While more than 15 major pieces of tax legislation have been enacted into law since 2000, the current tax planning environment has been heavily shaped by the American Taxpayer Relief Act of 2012, passed in January 2013, and the Protecting Americans from Tax Hikes (PATH) Act of 2015, passed late last year.
Together, these legislative acts made permanent several significant tax provisions that had previously existed only in temporary form, and introduced new rates and limitations that target high-income individuals. But while a host of popular tax benefits commonly referred to as “tax extenders” are now permanent fixtures in the tax code, others were simply extended, some only through the 2016 tax year. As a result, 2016 tax planning takes place in a relatively stable tax environment, with some small degree of uncertainty regarding the potential availability of specific provisions heading into the 2017 tax year.
These provisions are now part of the permanent tax landscape:
- The six-individual federal income tax rates (10%, 15%, 25%, 28%, 33%, and 35%) that had existed in temporary status for more than a decade, and a top 39.6% tax rate that applies to those with the highest incomes
- Special maximum tax rates generally apply to long-term capital gains and qualified dividends; the rate is 0%, 15%, or 20% depending on your federal income tax bracket
- Higher alternative minimum tax (AMT) exemption amounts are in effect and adjusted for inflation; the AMT is essentially parallel federal income tax system with its own rates and rules, and the higher exemption amounts and other related provisions significantly limit the reach of this tax
- Personal and dependency exemptions phase out at higher incomes, and itemized deductions may be limited
- “Marriage penalty” relief is now permanenting the form of an increased standard deduction for married couples and an expanded 15% federal income tax bracket
- Expanded tax credit provisions relating to the dependent care tax credit, the adoption tax credit, and the child tax credit
- Increased limits and more generous rules of application relating to certain education provisions, including Coverdell education savings accounts, employer-provided education assistance, and the student loan interest deduction
- Individuals age 70½ or older can make qualified charitable distributions (QCDs) from their IRAs, and exclude the distribution from gross income (up to$100,000 in a year); QCDs count toward satisfying any required minimum distributions (RMDs) that would otherwise have had to be made from the IRA
- Individuals who itemize deductions on Schedule A of IRS Form 1040 can elect to deduct state and local general sales taxes in lieu of the deduction for state and local income taxes
- The maximum amount that can be expensed by a small business owner under IRC Section 179 rather than recovered through depreciation deductions is$500,000, reduced by the amount by which the cost of qualifying property placed in service during the year exceeds$2,010,000 (2016 figures; will be adjusted for inflation in future years)