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IRS Issues Pension Plan Limitations and Tax Benefits Adjustments for 2016

IRS Issues Pension Plan Limitations and Tax Benefits Adjustments for 2016

As taxpayers prepare for 2016, the Internal Revenue Service (“IRS”) has issued its annual pension plan limitations and tax benefits adjustment updates. These amounts affect all taxpayers, from business to individual filers, and range from pension plan limits to individual exemption and standard deduction amounts. The items noted below are some of the more significant adjusted figures for the 2016 tax year. While a number of items have been adjusted by the IRS for the cost of living, it is important to note that many items have remained the same.

What has Changed?

  • The tax rate of 39.6% affects married taxpayers filing a joint return whose income exceeds $466,950 and single taxpayers whose income exceeds $415,050.
  • The limitation for itemized deductions to be claimed on tax year 2016 returns of married taxpayers filing a joint return begins with income of $311,300 or more (single taxpayers begins with income of $259,400 or more).
  • The personal exemption for tax year 2016 increases to $4,050, up from the exemption amount of $4,000. The exemption phase-out begins with income of $311,300 or more for married taxpayers filing a joint return (single taxpayers begins with income of $259,400 or more).
  • Under the small business healthcare tax credit, the maximum credit is phased out based on the employer’s number of full-time equivalent employees in excess of ten and the employer’s average annual wages in excess of $25,900 for tax year 2016, up from $25,800 for 2015.
  • The Alternative Minimum Tax exemption amount for 2016 has increased to $83,800 for married taxpayers filing a joint return, with phase out beginning at $159,700. The amount for single taxpayers is $53,900 with phase out set to begin at $119,700.
  • Qualified transportation benefits increases in 2016. Employees will be able to exclude up to $255 per month for qualified parking expenses and still up to $130 a month for the combined value of transit passes and transportation in a commuter highway vehicle.
  • Estates with decedents, who passed away in 2016, have an exclusion amount of $5,450,000, which has increased from the 2015 amount of $5,430,000.
  • The annual dollar limit on employee contributions to employer-sponsored healthcare flexible spending arrangements (FSA) has increased from $2,500 in 2015 to $2,550 in 2016.

What has not Changed?

  • The maximum earnings subject to the Social Security component of the FICA tax will remain the same at $118,500 in 2016.
  • The elective deferral (contribution) limit for employees who participate in Internal Revenue Code (“IRC”) §401(k), §403(b), most §457 plans, and the federal government’s Thrift Savings plan remains the same at $18,000.
  • The catch-up contribution limit for employees aged 50 and over who participate in IRC §401(k), §403(b), most §457 plans, and the federal government’s Thrift Savings Plan remains the same at $6,000.
  • The limitation for defined contribution plans under IRC §415(c)(1)(A) remains the same at $53,000.
  • The limitation under IRC §408(p)(2)(E) regarding SIMPLE retirement accounts remains the same at $12,500.
  • The limit on annual contributions to an Individual Retirement Arrangement (IRA) remains unchanged at $5,500. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains at $1,000.
  • Effective January 1, 2016, the limitation on the annual benefit under a defined benefit plan under IRC §415(b)(1)(A) remains unchanged at $210,000.
  • The annual exclusion for gifts remains at $14,000 for 2016.

For a complete list of 2016 inflation adjusted and other important tax figures and items including, but not limited to, updated 2016 tax tables, personal exemptions, adoption credit exclusions and various penalties for failure to file and failure to file correct returns please refer to Revenue Procedure 2015-53 which can be accessed at https://www.irs.gov/pub/irs-drop/rp-15-53.pdf.

Please contact a member of Withum’s Healthcare Services Group by filling out the form below.

The information contained herein is not necessarily all-inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriately qualified professionals for your individual facts and circumstances.

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