10 Rule Changes Taxpayers Need to Know in 2016

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KNOW THE CODE

The 2016 tax season is underway and many households have already submitted their returns. Though acting early is commendable, the Internal Revenue Service advises consumers to have all necessary documents (W-2s, annual statements, etc.) in hand before filing to avoid having to file an amended return later on. This year, there are also new forms, limits, and refund options to look out for. Tax software programs and accountants take care of the legwork, but it pays to research any changes to avoid confusion.

NEW FILING DEADLINE

Good news for procrastinators: Emancipation Day, a public holiday in Washington, D.C., falls on April 15 this year, pushing the filing deadline ahead to Monday, April 18, for most of the country. In two New England states, the celebration of Patriots Day, which falls on April 18, means residents of Maine and Massachusetts have until April 19 to file their returns.

ROTH IRA INCOME LIMITS

The income limits for contributing to Roth IRA accounts have been raised for 2015. Workers can contribute the full $5,500 maximum ($6,500 for those 50 and older) if they earn adjusted gross income of up to $116,000 for single filers or $183,000 for married couples filing jointly. Those who already have contributed too much can avoid paying a penalty by withdrawing the excess contribution and earnings before filing, or move the excess to a traditional IRA. Traditional IRAs have similar contribution limits, but a penalty isn't imposed for excess contributions. Rather, they simply aren't tax deductible.

LIMITED ROTH IRA ROLLOVERS

Starting in 2015, individuals were allowed to roll over funds from an IRA only once every 12 months. Those who performed two or more rollovers in 2015 may have to pay income tax, an early withdrawal penalty, and an excess contribution tax when they file in 2016. The rule applies only to indirect rollovers, when the individual has access to the money for up to 60 days and then deposits it into a new IRA, as opposed to direct rollovers or trustee-to-trustee transfers.

NEW LIMITS FOR TAX BENEFITS

Due to inflation adjustments, the limits for more than 40 tax provisions changed in 2015. For example, the standard deduction rose to $6,300 from $6,200 for single filers or those filing separately. The personal exemption also rose to $4,000, from $3,950, and now starts phasing out for individuals who made $258,250 or more. Changes were also made to the earned income tax credit, foreign earned income exclusions, and alternative minimum tax exemptions.

PENALTIES FOR UNINSURED TAXPAYERS

Since 2014, those without health insurance have had to pay increasing penalties unless they qualify for a limited number of exemptions. This could cost a family of four $1,235 if they were uninsured for all of 2015. The penalty is paid when the return is filed. If additional tax is owed, the penalty is added to the amount due. If a refund is due, the penalty is deducted from the amount owed the taxpayer.

NEW HEALTH CARE FORMS

Forms 1095-B and -C, which show proof of health insurance, are now mandatory for health coverage providers and large employers and must be sent to taxpayers by March 31. Taxpayers need not wait for the forms to arrive to file their 2015 tax returns. However, those who enrolled for coverage through the health insurance marketplace and received Form 1095-A should use it to file their returns.

FUNDING A MYRA

A myRA, for my IRA, is one option for those who want to start a retirement savings account. There are no costs or fees to create or manage a myRA, the principal is guaranteed, and the U.S. Treasury guarantees the investments. Individuals can now choose to fund a myRA account with a tax refund and may even receive a tax credit next year for doing so.

NO CHILD TAX CREDIT WITH FOREIGN INCOME

Starting in 2015, individuals who earned foreign income and file Form 2555 or 2555-EZ are no longer eligible for the child tax credit. For couples who file jointly, the rule may apply even if one parent works overseas while the rest of the family lives in the U.S.

LOSS OF PASSPORT FOR UNPAID TAXES

Effective Jan. 1, the IRS has the power to revoke or deny a U.S. citizen's passport for failing to pay taxes. Violators owe more than $50,000 and have an IRS lien or levy against them. Those with a repayment plan in place are exempt, and exceptions may be made for anyone who is actively disputing a case, or needs to travel for an emergency or humanitarian reasons.

SECTION 179 BUSINESS DEDUCTION

Section 179 allows small businesses to deduct the full purchase price of qualified equipment or software during the year of purchase rather than depreciate the expense over multiple years. The deduction limit is now permanently $500,000, with any increase indexed to inflation. Previously, Congress extended the $500,000 limit a single year at a time (often in late December, causing businesses to scramble to make purchases in order to claim write-offs), but the deduction became permanent with the passage of the Protecting Americans From Tax Hikes Act in December.