speak with a financial advisor to determine which taxes may apply to you and how financial solutions, such as life insurance, can help you with your estate tax planning needs.
 

With these changes afoot, be sure to talk to a financial advisor or tax professional to make sure you’re maximizing your tax savings, no matter what future tax laws bring.

1Pomerleau, Kyle. “2016 Tax Brackets.” Tax Foundation. October 14, 2015. http://taxfoundation.org/article/2016-tax-brackets
2Pomerleau, Kyle. “2017 Tax Brackets.” Tax Foundation. November 10, 2016. http://taxfoundation.org/article/2017-tax-brackets
3Miller, Stephen. “IRS Sets 2017 HSA Contribution Limits.” Society for Human Resource Management. May 2, 2016. https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/irs-sets-2017-hsa-contribution-limits.aspx
4“If you don’t have health insurance: How much you’ll pay.” HealthCare.gov. 2016. https://www.healthcare.gov/fees/fee-for-not-being-covered/
5“Estate Tax.” IRS. October 28, 2016. https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax
6Ebeling, Ashlea. “Where not to die in 2017?” Forbes. October 25, 2016.  http://www.forbes.com/sites/ashleaebeling/2016/10/25/where-not-to-die-in-2017/#71d19a443284

Lincoln Financial Group® affiliates, their distributors, and their respective employees, representatives and/or insurance agents do not provide tax, accounting or legal advice. Please consult an independent advisor as to any tax, accounting or legal statements made herein.