IRS Announces Cost of Living Adjustments for 2016 Tax Year

The IRS recently announced cost of living (COLA) inflation adjustments for over 50 tax provisions, which include pension plans, tax rate schedules and other changes. Because food and fuel are no longer factored into the calculation, the inflation rate is still relatively low, triggering only minor COLA adjustments, with some areas of the tax code remaining unchanged. Tax Law Code

Here are some of the highlights from the announced changes:

  • Threshold Increases for Top Tax Bracket: Currently, single taxpayers earning $413,200 and above and married couples filing jointly earning $464,850 and above fall into the 39.6% tax bracket. This will increase slightly to $415,050 and $466,950 respectively.
  • Standard Deduction Increases for Heads of Household: Heads of household will enjoy a slight increase in the standard deduction from $9250 to $9300. The standard deductions for single filers and married couples filing jointly remain unchanged.
  • Personal Exemption Increases Slightly: The personal exemption for tax year 2016 will rise from $4000 to $4050.
  • Slight Increase to Maximum Earned Income Tax Credit (EITC): The maximum EITC increases slightly from $6242 to $6269 for married taxpayers filing jointly with three or more qualifying children.
  • Foreign Earned Income Exclusion Increases Slightly: The Foreign Earned Income Exclusion increases in tax year 2016 to $101,300, up from the current rate of $100,800.

Pension Plan Limitation Changes: Because of the minimal inflation rate, there are very few cost of living adjustments for pension plan contributions in 2016. There are a few minor adjustments, however, including:

  • There is a slight increase in the deduction phase-out income level for IRA contributors who do not have a workplace retirement plan but have a spouse who has one. For 2015, the deduction is phased out for those earning between $183,000 and $193,000. This rises to between $184,000 and $194,000 for 2016.
  • There is a slight increase to the AGI phase-out range for taxpayers who contribute to a Roth IRA. For married couples filing jointly, the phase-out range goes up from $183,000 to $193,000 to $184,000 to $194,000. For single filers and heads of household, the range rises from between $116,000 and $131,000 to between $117,000 and $132,000.
  • The AGI limit for the saver’s credit increases slightly to $61,500 for married couples filing jointly (up from $61,000), $46,125 for heads of household (up from $45,750) and $30,750 for single and married filing separately (up from $30,500).

Most of the announced COLA adjustments are marginal. However, even small changes can sometimes have a significant impact on your overall taxes. To find out how the recent adjustments may affect your tax situation, speak with your local tax professional.

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